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                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
        
                   For the fiscal year ended January 30, 1999

                                       OR

         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
         EXCHANGE ACT OF 1934
         For the transition period from           To

Commission File No. 0-17870


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


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


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


Registrant's telephone number, including area code:  (973) 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. [X]
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As of April 16, 1999 17,176,286 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 $24,057,514.

         For the purposes of such calculation, all outstanding shares of Common
Stock have been considered held by non-affiliates, other than the 4,345,612
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 22, 1999.
<PAGE>   3
                              SAFE HARBOR STATEMENT
           UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

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

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

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

Any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time and it is not possible for management to
predict all of such factors, nor can it assess the impact of any such factor on
the business or the extent to which any factor, or combination of factors, may
cause results to differ materially from those contained in any forward-looking
statement.
<PAGE>   4
PART I

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 first Lechters Housewares(R) store was opened in Rockaway, New
Jersey. New store development emphasized mall locations but was subsequently
expanded to include strip center and city locations. The concept was distinctly
advantaged in the breadth of its assortment and the convenience of its
locations. In 1990, the Company created the Famous Brands Housewares Outlet(R)
concept as an additional growth opportunity. The intent of the Famous Brands
concept was to represent housewares manufacturers not otherwise having a retail
presence in outlet malls, a venue experiencing substantial customer traffic and
rapid new center development.

         The Company's unit expansion peaked in fiscal year 1992 when 81 new
stores were opened. As of the end of the current fiscal year, the Company owned
and operated 578 stores (443 Lechters Housewares(R) stores, 134 Famous Brands
Housewares Outlet(R) and one Cost Less Home Store(SM)) in 42 states and the
District of Columbia.

         The Company continued to reposition its basic concepts. While both 
concepts featured houseware products, Lechters Housewares(R) has been enhancing
its franchise as the country's largest specialty retailer of products for the
kitchen. Famous Brands Housewares Outlet(R) continued the process of
transitioning the greater portion of its assortment to off-price merchandise
in an effort to establish the exceptional value proposition expected in outlet
mall locations. The outcome of the repositioning has resulted in the evolution
of the Company into two major segments, Specialty Housewares and Off-Price Home
Business. Cost Less Home Store(SM), the Company's newest concept, is focused on
a "big box" format with 20,000 - 25,000 gross square feet of space. In addition
to an expanded offering of the Company's base housewares assortment, the
concept has added items including domestics and gourmet foods. The details of
both segments' operating strategies follow in this report.

         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.


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<PAGE>   5
OPERATING STRATEGIES

A.  MERCHANDISING AND MARKETING

         Over the past four years, the Company has been engaged in a variety of
tests and trials designed to more effectively position itself as a player in the
markets in which it competes. Approximately 18 months ago, the decision was
reached that the Company needed to re-invent itself in order to compete
effectively in the new millennium.

         While there has been considerable progress in development of growth
opportunities for the Company, there remains a number of significant changes in
order to exploit these opportunities. Moreover, the Company must prepare for
continuous change in the way it does business.

         To this end, the Company is focusing on the following strategic
priorities:

- Re-deployment of assets into retail concepts that can and will perform at 
  above average levels resulting in stakeholder (customers, employees,
  investors, and vendors) satisfaction with anticipated returns. Two of these
  retail concepts are already in place: Lechters Kitchen Place(R) and Cost Less
  Home Store(SM).

- Re-energizing the existing Lechters Housewares(R) business with a smaller
  number of profitable stores, including the Lechters Kitchen Place(R) stores.
  This business will continue to provide significant positive cash flow as 
  Lechters Housewares(R) contracts and this format will remain a key part of the
  Company's core business.

- Famous Brands Housewares Outlet(R) sales will be derived from a smaller number
  of core stores as the Company closes under-performing locations.

- Geographic concentration that will allow the Company to effectively support
  the existing and new concepts with both marketing and management focus.

- Development of an organizational capability to create (or re-position) and
  grow retail concepts in markets where meaningful competitive advantage can be
  achieved.

The plans for each of the Company's business segments follow.

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<PAGE>   6
BUSINESS SEGMENTS

The Company operates two segments: Specialty Housewares and the Off-Price Home
Business.

SPECIALTY HOUSEWARES

The Specialty Housewares segment is the largest business segment and accounted
for 78.3% of total sales in Fiscal 1998. This segment consists of two separate
formats: Lechters Housewares(R) and Lechters Kitchen Place(R).

     Lechters Housewares(R)
         Lechters Housewares(R) operates in two different size categories; a
         3,000 square foot Lechters Housewares(R) store and a 6,000 square foot
         Super Lechters Housewares(R) store. The 3,000 square foot Lechters
         Housewares(R) store offers customers an edited assortment of
         products for the kitchen and home at moderate prices while Super
         Lechters Housewares(R) stores have a more extensive merchandise
         assortment. The Company ended the year with 359 Lechters Housewares(R)
         stores and 84 Super Lechters Housewares(R) stores.

     Lechters Kitchen Place(R)
         This format is a re-invention of the Lechters Housewares(R) store. The
         first two Lechters Kitchen Place(R) stores opened in the fall of 1998.
         These stores are approximately 5,000 to 6,000 square feet in size. The
         Lechters Kitchen Place(R) stores include many of the existing Lechters
         Housewares(R) merchandise categories plus significant expansions
         including a complete kitchen electric department, an expanded cookware
         department, a gourmet food department and trade-up assortments in all
         categories. The store features merchandise, organized by department, in
         an easy to shop environment and a new, more attractive store design.
         The price points are higher than the traditional Lechters store with
         the store positioned between Lechters and department and better
         specialty stores. The average unit price is targeted at $10.00 vs.
         $5.87 for Lechters Housewares(R).


OFF-PRICE HOME BUSINESS

The Off-Price Home Business segment accounted for 21.7% of total sales in Fiscal
1998. This segment consists of two separate formats: Famous Brands Housewares
Outlet(R) and Cost Less Home Store(SM)

Famous Brands Housewares Outlet(R)
     Famous Brands is a 4,000 square foot specialty retailer of off-price
     housewares and products for the home. These stores are located in outlet
     centers. Lechters operated 134 Famous Brands Stores at the end of Fiscal 
     1998.

Cost Less Home Store(SM)
     Cost Less Home Store(SM) presents a new growth vehicle for Lechters, Inc.
     The typical Cost Less Home Store(SM) has approximately 20,000 - 25,000
     square feet devoted to the sales of housewares, linens and domestics,
     kitchen textiles, gifts, home furnishing, furniture, gourmet food and
     seasonal items. This concept offers exceptional value (discounts up to 70%
     off of department and specialty store prices) on a


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<PAGE>   7
     constantly changing assortment of off-price merchandise in an easy-to-shop
     environment. One Cost Less Home Store(SM) store opened in November of
     Fiscal 1998 and a second opened in February of Fiscal 1999.

Speciality Housewares

         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" and with at least
200,000 square feet of retail space for specialty stores. City stores and strip
center stores are also operated under this trade name. The Company believes it
appeals to a broad range of customers. Research indicates that the primary
customer is female from a household with an average annual household income of
$40,000 - $50,000.

         The Lechters Housewares(R) product line is broadly defined as basic
housewares (cookware, bakeware, kitchen gadgets, utensils, small electrics,
household storage and organization) and decorative housewares (table top,
textiles, frames) which accounted for 63% and 37%, respectively, of Fiscal 1998
sales. Of the over 4,000 items in the line, 25% accounted for approximately 48%
of current year sales. No individual item accounted for more than 1% of current
fiscal year sales.

         All products sold by the Company are either private label or national
brand names including but not limited to Rubbermaid, Durand, Ecko, Farberware,
Henckels, Krups, OXO, Pyrex, Wearever Anchor Hocking and T-Fal. The Company's
own brands include Cooks Club(R) (cookware, gadgets & utensils), Simple
Solutions(R) (storage & organization) and Regent Gallery(R) (frames &
accessories). Private label merchandise accounted for approximately 20% of
Fiscal 1998 net sales.

         Lechters Housewares(R) believes that it has unique strengths in several
areas. The Company believes that this concept has a strong customer franchise.
Research indicates that the Lechters name is known by over 80% of mall shoppers.
Over 23 million customer transactions were conducted last year in the Lechters
stores and those customers purchased over 57 million items. Lechters has a loyal
core of customers who know, trust and shop the store on a recurring basis.

         Lechters believes that its assortments of kitchen gadgets and picture
frames are superior to other national retailers. Lechters also believes that its
complete assortment of value priced kitchen products merchandised in
conveniently located compact stores offers a meaningful alternative to its
competitors.

         Market research indicates that 27% of Lechters customers purchase gifts
and that gift purchases carry a 25% higher average ticket price than non-gift
purchases. The Company has developed specific strategies to appeal to the gift
customer.

         Lechters is also a leader in seasonal items and the development of new
and fresh merchandise through private label as well as branded products.
Lechters strives to ensure that new items, particularly those geared toward
specific seasonal business, reflect current color and fashion trends.

         National brand merchandise is generally priced at department store and
specialty retailer "sale prices" everyday. The value of these products is
further enhanced by periodic sales and

                                       4
<PAGE>   8
promotional events. Lechters Housewares(R) offers unique value through its
specially designed private label program. The Company's price advantage reflects
its purchasing power and its unique ability to design proprietary product
emphasizing design, quality and functionality and secure special savings by
importing that product directly from overseas.

         Items generally range in price from $1.00 to $200.00, with an average
selling price of $5.87. All sales are transacted in cash and through third-party
credit cards, which accounted for approximately 61% and 39%, of Fiscal 1998 net
sales, respectively.

         The Company runs an advertising campaign consisting of 12 circulars
inserted in Sunday newspapers. These newspapers are located in 8 major
metropolitan areas across the country. Each insert has a circulation of over 5
million copies and with respect to the numbers of store locations targeted
impacts approximately 52% of the Lechters Housewares(R) business. The Company's
advertising program began in 1996 and based on continued success has been
expanded over the last two years.

         Funding of the Company's advertising expense is supported in part by
cooperative advertising allowances from suppliers. Net advertising expense was
1.7% of Lechters Housewares(R) sales in Fiscal 1998 as compared to 1.8% in
Fiscal 1997.

         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. The Company also experiences a strong back-to-school
business which commences in late July. In Fiscal 1998, November/December and
back-to-school sales accounted for approximately 32% and 19%, respectively, of
total year sales.

         Lechters Kitchen Place(R) stores represent a re-invention of the
Lechters Housewares(R) concept. These stores are 5,000 to 6,000 square feet. The
merchandise assortment includes most of the existing Lechters businesses plus
supplemental categories such as gourmet foods. This concept has an expanded food
preparation business to include a much broader assortment of cookware and
kitchen electrics. The price points have been increased with a goal of a $10.00
average ticket vs. $5.87 for the Lechters Housewares(R) stores. This trade up in
prices has been accomplished by adding better merchandise that the customer
expects to find in a specialty store environment. Lastly many of the lower
opening price points have been eliminated.

         Lechters Kitchen Place(R) is positioned between the current Lechters
Housewares(R) and better specialty and department stores. The environment is a
completely redesigned environment with a new floor plan, fixtures and color
scheme. The store is arranged in distinct merchandise departments providing a
customer friendly and easy-to-shop environment.

         Two prototype stores were opened in the fall of 1998. During the spring
of 1999 the merchandise mix will be adjusted based on what has been learned. The
Company anticipates that additional test stores will be opened within the next
12 months. As a side benefit to this strategy, many of the new, trade up items
successfully tested in Lechters Kitchen Place(R) stores are being expanded to
Lechters Housewares(R) stores.

                                       5
<PAGE>   9
Off-Price Home Business

         The mission of Famous Brands Housewares Outlet(R) of the Company's
Off-Price Home Business segment is to become the leading retailer of off-price
housewares in the outlet centers in which it operates 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 Outlet(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.

         Famous Brands Housewares Outlet(R) began Fiscal 1998 with approximately
32% of sales generated by off-price merchandise. The remainder of the assortment
was the same as the Lechters Housewares(R) assortment with limited reductions in
pricing. At the end of Fiscal 1998, approximately 50% of sales were generated by
off-price merchandise.

         The assortment of off-price merchandise is broader than the assortment
offered in Lechters Housewares(R). For example, categories like accent
furniture, lighting and decorative silk flower arrangements as well as expanded
giftware are periodically added as opportunistic buys present themselves. Their
broadened category mix contributes to the "treasure hunt" atmosphere that is so
important to the appeal of this business. The Famous Brands Housewares Outlet(R)
stores offer an assortment of basic Lechters Housewares(R) merchandise to
supplement the constantly changing assortment of off-price purchases. The
strategy is supported by a merchandising team dedicated to the Off-Price Home
Business.

         Famous Brands Housewares Outlet(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 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 Outlet(R)
business will continue to rely primarily on in-store signs, handouts, displays
and participation in promotions sponsored by malls. The location of these
centers outside major media markets preclude the use of traditional broadcast or
print media.

         The seasonality of the Famous Brands Housewares Outlet(R) business
differs slightly from that of Lechters Housewares(R). The summer season
represents a greater portion of the annual sales in Famous Brands Housewares
Outlet(R) given the increase in leisure travel and the proximity of outlet
centers to major routes and vacation destinations. In Fiscal 1998, the
November/December period represented 27% of total year sales in Famous Brands
Housewares Outlet(R) versus 32% for Lechters Housewares(R).

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         During Fiscal 1998 the Company closed 31 Famous Brands Housewares
Outlet(R) stores. The Company plans to continue to reduce the number of Famous
Brands Housewares Outlet(R) stores, with the intention of operating a core group
of profitable stores in viable outlet malls.

         Cost Less Home Store(SM) is a new strategy that is an outgrowth of the
off-price strategy started in the Famous Brands Outlet(R) stores. The typical
Cost Less Home Store(SM) is based on a store size of approximately 20,000 to
25,000 square feet in size and is dedicated to the sales of housewares, linens
and domestics, kitchen textiles, gifts, home furnishing, ready-to-assemble
furniture, oriental and area rugs, gourmet food and seasonal items. This concept
features exceptional value on a constantly changing assortment of merchandise.
The customer can expect to achieve discounts up to 70% off of department and
specialty store prices. Better-branded merchandise is featured with guaranteed
lowest prices.

         The Company believes that it has unique strengths that allow it to
compete effectively in the Off-Price Home Business. These strengths include:

     -  A merchandising team with extensive experience in the field of off-price
        purchasing.
     -  Strong vendor relationships which enable the Company to gain favorable
        consideration when it competes for off-price merchandise.
     -  The financial ability to purchase large quantities of off-price
        merchandise and pay promptly.
     -  A distribution system that supports the off-price business.

         The first Cost Less Home Store(SM) was opened in the Philadelphia
metropolitan area in November of Fiscal 1998. A second store was opened in
February of Fiscal 1999 in the same market area. Both stores are performing up
to expectations. Consumer research indicates that the customer likes the
environment and believes that the prices are very attractive.

         The Company anticipates opening additional Cost Less Home Store(SM)
stores in Fiscal 1999.

B.  PURCHASING, WAREHOUSING AND DISTRIBUTION

         The Service Office 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 has a dedicated buying staff for each of its segments. The
Specialty Housewares buying staff is comprised of a Vice President - General
Merchandise Manager, two merchandise managers and six buyers. The Off-Price
Home Business buying staff includes a Vice President - General Merchandise 
Manager, one merchandise manager and five buyers.

         A Planning and Allocation staff supports the buying staff. That staff
includes a Vice President of Merchandise, Planning and Allocation, three senior
planners, teams of inventory control specialists and analysts supporting each
buying group.


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<PAGE>   11
         The Company purchases its products from over 400 suppliers with no
supplier accounting for more than 2.7% of Fiscal 1998 receipts. Approximately
65% of its products are purchased in the United States which ensures sufficient
flexibility in the management and flow of merchandise. The remaining 35% is
proprietary merchandise developed by the Company and imported directly from
overseas. This proprietary merchandise 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 ten weeks of supply of
Specialty Housewares re-orderable merchandise at the distribution centers. It
maintains six weeks of supply of off-price merchandise at the distribution
centers, to support the Off-Price Home Business.

         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 shipping an order from the
warehouse, depending upon the store's distance from the distribution centers. On
average, stores are supplied with merchandise on a bi-weekly basis. Shipments
frequently are increased during peak sales periods and are more frequent to high
volume and city locations. The ordering process is facilitated by a Computer
Assisted Replenishment (CAR) system.

C. 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. 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 store's 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, 1999, the field organization was comprised of 3 Regional
Vice Presidents and 1 Regional Manager; each has profit and loss responsibility
for several districts and provides leadership to 38 District Managers. The
District Managers are responsible for the day-to-day

                                       8
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operations of the stores. Their supervisory span of control ranges from 12 to 20
stores, supported by Area Managers who are Store Managers with additional
oversight responsibility for 1 to 3 additional 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
whom 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.

         The Company is committed to the in-store development of its Associates.
A training and evaluation program is provided to new Store 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 attend periodic
training sessions designed to develop their management, merchandising and
customer service skills.

         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 an effort to
control inventory shrinkage. Their periodic reviews are complemented by audit
programs that include District Manager conducted reviews and Service Office
monitoring of store transaction reports. Particular emphasis is placed on stores
with a history of inventory shrinkage in excess of the norm.

D. 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
Outlet(R) stores are located in the dominant outlet projects nationally. The
two Lechters Kitchen Place(R) stores are located in mall locations. The Cost
Less Home Store(SM) stores opened to date are located in strip centers.

         As shown in the following table, the Company operated 443 Lechters
Housewares(R) stores as of year-end. These stores range in size from 1,800 to
10,900 square feet and average approximately 3,700 square feet. The Company's
134 Famous Brands Housewares Outlet(R) stores range in size from 3,000 to 7,500
square feet and average 3,900 square feet. The Company opened its first Cost
Less Home Store(SM) in November Fiscal 1998 at 18,400 gross square feet. It is
anticipated that future stores will range in size from 20,000 to 25,000 square
feet.


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<TABLE>
<CAPTION>
                                                              Famous Brands  Cost Less
                                                                Houseware       Home     Total
                              Lechters Housewares(R)            Outlet(R)    Store(SM)   -----
                     -----------------------------------------  ---------    ---------              
                       Malls     Strips     City     Sub-Total                               
<S>                  <C>         <C>       <C>       <C>         <C>           <C>      <C>         
January 31, 1998:                                                                                   
   Units                   403        38        24         465       161            0         626   
   Square Feet       1,465,000   142,500   105,300   1,712,800   633,600            0   2,346,400   
                                                                                                    
                                                                                                    
1998 Additions:                                                                                     
   Units                     1        12         2          15         4            1          20   
   Square Feet           2,600    38,200     6,200      47,000    13,300       18,400      78,700   
                                                                                                    
1998 Closings:                                                                                      
   Units                    37         0         0          37        31            0          68   
   Square Feet         118,400         0         0     118,400   117,800            0     236,200   
                                                                                                    
January  30, 1999:                                                                                  
   Units                   367        50        26         443       134            1         578   
   Square Feet       1,349,200   180,700   111,500   1,641,400   529,100       18,400   2,188,900(1)
</TABLE>

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

         The Company's present expansion plan will focus on Cost Less Home
Stores(SM), Lechters Kitchen Place(R), Lechters Housewares(R) strip center
locations and Lechters Housewares(R) city locations. The Company's Fiscal 1999
development plan is to open approximately 24 new stores.

         In determining where and in what format new stores will be opened, the
Company's preference is to backfill existing advertised 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 division and further vary
with the size of the store and site conditions. As shown below, the costs
incurred by the Company to open an average 3,200 square foot store and the
estimated cost for a Cost Less Home Store(SM) under typical site conditions are
approximately:

<TABLE>
<CAPTION>
                                                                     Inventory,
                                        Leasehold     Fixtures         net of       Preopening
                                       Improvements  & Equipment   Accounts Payable   Expense
                                       ------------  -----------   ----------------   -------
<S>                                      <C>          <C>             <C>             <C>    
Lechters Housewares(R) (Malls)           $170,000     $ 55,000        $ 95,000        $ 8,000
Lechters Housewares(R) (Strip Centers)   $120,000     $ 58,000        $ 89,000        $ 6,000
Lechters Housewares(R) (City)            $315,000     $215,000        $134,000        $14,000
Lechters Kitchen Place(R)                $315,000     $102,000        $142,000        $14,000
Famous Brands Housewares Outlet(R)       $ 61,000     $ 58,000        $ 85,000        $13,000
Cost Less Home Store(SM)                 $315,000     $215,000        $399,000        $50,000
</TABLE>


                                       10
<PAGE>   14
         The Company actively manages its real estate portfolio to ensure
profitability at the store level. In case of an under-performing 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 closed sixty-eight (68) stores in Fiscal Year 1998. In
Fiscal Year 1999, the Company plans to close sixty (60) to seventy (70) stores.
This continued acceleration in store closings is partly to improve the quality
of the Company's store locations and partly to redeploy the assets from
under-performing locations. The majority of the redeployments are expected to
be mall based to strip center locations especially in major markets, wherein
the benefits of its advertising programs can be leveraged.

         The majority of the Company's leases expire or will be subject to
termination by the Company over the next four years. While the current real
estate environment has improved, the Company does have leverage in the
management of its occupancy expenses and flexibility in store location. The
Company intends to capitalize on this flexibility by seeking shorter lease terms
where it is an advantage and longer lease terms where it makes sense to make a
longer commitment.

E.  INFORMATION TECHNOLOGY

         The Company relies heavily on technology in the conduct of its
business. While fully automated, it is continually reevaluating its systems
capabilities to support the current and future needs of the business.

         The Company's data reside on a combination of platforms connected in
an open system, client/server environment. By the end of Fiscal 1999, all
production processing will be consolidated on a single platform, the IBM SP2.
This restructuring is intended to take advantage of the increased processing
power inherent in the most current technology and also eliminate the
inefficiency of having to support a more complex and aging hardware
configuration. In Fiscal 1998 the Company completed the upgrade of its local
area network (LAN) in order to service the greater utilization of decision
support applications and electronic communications throughout the organization.

         The corporate data center is located within the Company's Service
Office in Harrison, New Jersey. To ensure continuous operations, the Company
also maintains backup system capabilities at a third-party 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 communication
capabilities and access to essential store, district and region level management
reports.

         The Company controls the level and distribution of merchandise in its
distribution centers and stores through the use of an internally developed
replenishment system. While sufficient to meet


                                       11
<PAGE>   15
the historic distribution characteristics of the business, the development of a
more dynamic profile of current and future operations requires a substantially
greater degree of functionality. Accordingly, in September 1997, the Company
committed to the phased implementation of a replacement merchandising system.
The Company expects to complete the installation of JDA's merchandise software
by July 1999.

         The Company's distribution centers are internally operated using 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. While sufficient to meet the
needs of the business in the past, the new business concepts require additional
functionality to run the operation. In September 1998, the Company committed to
the implementation of a replacement warehouse management system. The Company
expects to complete installation of JDA's warehouse management software by
August 1999.

         In Fiscal 1997, the Company successfully installed the first phase of a
new financial system. This first phase included the upgrading of basic financial
functions relating to the processing of the business. In Fiscal 1998, the
Company augmented the new system with substantial planning, decision support and
report writing capabilities. During Fiscal 1999, this system will be fully
integrated with the aforementioned JDA merchandise system.

         The Company has aggressively expanded its Electronic Data Interchange
(EDI) capabilities and is currently communicating with over 300 of its highest
volume vendors. During Fiscal 1999, the Company plans to continue to enhance
these vendor partnerships and to integrate EDI technology into additional areas
of the business.

         The Company maintains a Website at `www.lechters.com'. The Website
continues to be revamped to make for more graphical appeal and ease of
navigation. The site features descriptive Company information, upcoming sales
promotions in the stores and basic investor relations materials. While the
Company does not presently conduct any commerce through the site, a project is
being planned for the near future.

         With respect to the Year 2000 and the actions both planned and taken by
the Company to reduce this risk, please see the "Year 2000" caption of the
Company's Management's Discussion and Analysis of Financial Conditions and
Results of Operations included in item 7 of this Form 10-K.


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, supermarkets 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 the Company offers a broader assortment of
housewares merchandise than most of its competitors. Furthermore, its 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

                                       12
<PAGE>   16
compete favorably will not be adopted by companies having greater financial and
other resources than the Company.

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", "Perfect Grip" and "Simple Solutions"
for certain housewares items. In addition, the Company has applied for
registration of other marks used in the operation of its business, and those
applications are pending.

ASSOCIATES

         On April 1, 1999, the Company employed 6,246 persons, 2,891 of whom
were full-time (30 or more hours per week) and 3,355 of whom were part-time
Associates. Of this total, 461 were located at the Company's Harrison, New
Jersey Service Office and two distribution centers. Included in this total, 42
were Regional and District Managers, 6 were Loss Prevention Managers and 40
Associates were located at the Company's North Las Vegas, Nevada distribution
center.

         On April 1, 1999, the 172 non-management distribution and office
Associates at the Harrison, New Jersey facility were represented by UNITE, Local
99. On April 26, 1999, the Company and UNITE, Local 99 entered into an agreement
as to the terms and conditions of a contract covering the distribution
Associates for the period from March 16, 1999 to March 15, 2002. The contract
covering office employees expires on June 30, 2000. The 5,785 Associates in the
Company's 578 retail stores are 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.

EXECUTIVE OFFICERS

         The following table shows information regarding executive officers of
the Company as of April 20, 1999:

                             Position or Office           Term of Employ-
Name                  Age    with the Company             ment Commenced
----                  ---    ----------------             --------------
Donald Jonas          69     Chairman of the Board,       January 1984
                             and Chief Executive
                             Officer

James Shea            53     President                    November 1994


                                       13
<PAGE>   17
Robert J. Harloe      54     Senior Vice President        August 1994
                             - Human Resources

Dennis Hickey         51     Senior Vice President        January 1991
                             - Stores

Ira S. Rosenberg      65     Vice President,              January 1984
                             Secretary and
                             Corporate Counsel

James J. Sheppard     47     Senior Vice President        June 1992
                             and Chief Financial
                             Officer

William  Sullivan     55     Senior Vice President        March 1998
                             - Real Estate

         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 with the election of James Shea as
President in February 1999, Mr. Jonas relinquished title as of that date. He is
also a Director of Dress Barn, Inc.

         James Shea was elected President in February 1999. Prior to that, he
was Senior Vice President of Marketing and Merchandising of the Company having
been elected 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 the May Department Stores Company, from 1990 to
November 1994. 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.

         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.

         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.


                                       14
<PAGE>   18
         James J. Sheppard was elected Senior Vice President and Chief
Financial Officer of the Company in June 1998. Prior to that he was Vice
President and Corporate Controller having joined the Company as Corporate
Controller in June 1992. Mr. Sheppard previously held the positions of
Corporate Controller for Deer Park Spring Water and Staff Vice President,
Assistant Controller for TW Services.

         William R. Sullivan was elected Senior Vice President - Real Estate of
the Company in April 1998 having joined the Company in March 1998. Prior to that
he was employed by Compass Retail, Inc., a division of Equitable Real Estate,
from 1990 to 1997 as Executive Vice President - Leasing. Mr. Sullivan previously
held the position of Senior Vice President of Leasing for Kravco, Inc. in King
of Prussia, Pennsylvania, from 1972 to 1990. Mr. Sullivan started his career in
the shopping center business with The Rouse Company.

ITEM 2.  PROPERTIES.

         The general offices of the Company are located at 1 Cape May Street,
Harrison, New Jersey. The Company leases approximately 550,000 square feet of
floor space at this location. Approximately 460,000 square feet are being
utilized for the distribution center, and approximately 90,000 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 a distribution center of approximately 155,000
square feet 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 April 7, 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.

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.


                                       15
<PAGE>   19
         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 1998      High         Low
          -----------      -----        ---
<S>                       <C>        <C>
        1st Quarter       6-15/16      4-3/4
        2nd Quarter         6-3/8      4-1/8
        3rd Quarter         4-7/8    2-11/16
        4th Quarter         3-3/8      2-1/8
<CAPTION>
          Fiscal 1997      High         Low
          -----------      -----        ---
<S>                       <C>        <C>
        1st Quarter         4-1/8      3-1/8
        2nd Quarter         5-1/8      3-1/4
        3rd Quarter        5-7/16      3-1/2
        4th Quarter         7-3/8      4-7/8
</TABLE>

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

         On April 16, 1999, there were approximately 798 holders of record of
the Common Stock. On April 16, 1999, the closing price of the Common Stock was
$1.875.

         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 Note 7
to the Consolidated Financial Statements.


                                       16
<PAGE>   20
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-Two
                                                Weeks Ended                  Weeks Ended     Weeks Ended
                               --------------------------------------------- -----------     -----------
                                January 30,       January 31,     February 1,  February 3,     January 28,
                                    1999            1998            1997         1996            1995
                               ---------------------------------------------------------------------------
                               (Dollars in thousands, except share, per share and selected operating data)
<S>                            <C>             <C>             <C>           <C>             <C>        
Income Statement Data:
Net sales                      $    428,219    $    445,310    $   441,243   $    432,048    $   399,264
Cost of goods sold
  (including occupancy
   and indirect costs)              317,868         325,269        322,110        310,163        282,875
                               ------------    ------------    -----------   ------------    -----------

Gross profit                        110,351         120,041        119,133        121,885        116,389
Selling, general and,
  administrative expenses           118,606         115,541        110,848        109,414         93,853
Restructuring expense                    --              --             --           (217)        11,000
Provision for
   asset impairment                   1,543           8,746            370             --             --
                               ------------    ------------    -----------   ------------    -----------


Operating (loss) income              (9,798)         (4,246)         7,915         12,688         11,536
Other (Income) expense (1)             (117)          1,952          3,372          5,039          5,838
                               ------------    ------------    -----------   ------------    -----------

(Loss) Income before
income tax provision                 (9,681)         (6,198)         4,543          7,649          5,698
                        
Income tax (benefit)
provision                            (3,940)         (2,440)         1,200          3,146          2,336
                               ------------    ------------    -----------   ------------    -----------

Net (loss) income                    (5,741)         (3,758)         3,343          4,503          3,362

Preferred stock dividend
   requirement                        1,010           1,010            842             --             --
                               ------------    ------------    -----------   ------------    -----------
Net (loss) income
available to common
shareholders                   ($     6,751)   ($     4,768)   $     2,501   $      4,503    $     3,362
                               ============    ============    ===========   ============    ===========


Net (loss) income
  per common share (2) (3)
   Basic                       ($      0.39)   ($      0.28)   $      0.15   $       0.26    $      0.20
   Diluted                     ($      0.39)   ($      0.28)   $      0.15   $       0.26    $      0.20

Weighted average common
  shares outstanding (3) (4)
   Basic                         17,176,000      17,159,000     17,155,000     17,147,000     16,898,000
   Diluted                       17,176,000      17,159,000     17,155,100     17,154,000     16,989,000
</TABLE>


                                       17
<PAGE>   21
<TABLE>
<CAPTION>
                                                  Fifty-Two                  Fifty-Three      Fifty-Two
                                                 Weeks Ended                 Weeks Ended     Weeks Ended
                                -------------------------------------------- ------------    -----------
                                  January 30,     January 31,    February 1,  February 3,    January 28,
                                     1999           1998            1997         1996           1995
--------------------------------------------------------------------------------------------------------
                             (Dollars in thousands, except share, per share and selected operating data)
<S>                             <C>             <C>           <C>             <C>           <C>       
Selected Operating Data:

Stores opened during year                20              7             16             48            49
Stores closed during year                68             30              9             11            11
Stores open at year-end                 578            626            649            642           605
Total square feet of store
  space (at year-end) (5)         2,188,900      2,346,400      2,432,200      2,405,100     2,228,195
Sales per average square
  foot of total space (5) (6)   $       189     $      186    $       182     $      186    $      187
Percentage increase
  (decrease) in comparable
  store sales (7)                      (1.1%)          0.5%          (0.2%)         (1.6%)         3.2%


Balance Sheet Data:
Working capital                 $   164,474     $  163,998    $   151,954     $  136,113    $  134,785
Total assets                        267,644        277,434        272,333        272,312       270,710
Long-term debt                       61,232         60,001         58,853         75,038        77,777
Shareholders' equity                159,134        165,850        170,408        148,642       143,541
Total debt to total
  Capitalization                       27.8%          26.6%          25.7%          34.4%         36.0% 
</TABLE>


(1)  Other (income) expense includes interest expense net of interest income,
     gains realized on the sale of government securities and investment income,
     primarily dividends, from marketable securities.
(2)  Net (loss) income per share for Fiscal 1998, Fiscal 1997 and Fiscal 1996
     was calculated on net (loss) income less the preferred stock dividend
     requirement.
(3)  The Company has never paid any cash dividends on its Common Stock.
(4)  Outstanding shares for the calculation of "basic" net (loss) income per
     common share is the weighted average of outstanding shares calculated on a
     daily basis. Outstanding shares for "diluted" net (loss) income per common
     share includes incremental shares for the Company's incentive stock option
     plan. The incremental shares represent the average of incremental shares
     included in the calculation of net (loss) income per common share for each
     quarter.
(5)  Approximately 90% of total store space represents selling area. The balance
     is storage and office space.
(6)  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.
(7)  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. Comparable store sales for Fiscal 1998 and Fiscal 1997
     exclude sales of stores to be closed starting 90 days prior to closing.


                                       18
<PAGE>   22
ITEM 7.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS.

RESULTS OF OPERATIONS

FISCAL 1998 IN COMPARISON WITH FISCAL 1997

         Sales for Fiscal 1998, the fifty-two week period ended January 30,
1999, decreased $17,091,000 to $428,219,000, a 3.8% decrease from Fiscal 1997,
the fifty-two week period ended January 31, 1998. The decrease in sales was due
to the closing of 68 stores during the year which was partially offset by the
opening of 20 stores during Fiscal 1998. The decrease was also attributable to
the 1.1% decrease in comparable store sales for Fiscal 1998. At the close of the
fiscal year, the Company operated 578 stores compared with 626 stores in
operation at the end of Fiscal 1997.

         Gross profit for Fiscal 1998 was $110,351,000, a $9,690,000 decrease
from the prior fiscal year. The gross profit rate was 25.8% as a percent of
sales, which was 1.2 percentage points below the gross profit rate of Fiscal
1997. The major contributing factors to reduced gross profit from an overall
viewpoint was the reduction of sales partially offset by reduced occupancy costs
such as common area maintenance, real estate taxes, depreciation and utilities,
due to a fewer number of stores in operation. With respect to the gross profit
rate, factors which contributed to the reduction from Fiscal 1997 were the
additional price reductions due to the continued emphasis on "special buy" and
"off-price" strategies and a less favorable inventory shrinkage performance than
the prior fiscal year.

         Selling, general and administrative expenses increased $3,065,000 to
$118,606,000. The expense rate was 27.7% of sales which was 1.8 percentage
points higher than the prior fiscal year. Due to fewer stores, store operating
expenses were lower than the prior fiscal year with the exception of payroll and
related benefits. Payroll at the store level increased due to the additional
handling required for "off-price" and "special buy" merchandise. Expenses of the
Service Office were higher than the prior fiscal year due to additional
resources supporting the Company's new concepts and initiatives, increased
payroll expense in the distribution centers related to the additional handling
needed for "special buy" merchandise and increased occupancy costs, also, at the
distribution centers. Information technology costs increased at the Service
Office due to the on-going design and installation of new merchandise systems
scheduled for completion in Fiscal 1999.

         The Company recorded a non-cash provision for asset impairment of
$1,543,000 for Fiscal 1998 as required by Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed of". The provision was determined by a
comparison of each store's operating cash flow performance versus the carrying
value of the assets at that location. In cases where the undiscounted cash flows
produced by the store were not sufficient to recover the carrying value of the
long-term assets at the location, the store's assets are adjusted to their
estimated fair value. The fair value was estimated by applying a discount rate
to the undiscounted cash flows. For Fiscal 1997 the asset impairment provision
determined in the same manner was $8,746,000.


                                       19
<PAGE>   23
         For Fiscal 1998, net other expense (income) was an income of $117,000
versus an expense of $1,952,000 for the comparable fifty-two week period of
Fiscal 1997. Interest expense was $151,000 lower than the prior fiscal year at
$4,474,000. Interest income increased $1,644,000 over the prior year to
$3,978,000 while other investment gain/income increased $274,000 to $613,000.
Throughout Fiscal 1998 the Company had higher invested balances and favorable
investment market conditions producing the favorable performance compared to the
prior year.

         Income taxes for Fiscal 1998 were at an effective rate of 40.7% which
was comparable to the Company's historical income tax rate except for Fiscal
1996 which had an effective rate of 26.4% related to the reversal of residual
estimated liabilities for prior years. The income tax provision for Fiscal 1998
is a "benefit" due to the reported loss for the fiscal year.

         The net loss for Fiscal 1998 was $5,741,000 compared to a net loss for
Fiscal 1997 of $3,758,000. The loss was primarily the result of reduced sales
and gross profit and additional selling, general and administrative expenses
needed to support the Company's new strategies.

FISCAL 1997 IN COMPARISON WITH FISCAL 1996

         Net sales for Fiscal 1997, the fifty-two week period ended January 31,
1998, increased $4,067,000 to $445,310,000, a 0.9% increase over Fiscal 1996,
the fifty-two week period ended February 1, 1997. The increase in sales reflects
a 0.5% increase in same store sales, offset in part by a net reduction in store
count of 23 (7 openings, 30 closings). At the close of the fiscal year the
Company operated 626 stores compared with 649 stores at the close of Fiscal
1996.

         Gross profit for Fiscal 1997 was $120,041,000, a $908,000 increase over
the prior fiscal year. The gross profit rate of 27.0% as a percent of sales
equaled the rate for Fiscal 1996. Favorable shrinkage performance and a
favorable merchandise mix in Lechters Housewares were offset by additional price
reductions, the transition in progress to lower margin off-price merchandise in
Famous Brands and the under-absorption of higher occupancy costs.

         Selling, general and administrative expenses increased $4,693,000 to
$115,541,000. The expense rate of 25.9% was 0.8% above the rate for Fiscal 1996.
The additional expense reflects the costs of the Company's expanded advertising
program, an increase in Service Office payroll to support staffing of the Famous
Brands off-price merchandise strategy and new concept development initiative,
added investment in information technology and costs relating to the closing of
30 stores.

         The Company recorded a non-cash provision for asset impairment of
$8,746,000 during the fourth quarter of Fiscal 1997. This charge to operating
income relates primarily to the write-down of under-performing store long-lived
assets in accordance with the requirements of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets to
Be Disposed Of." The provision reflects the impairment of under-performing
properties, some of which were closed in Fiscal 1998.

         Other expenses for Fiscal 1997 were $1,952,000, a decrease of
$1,420,000 from Fiscal 1996. At 0.4% of sales, other expenses were 0.4% below
the prior fiscal year rate. Interest expense declined $378,000 primarily as a
result of the early retirement of the Senior Notes Payable in Fiscal

                                       20
<PAGE>   24
1996. Interest income increased $684,000 and investment gains/income increased
$358,000 reflecting the higher levels of invested cash and marketable securities
and favorable market rates.

         Income taxes for Fiscal 1997 were at an effective rate of 39.4% which
was comparable to the Company's historical income tax rate except for Fiscal
1996 which had an effective rate of 26.4% related to the reversal of residual
estimated liabilities for prior years. The income tax provision for Fiscal 1997
is a "benefit" due to the reported loss for the fiscal year.

         The net loss for Fiscal 1997 was $3,758,000 compared to a net income
for Fiscal 1996 of $3,343,000. The loss was primarily the result of the
aforementioned provision for asset impairment.

YEAR 2000

         The Year 2000 ("Y2K") issue is primarily the result of computer
programs using two digits instead of four digits to indicate the year. From the
Company's perspective, the major risks associated with the Year 2000 involve 
areas in which the Company is dependent on others to take appropriate and 
timely actions before January 1, 2000. Specifically, as a retailer, the Company 
is dependent upon an uninterrupted supply of merchandise to its stores, upon 
landlords to provide normal operating conditions at the properties leased by 
the Company in which to transact business and upon service providers who supply 
such items as phone service and utilities which allow the Company to operate 
its stores located in 42 states and the District of Columbia from its 
headquarters in New Jersey. These key factors must be resolved by outside 
parties. Without a successful resolution of these factors, the Company will not 
be able to operate in its normal manner and severe adverse economic 
consequences will result. With respect to the products sold by the Company, for 
the most part, they do not contain embedded electronic devices which would make 
them subject to Y2K issues.

         To monitor these outside parties in their Y2K process and to ensure 
that all factors over which it had control from a Y2K perspective were resolved 
before the start of the Y2K, the Company initiated its Year 2000 compliance 
project during Fiscal Year 1997 with a review of all existing information 
technology ("IT") software systems by the vendor.

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

         The Company established a Year 2000 Compliance Task Force in the third
quarter of Fiscal 1998 whose charter is to review all of the Company's efforts
to ensure that the Company will be Year 2000 compliant prior to December 31,
1999. Comprised of representatives from Information Technology, Operations,
Finance, Loss Prevention, Merchandising and Human Resources, the task force has
reviewed all known potential Year 2000 issues and has established a Master
Schedule of items ready to be resolved to ensure that the Y2K will have no
adverse impact on the Company. The Y2K Task Force's initial focus was to review
steps taken to date primarily in the IT area.

         The Y2K Task Force also commenced its review of non-IT related issues
involving equipment with embedded technology which may not be Year 2000
compliant. This phase of the


                                       21
<PAGE>   25
project has been completed it has identified limited amounts of equipment with
embedded technology subject to Y2K exposure. Early in Fiscal 1999, the Company
mailed a Y2K readiness questionnaire to all of its vendors. A second mailing
was also made to key vendors who did not respond to the initial mailing.

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

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

         As part of their oversight responsibilities, the Audit Committee of the
Board of Directors has requested and will be provided with periodic status
reports, on at least on a monthly basis, on the progress the Company has made
with respect to Year 2000 readiness and compliance.

         The cost of the software purchased for the major systems as described
above approximates $4,200,000. Future costs of new software for major systems
are estimated to be $1,200,000 for the completion of the merchandise inventory
analysis and control system and $1,400,000 for a warehouse management system.
Costs of compliance such as hardware upgrades, equipment replacement and
miscellaneous software, which are "capitalized" as other assets, are estimated
to be $300,000. Costs of re-training or modifications to existing programs will
be expensed as incurred and are estimated to be $400,000. It is anticipated that
funds for Year 2000 compliance costs will be generated by internal sources.

LIQUIDITY AND CAPITAL RESOURCES

         The combined balances of cash, cash equivalents and marketable
securities at January 30, 1999 as shown on the Consolidated Balance Sheet
totaled $98,253,000, an increase of $7,111,000 over the combined balances of
$91,142,000 at January 31, 1998. As depicted on the Consolidated Statements of
Cash Flows, the increase in cash and cash equivalents was $19,108,000 for the
fifty-two week period ended January 30, 1999 compared with a $9,373,000 increase
for Fiscal 1997.

         Cash flows from operating activities consist primarily of net (loss)
income adjusted for certain non-cash charges such as depreciation and
amortization, deferred taxes, loss on disposal of


                                       22
<PAGE>   26
fixed assets and the provision for asset impairment. Operating activities also
include changes in operating assets, which include accounts receivable,
inventory, accounts payable, accrued liabilities and other items. Net cash
provided by operating activities for Fiscal 1998 was $16,648,000 compared to
$35,617,000 for Fiscal 1997. For Fiscal 1998 there was a net loss of $5,741,000
which reduced cash. Significant offsets to the net loss which provided cash were
depreciation and amortization of $16,676,000, the asset impairment provision of
$1,543,000 and a decrease in merchandise inventories of $9,810,000. The most
significant operating activity reducing cash flow was the increase in other
assets due to the increased investments in information technology software.

         With respect to investing activities, in addition to the decrease in
marketable securities of $12,040,000, capital expenditures were $8,580,000
compared to $4,860,000 for Fiscal 1997. Capital expenditures were principally
for the construction of and fixtures for new and remodeled stores opened in
Fiscal 1998. Other capital expenditures for Fiscal 1998 included significant
amounts for computer hardware expenditures related to systems infrastructure
enhancements.

         Planned capital expenditures for Fiscal 1999 are estimated at
$14,000,000 - $15,000,000 primarily for new stores, renovations, remodels and
computer hardware.

         With respect to the Company's line of credit, on March 26, 1998, the
Company entered into a new $40,000,000 Credit Agreement which replaced the
existing credit facility. The Credit Agreement includes a restrictive covenant
which prohibits the payment of dividends on the Company's common stock. The
Credit Agreement was amended on March 23, 1999 waiving certain operating
covenants with respect to consolidated net income and leverage ratio as defined
by the Credit Agreement for Fiscal 1998 and adjusting the covenants and fee
structure for the balance of the Agreement. The credit facility consists of a
$20,000,000 line of credit for direct borrowings and a $20,000,000 line for
issuance of Letters of Credit.

         The term of the new agreement is for three years, with the Letter of
Credit component renewable annually during that period. The Letter of Credit
component was renewed for another year on March 23, 1999. As of the end of
Fiscal 1998, there were no outstanding borrowings under the then existing Credit
Agreement. At January 30, 1999 and January 31, 1998 the Company was liable for
drawings under outstanding Letters of Credit in the amount of approximately
$11,579,000 and $8,299,000, respectively.

INFLATION

         The economy's experienced low inflation, in conjunction with increased
competition, has severely restricted pricing opportunities within the housewares
segment. In fact, certain lines of merchandise considered commodity in nature
have experienced price deflation over the last several years. The result has
been adverse pressure on the Company's gross margin and inability to check
further profit erosion given the concurrent rise in selling, general and
administrative expenses. The Company has responded to the situation by
increasing the penetration of its private label program and non-commodity
assortment of merchandise, introducing higher price point items to the line and
taking selective price increases where the market allows. Additionally, the
Company has in place an aggressive program to reduce its cost of operations and
financing.


                                       23
<PAGE>   27
SEASONALITY

         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 June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 must be adopted by
January 30, 2000. The Company has not actively engaged in derivative
instruments to hedge its market risks. Accordingly, this statement is not
expected to materially impact the Company's financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

                  The Company imports about 35% of its merchandise from
the Far East which subjects it to the market risk of currency fluctuations.
However, the Company uniformly utilizes purchase contracts and letters of
credit denominated in US dollars to mitigate this risk. Additionally, there are
multiple suppliers, both foreign and domestic, of its products. With respect to
marketable securities, the Company is subject to the variations in the
investment markets. It mitigates this risk by employing the services of a
investment management firm which with the Company's oversight invests solely in
the highest quality securities and spreads the market risk among various types
of securities with varying maturities.

   
         With respect to its Credit Agreement, although the Company has not had 
to borrow funds under the Credit Agreement during Fiscal 1998 and Fiscal 1997,
should it need to utilize the line of credit for direct borrowings, the interest
rate is subject to market conditions at the time of the borrowing.
    

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 22, 1999.


                                       24
<PAGE>   28
PART IV

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

     (a)          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.
                  (Incorporated herein by reference to the Company's Annual
                  Report on Form 10-K for the year ended February 1, 1997.)

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

     10.1         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). (1.)

     10.2         Credit Agreement dated March 26, 1998. (Incorporated herein by
                  reference to Exhibit 10.2 to this Company's Annual Report on
                  Form 10-K for the year ended January 31, 1998).

     10.2.1       First Amendment and Waiver to Credit Agreement dated March 23,
                  1999.*

     10.3         Form of Deferred Compensation Agreement (Incorporated herein
                  by reference to Exhibit 10.5 to the Registration Statement).
                  (1.)

     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). (1.)

     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). (1.)


                                       25
<PAGE>   29
     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). (1.)

     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). (1.)

     10.8         Form of Consulting Agreement (Incorporated herein by reference
                  to Exhibit 10.9.1 to the Registration Statement). (1.)

     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). (1.)

     10.10        Agreement between the Company and Local 99, UNITE to a
                  collective bargaining agreement covering warehouse employees
                  dated March 16, 1996. (Incorporated herein by reference to the
                  Company's Annual Report on Form 10-K for the year ended
                  February 1, 1997).

     10.10.1      Memorandum of Agreement dated April 26, 1999 between the
                  Company and Local 99, UNITE extending the term of Agreement
                  covering warehouse employees dated March 16, 1996 to
                  March 15, 2002.*

     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).

     10.11.1      Lease Modification Agreement dated June 19, 1995 covering the
                  Distribution Center and Office space in Harrison, NJ. *

     10.11.2      Lease Modification Agreement dated July 22, 1998 covering the
                  Distribution Center and Office space in Harrison, NJ. *

     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).

     10.13        Agreement dated March 27, 1998 between the Company and Local
                  99, UNITE, covering office employees for a term from July 1,
                  1997 to June 30, 2000. (Incorporated herein by reference to
                  Exhibit 10.13 to the Company's Annual Report on Form 10-K for
                  the year ended January 31, 1998).

     10.14        Memoranda of Agreement dated March 27, 1998 between the
                  Company and Local 99, UNITE, amending, respectively, Agreement
                  dated March 16, 1996 covering warehouse employees and
                  Agreement dated March 27, 1998 covering office employees.
                  (Incorporated herein by reference to Exhibit 10.14 to the 
                  Company's Annual Report on Form 10-K for the year ended 
                  January 31, 1998).

     10.15        Lechters Long-Term Incentive Plan. (Incorporated herein by
                  reference to Exhibit 10.1 to the Company's Form 10-Q for the
                  period ended August 1, 1998). (1.)


                                       26
<PAGE>   30
     21           Subsidiaries of the Company. *

     23           Consent of Deloitte & Touche LLP.*

     27           Financial Data Schedule *

*Filed herewith.
(1.) Management Compensatory Plan.


                                       27
<PAGE>   31
                                   SIGNATURES

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

                                       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 by the following persons on behalf of the registrant
in the capacities and on the date indicated.


<TABLE>
<CAPTION>
         Signature                                    Title                                     Date
         ---------                                    -----                                     ----
<S>                                  <C>                                                    <C>
                                     Chairman of the Board, Chief Executive Officer,  
    /s/ DONALD JONAS                 and Director (Principal Executive Officer)             April 27, 1999
-----------------------------                                                               --------------
       (DONALD JONAS)                                                                 
                                     Senior Vice President (Principal Financial       
  /s/ JAMES J. SHEPPARD              Officer and Principal Accounting Officer)              April 27, 1999
-----------------------------                                                               --------------
     (JAMES J. SHEPPARD)                                                                    

    /s/ MARTIN BEGUN                 Director                                               April 27, 1999
-----------------------------                                                               --------------
       (MARTIN BEGUN)                                                                       

  /s/ CHARLES A. DAVIS               Director                                               April 27, 1999
-----------------------------                                                               --------------
     (CHARLES A. DAVIS)                                                                     

 /s/ BERNARD D. FISCHMAN             Director                                               April 27, 1999
-----------------------------                                                               --------------
    (BERNARD D. FISCHMAN)                                                                   

    /s/ ROBERT KNOX                  Director                                               April 27, 1999
-----------------------------                                                               --------------
       (ROBERT KNOX)                                                                        

   /s/ ANTHONY MALKIN                Director                                               April 27, 1999
-----------------------------                                                               --------------
      (ANTHONY MALKIN)                                                                      


  /s/ ROBERTA MANEKER                Director                                               April 27, 1999
-----------------------------                                                               --------------
     (ROBERTA MANEKER)                                                                      
</TABLE>



                                       28
<PAGE>   32
<TABLE>
<S>                                  <C>                                                    <C>
  /s/ NORMAN MATTHEWS                Director                                               April 27, 1999
-----------------------------                                                               --------------
     (NORMAN MATTHEWS)                                                                      

    /s/ JOHN WOLFF                   Director                                               April 27, 1999
-----------------------------                                                               --------------
       (JOHN WOLFF)                                                                         

 /s/ STEVE WESTERFIELD               Director                                               April 27, 1999
-----------------------------                                                               --------------
    (STEVE WESTERFIELD)                                                                     
</TABLE>


                                       29
<PAGE>   33
                         LECHTERS, INC. AND SUBSIDIARIES

                                TABLE OF CONTENTS

                                                                 Page
                                                                 ----

MANAGEMENT'S REPORT                                               F-1

INDEPENDENT AUDITORS' REPORT                                      F-2

FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED
      JANUARY 30, 1999

      Consolidated Balance Sheets                                 F-3

      Consolidated Statements of Operations                       F-4

      Consolidated Statements of Cash Flows                       F-5

      Consolidated Statement of Shareholders' Equity              F-6

      Notes to Consolidated Financial Statements                F-7 - F-21
<PAGE>   34
MANAGEMENT'S REPORT

To the Shareholders of Lechters, Inc.:

We have prepared the consolidated financial statements of Lechters, Inc.,
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 to 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



James J. Sheppard
Senior Vice President and
Chief Financial Officer


                                      F-1
<PAGE>   35
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 (the "Company") as of January 30, 1999 and January 31, 1998,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended January 30, 1999.
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 January 30, 1999
and January 31, 1998, and the results of their operations and their cash flows
for each of the three years in the period ended January 30, 1999 in conformity
with generally accepted accounting principles.


DELOITTE & TOUCHE LLP

Parsippany, New Jersey
March 24, 1999




                                      F-2
<PAGE>   36
LECHTERS, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                             January 30, January 31,
                                                                                1999       1998
                                                                              --------   --------
<S>                                                                           <C>        <C>
ASSETS
CURRENT ASSETS:
   Cash and cash equivalents                                                  $ 35,503   $ 16,395
   Marketable securities                                                        62,750     74,747
   Accounts receivable                                                           4,185      5,084
   Merchandise inventories                                                      89,224     99,034
   Prepaid expenses                                                              1,734      2,145
                                                                              --------   --------
     Total current assets                                                      193,396    197,405
                                                                              --------   --------

PROPERTY AND EQUIPMENT:
   Fixtures and equipment                                                       57,678     58,403
   Leasehold improvements                                                       96,452     94,994
                                                                              --------   --------
                                                                               154,130    153,397
   Less accumulated depreciation and amortization                               88,401     79,891
                                                                              --------   --------
      Net property and equipment                                                65,729     73,506
                                                                              --------   --------

OTHER ASSETS                                                                     8,519      6,523
                                                                              --------   --------
TOTAL ASSETS                                                                  $267,644   $277,434
                                                                              ========   ========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
   Accounts payable                                                           $  8,982   $ 10,127
   Dividends payable-preferred stock                                             1,010      1,010
   Salaries, wages and other accrued expenses                                   17,156     18,102
   Taxes, other than income taxes                                                1,774      1,227
   Income taxes payable                                                             --      2,941
                                                                              --------   --------
     Total current liabilities                                                  28,922     33,407

LONG-TERM DEBT                                                                  61,232     60,001

DEFERRED INCOME TAXES                                                           10,538     11,456

OTHER LIABILITIES                                                                7,818      6,720

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
   Convertible preferred stock, $100 par value authorized 1,000,000 shares,
       issued and outstanding Series A - 149,999 shares and
       Series B - 50,001 shares                                                 20,000     20,000


   Common stock, no par value,authorized 50,000,000 shares,
       issued and outstanding 17,176,286 and 17,174,286,                            58         58
       respectively
   Accumulated other comprehensive income                                          109         84
   Additional paid-in capital                                                   62,380     62,370
   Retained earnings                                                            76,587     83,338
                                                                              --------   --------
     Total shareholders' equity                                                159,134    165,850
                                                                              --------   --------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                    $267,644   $277,434
                                                                              ========   ========
</TABLE>


                 See notes to consolidated financial statements.


                                      F-3
<PAGE>   37
LECHTERS, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                       Fiscal Year Ended
                                                         --------------------------------------------
                                                          January 30,     January 31,     February 1,
                                                             1999            1998            1997
                                                         ------------    ------------    ------------
<S>                                                      <C>             <C>             <C>
NET SALES                                                $    428,219    $    445,310    $    441,243

COST OF GOODS SOLD (including occupancy
   and indirect costs)                                        317,868         325,269         322,110
                                                         ------------    ------------    ------------
GROSS PROFIT                                                  110,351         120,041         119,133

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                  118,606         115,541         110,848

PROVISION FOR ASSET IMPAIRMENT                                  1,543           8,746             370
                                                         ------------    ------------    ------------

OPERATING (LOSS)/ INCOME                                       (9,798)         (4,246)          7,915

OTHER EXPENSES (INCOME):
   Interest Expense                                             4,474           4,625           5,003
   Interest Income                                             (3,978)         (2,334)         (1,650)
   Net Investment (Gain/Income) Loss                             (613)           (339)             19
                                                         ------------    ------------    ------------
                                                                 (117)          1,952           3,372
                                                         ------------    ------------    ------------

(LOSS)/ INCOME BEFORE INCOME TAX PROVISION                     (9,681)         (6,198)          4,543

INCOME TAX (BENEFIT) PROVISION                                 (3,940)         (2,440)          1,200
                                                         ------------    ------------    ------------

NET (LOSS)/ INCOME                                             (5,741)         (3,758)          3,343

Preferred Stock Dividend Requirement                            1,010           1,010             842
                                                         ------------    ------------    ------------


Net (Loss)/ Income Available to Common Shareholders      ($     6,751)   ($     4,768)   $      2,501
                                                         ============    ============    ============

NET (LOSS)/ INCOME PER COMMON SHARE
   Basic                                                 ($      0.39)   ($      0.28)   $       0.15
                                                         ============    ============    ============
   Diluted                                               ($      0.39)   ($      0.28)   $       0.15
                                                         ============    ============    ============

WEIGHTED AVERAGE COMMON  SHARES OUTSTANDING
   Basic                                                   17,176,000      17,159,000      17,155,000
                                                         ============    ============    ============
   Diluted                                                 17,176,000      17,159,000      17,155,100
                                                         ============    ============    ============
</TABLE>

                 See notes to consolidated financial statements.


                                      F-4
<PAGE>   38
LECHTERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
                                                                  Fiscal Year Ended
                                                           --------------------------------
                                                          January 30, January 31, February 1,
                                                             1999        1998        1997
                                                           --------    --------    --------
<S>                                                        <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income                                          ($ 5,741)   ($ 3,758)   $  3,343
  Adjustments to reconcile net (loss)/income to net cash
     provided by operating activities:
  Provision for asset impairment                              1,543       8,746         370
  Depreciation and amortization                              16,676      18,014      17,672
  Loss on disposal of property and equipment                  1,580       1,702       1,067
  Deferred income taxes                                        (936)     (4,998)       (894)
  Deferred rent                                               1,075         968       1,160
  Other                                                        (751)        265         521
Changes in operating assets and liabilities
  Decrease in accounts receivable                               899         477          12
  Decrease in merchandise inventories                         9,810       1,408       9,456
  Decrease (Increase) in prepaid expenses                       411       3,589        (215)
  Increase in other assets                                   (3,433)     (3,314)       (446)
  (Decrease) Increase in accounts payable,
    Accrued salaries, wages and other accrued
    Expenses and taxes, other than income taxes              (1,544)     11,556      (5,089)
  (Decrease) Increase in income taxes payable                (2,941)        962       1,226
                                                           --------    --------    --------

Net cash provided by operating activities                    16,648      35,617      28,183
                                                           --------    --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures                                       (8,580)     (4,860)     (8,053)
  Decrease (Increase) in marketable securities               12,040     (20,471)    (16,592)
                                                           --------    --------    --------

  Net cash provided by (used in) investing activities         3,460     (25,331)    (24,645)
                                                           --------    --------    --------

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)
  Exercise of stock options                                      10          97          --
  Payment of preferred stock dividends                       (1,010)     (1,010)         --
                                                           --------    --------    --------

  Net cash used in financing activities                      (1,000)       (913)       (750)
                                                           --------    --------    --------

INCREASE IN CASH AND CASH
   EQUIVALENTS                                               19,108       9,373       2,788

CASH AND CASH EQUIVALENTS, BEGINNING
   OF YEAR                                                   16,395       7,022       4,234
                                                           --------    --------    --------

CASH AND CASH EQUIVALENTS, END OF YEAR                     $ 35,503    $ 16,395    $  7,022
                                                           ========    ========    ========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
  INFORMATION:
  Cash paid during the year for:
     Interest                                              $  2,769    $  3,406    $  4,616
                                                           ========    ========    ========

     Income taxes                                          $  2,296    $  2,073    $    920
                                                           ========    ========    ========
</TABLE>

                See notes to consolidated financial statements.

                                      F-5
<PAGE>   39
LECHTERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Amounts in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                      Convertible
                                       Common          Preferred     
                                    Stock Issued      Stock Issued                           Accumulated             Compre-
                                 -----------------  -----------------  Additional               Other                 hensive
                                                                        Paid-In     Retained Comprehensive            Income
                                   Shares   Amount  Shares    Amount    Capital     Earnings   Income      Total      (Loss)
                                   ------   ------  ------    ------    -------     --------   ------      -----      ------
<S>                              <C>          <C>   <C>       <C>       <C>         <C>         <C>      <C>          <C>
BALANCE,
   FEBRUARY 3, 1996              17,155,086   $58        --   $    --   $ 62,773    $ 85,773    $  38    $ 148,642    $    --

Net Income                               --    --        --        --         --       3,343       --        3,343      3,343
Other comprehensive income,
 (loss) net of tax:
   Unrealized loss on
   available for sale
   securities                            --    --        --        --         --          --      (67)         (67)       (67)
Issuance of convertible
   preferred stock, net of
   issuance expenses                     --    --   200,000    20,000       (500)         --       --       19,500         --
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    $ 3,276
                                                                                                                      =======
Net loss                                 --    --        --        --         --      (3,758)      --       (3,758)    (3,758)
Other comprehensive income,
   (loss) net of tax:
     Unrealized gain on
     available for sale
     securities                          --    --        --        --         --          --      113          113        113
 Exercise of stock options           19,200    --        --        --         97          --       --           97         --
 Declaration of dividend on
   convertible preferred stock           --    --        --        --         --      (1,010)      --       (1,010)        --
                                 ----------   ---   -------   -------   --------    --------    -----    ---------    -------
BALANCE,
   JANUARY 31,  1998             17,174,286    58   200,000    20,000     62,370      83,338       84      165,850    ($3,645)
                                                                                                                      =======
Net Loss                                 --    --        --        --         --      (5,741)      --       (5,741)    (5,741)
Other comprehensive income,
    (loss) net of tax:
      Unrealized gain on
      available  for sale        
      securities                         --    --        --        --         --          --       25           25         25
Exercise of stock options             2,000    --        --        --         10          --       --           10         --
Declaration of dividend on
  convertible preferred stock            --    --        --        --         --      (1,010)      --       (1,010)        --
                                 ----------   ---   -------   -------   --------    --------    -----    ---------    -------
Balance,
    JANUARY 30, 1999             17,176,286   $58   200,000   $20,000   $ 62,380    $ 76,587    $ 109    $ 159,134    ($5,716)
                                 ==========   ===   =======   =======   ========    ========    =====    =========    =======
</TABLE>



                 See notes to consolidated financial statements.


                                      F-6
<PAGE>   40
LECHTERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE FISCAL YEARS ENDED JANUARY  30, 1999
(Amount in thousands, except share and per share amounts)

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 January 30, 1999, the Company operated 578
                  stores in 42 states and the District of Columbia.

                           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.

b)                         References to Fiscal 1998, Fiscal 1997 and Fiscal
                  1996 mean the fiscal year ending on the Saturday closest to
                  the end of January. Fiscal Year 1998, Fiscal Year 1997 and
                  Fiscal Year 1996 were each comprised of 52 weeks.

c)                         Cash and 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 component of other comprehensive income. (See 
                  Note 9.)

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

<TABLE>
<CAPTION>
                                                            January 30,    January 31,
                                                               1999           1998
                                                              -------      ---------
<S>                                                           <C>           <C>
                  Lower of cost (first-in, first-out) or
                  market as  determined by the retail
                  inventory method (stores)                   $57,912       $ 69,167

                  Lower of cost (first-in, first-out) or
                  market (distribution centers)                31,312         29,867
                                                              -------      ---------
                                                              $89,224      $  99,034
                                                              =======      =========
</TABLE>


                                      F-7
<PAGE>   41
                           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 January 30, 1999 total indirect costs
                  included as part of inventory were approximately $7,900. At
                  January 31, 1998, indirect costs included as part of inventory
                  were approximately $8,500.

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. As
                  required by Statement of Financial Accounting Standards (SFAS)
                  No. 121, "Accounting for the Impairment of Long-Lived Assets
                  and for Long-Lived Assets to be Disposed Of", the Company
                  evaluates each stores' performance and measures the carrying
                  value of each locations' fixed assets, principally leasehold
                  improvements and fixtures, versus its estimated undiscounted
                  future cash flows. When the evaluation of a store location
                  indicates that the undiscounted cash flows are not sufficient
                  to recover the carrying value of the long-term assets at the
                  store, the store assets are adjusted to their fair values. The
                  fair value is estimated by applying a discount rate to the
                  undiscounted cash flows. During Fiscal 1998, the Company
                  recorded a $1,543 provision for the impairment of long lived
                  assets located in stores. The asset impairment provisions
                  recorded in Fiscal 1997 and Fiscal 1996 were $8,746 and $370,
                  respectively. As a result of the asset impairment provisions
                  recorded, depreciation and amortization expenses for the store
                  locations which have been impaired will be reduced in future
                  years.

f)                         Pre-opening Costs - During Fiscal 1998, the Company
                  adopted the policy of expensing pre-opening costs as incurred.
                  In the prior fiscal years, pre-opening costs were capitalized
                  and amortized over a period of 12 months from the date
                  operations commence. This change did not have a material
                  impact on the financial statements for Fiscal 1998.

g)                         Income Taxes - In accordance with SFAS No. 109,
                  "Accounting for 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.)

h)                         Net (Loss) Income per Common Share - In February
                  1997, the Financial Accounting Standards Board ("FASB") issued
                  SFAS No. 128, "Earnings per Share", which amended the manner
                  in which net (loss) income per share is calculated and
                  presented on financial statements. In accordance with SFAS No.
                  128, "basic" net (loss) income per share data were computed by
                  dividing net (loss) income less the dividend requirements for
                  the Company's Convertible Preferred Stock by the weighted
                  average of common shares outstanding during each period
                  presented. For the computation of "diluted" earnings per
                  share, potential shares of common stock related to the
                  Company's 1989 Incentive and Non-Qualified Stock Option Plan
                  were excluded from the Fiscal 1998 and the Fiscal 1997
                  computations since they would have been anti-dilutive. With
                  respect to the Company's 5% Convertible Subordinated
                  Debentures issued in September 1991, the assumed conversion of
                  these securities would also have had an anti-dilutive effect
                  on the net (loss) income per share data presented for Fiscal
                  1998, Fiscal 1997 and Fiscal 1996. With respect to the


                                      F-8
<PAGE>   42
                  Company's 5.05% Convertible Preferred Stock issued in April
                  1996, the assumed conversion of the preferred stock would also
                  have had an anti-dilutive effect on the net (loss) income data
                  presented for Fiscal 1998, Fiscal 1997 and Fiscal 1996.

                  The number of shares used in computing basic and diluted net
                  (loss) income per share was determined as follows:

<TABLE>
<CAPTION>
                                                                              Fiscal Year Ended
                                                                ------------------------------------------------
                                                               January 30,        January  31,        February 1,
                                                                   1999              1998                1997
                                                                ----------         ----------         ----------
<S>                                                             <C>                <C>                <C>
                   Basic:

                   Weighted average common
                     shares outstanding                         17,176,000         17,159,000         17,155,000
                                                                ==========         ==========         ==========

                   Diluted:

                   Weighted average common
                     shares outstanding                         17,176,000         17,159,000         17,155,000
                   Common share equivalents                              -                  -                100
                                                                ----------         ----------         ----------
                                                                17,176,000         17,159,000         17,155,100
                                                                ==========         ==========         ==========
</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.

                                 The fair value of the Company's cash and cash
                        equivalents, accounts receivable and accounts payable
                        approximate their carrying values at January 30, 1999
                        and January 31, 1998, due to the short term maturities
                        of these investments. The fair value of the Company's
                        long-term debt at January 30, 1999 and January 31, 1998
                        was $43,875 and $53,300 respectively. The carrying value
                        of long-term debt at January 30, 1999 and January 31,
                        1998 was $61,232 and $60,001 respectively. The fair
                        value of the Company's long-term debt is based on market
                        prices or dealer quotes (for publicly traded
                        debentures).

               j)                Comprehensive Income- During Fiscal 1998, the
                        Company adopted SFAS No. 130, "Reporting Comprehensive
                        Income". Comprehensive income, which is reported in the
                        Statements of Consolidated Shareholders' Equity, is
                        defined as the total change in shareholders' equity
                        during the period other than from transactions with
                        shareholders. For the Company, comprehensive income


                                      F-9
<PAGE>   43
                        consists of net income and the net change in unrealized
                        gains and losses, net of taxes, on securities classified
                        for SFAS No. 115 purposes as held available for sale.
                        Accumulated other comprehensive income consists of the
                        accumulated unrealized gains and losses, net of
                        applicable income taxes and net of reclassification
                        adjustments for gains and losses included in net income.

               k)                Recent Accounting Pronouncements - In June
                        1998, the FASB issued SFAS No. 133, "Accounting for
                        Derivative Instruments and Hedging Activities." SFAS No.
                        133 must be adopted by January 30, 2000. The Company has
                        not actively engaged in derivative instruments to hedge
                        its market risks. Accordingly, this statement is not
                        expected to materially impact the Company's financial
                        statements.


                l)               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.


                m)               Reclassifications - Certain reclassifications
                        have been made to the financial statements of prior
                        years to conform with the classifications used for
                        Fiscal 1998.

2.       SEGMENT INFORMATION

         The company has adopted SFAS No. 131, "Disclosures about Segment of an
         Enterprise and Related Information," effective with the Fiscal year
         ended January 30, 1999. The statement requires companies to disclose
         segment data based on how management makes decisions about allocating
         resources to segments and measuring their performance. The Company
         defines its principal business segments into two divisions, the
         Specialty Housewares segment which operates as Lechters Housewares(R)
         and Lechters Kitchen Place(R), and the Off-Price Home Business segment
         which operates as Famous Brands Housewares Outlet(R) and Cost Less Home
         Store(SM). The contribution of these segments, as well as "corporate
         and other" for Fiscal 1998, 1997, and 1996 are summarized below.
         Corporate and other includes general corporate expenses, principally
         service office expense and distribution centers as well as interest
         income and expense.


                                      F-10
<PAGE>   44
         The Company's segment disclosures are as follows:


<TABLE>
<CAPTION>
                                                          Fiscal Year Ended
                                                 -------------------------------------
                                                 January 30, January  31,  February 1,
                                                     1999        1998         1997
                                                  ---------    ---------    ---------
<S>                                               <C>          <C>          <C>
   SALES
Specialty Housewares                              $ 335,483    $ 346,947    $ 340,904
Off-Price Home Business                              92,736       98,363      100,339
                                                  ---------    ---------    ---------

Total Sales                                       $ 428,219    $ 445,310    $ 441,243
                                                  =========    =========    =========

 (LOSS) INCOME BEFORE INCOME TAX PROVISION
Specialty Housewares                              $  17,023    $  14,664    $   9,575
Off-Price Home Business                                (418)       3,954       18,598
Corporate and Other                                 (26,403)     (22,864)     (20,258)
                                                  ---------    ---------    ---------

Operating  (Loss) / Income                           (9,798)      (4,246)       7,915

Interest (Income) / Expense                            (117)       1,952        3,372
                                                  ---------    ---------    ---------

Total (Loss) Income before income tax provision   ($  9,681)   ($  6,198)   $   4,543
                                                  =========    =========    =========

   DEPRECIATION AND AMORTIZATION EXPENSE
Specialty Housewares                              $   9,580    $  11,178    $  11,399
Off-Price Home Business                               1,639        1,865        1,677
Corporate and Other                                   5,457        4,971        4,596
                                                  ---------    ---------    ---------

Total Depreciation and Amortization Expense       $  16,676    $  18,014    $  17,672
                                                  =========    =========    =========


   CAPITAL ADDITIONS
Specialty Housewares                              $   5,974    $   2,363    $   4,335
Off-Price Home Business                                 940          516        1,615
Corporate and Other                                   1,666        1,981        2,103
                                                  ---------    ---------    ---------

Total Capital Additions                           $   8,580    $   4,860    $   8,053
                                                  =========    =========    =========

   TOTAL ASSETS
Specialty Housewares                              $  93,571    $ 103,550    $ 122,096
Off-Price Home Business                              20,574       25,013       32,415
Corporate and Other                                 153,499      148,871      117,822
                                                  ---------    ---------    ---------

Total Assets                                      $ 267,644    $ 277,434    $ 272,333
                                                  =========    =========    =========
</TABLE>


                                      F-11
<PAGE>   45
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. 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. The Company may at any time
               require the conversion of all of the outstanding Series A
               Preferred and all of the outstanding Series B Preferred into
               shares of Common Stock if the closing price of the Common Stock
               based on trading in the NASDAQ National Market, or such other
               stock market on which the Common Stock is then traded, as
               reported in the Wall Street Journal averages not less than
               $15.625 over the 60 trading days ending on the date immediately
               preceding the date of the Company's election to cause such
               mandatory conversion. The Company must convert all of the
               outstanding shares of both the Series A Preferred and Series B
               Preferred simultaneously. Any such mandatory conversion shall
               only be effected upon written notice delivered to all holders of
               Series A Preferred and Series B Preferred within 10 days
               following the date on which the Company elects to cause such
               conversion.

               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.

               Robert Knox, a Director of the Company, is Senior Managing
               Director of Cornerstone Equity Investors, LLC, the investment
               manager for Prudential Private Equity Investors III, L.P.

         b)    Stock Options - As permitted by SFAS No. 123, "Accounting for
               Stock-Based Compensation," 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 January
               30, 1999, January 31, 1998 and February 1, 1997.


                                      F-12
<PAGE>   46
<TABLE>
<CAPTION>
                                                                           Fiscal Year Ended
                                                                 ---------------------------------------
                                                                 January 30,    January 31,  February 1,
                                                                    1999           1998          1997
             -------------------------------------------------------------------------------------------
<S>                                                               <C>            <C>            <C>
             Net (loss) income available to common shareholders:
               As reported                                        ($6,751)       ($4,768)       $2,501
               Pro-forma                                          ($7,166)       ($5,133)       $2,079
                                                                  

             Net (loss) income per common share:
               As reported                                         ($0.39)        ($0.28)       $ 0.15
               Pro-forma                                           ($0.42)        ($0.31)       $ 0.12
</TABLE>

                  The pro forma effect of applying SFAS No. 123 is not
         necessarily indicative of the effect on reported net income for future
         years.

                  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
                                                          --------------------------------------
                                                          January 30,   January  31, February 1,
                                                             1999           1998       1997
                --------------------------------------------------------------------------------
<S>                                                         <C>           <C>        <C>
                Dividend yield                                   0%            0%         0%
                Expected volatility                             62%           64%        68%
                Risk-free interest rate                        5.4%          6.2%       6.3%
                Expected life of options                    6 years       6 years    6 years
</TABLE>

                  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 consultant's option is exercisable in
         annual installments over a period of four years and terminates on the
         tenth anniversary of the date of each installment.

                  Options granted under the Company's 1989 Incentive 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.

         Changes in stock options granted under the 1989 Incentive Stock Option
         Plan were as follows:


                                      F-13
<PAGE>   47
<TABLE>
<CAPTION>
                                          Fiscal 1998                      Fiscal 1997                    Fiscal 1996
                                    --------------------------     ---------------------------     ----------------------------

                                                  Weighted                        Weighted                         Weighted
                                                   Average                         Average                          Average
                                    Shares      Exercise Price     Shares       Exercise Price     Shares        Exercise Price
                                    ------      --------------     ------       --------------     ------        --------------
<S>                               <C>               <C>          <C>                 <C>           <C>               <C>
Beginning Balance                 1,424,910         $5.28        1,109,320           $5.36         940,320           $5.80
Granted                              96,800          4.25          505,500            4.87         283,990            5.12
Exercised                            (2,000)         5.00          (19,200)           5.02               -               -
Canceled                           (272,980)         5.32         (170,710)           4.97        (114,990)           8.34
                                  ---------                      ---------                       ---------
Ending balance                    1,246,730         $5.18        1,424,910           $5.28       1,109,320           $5.36
                                  =========         =====        =========                       =========           =====


Reserved for future grant at
year-end                            246,980                         70,800                         405,590

Exercisable                         423,874         $5.64          383,446           $5.91         213,730           $6.60

Weighted average fair
value of options
granted during the
year                                                $2.58                            $3.15                           $3.41
</TABLE>


                  The following table summarizes information concerning stock
         options granted under the 1989 Incentive Stock Option Plan which were
         outstanding at January 30, 1999:

<TABLE>
<CAPTION>
                                                   Options Outstanding                              Options Exercisable
                                ----------------------------------------------------------     ---------------------------------
                                                                                                   Number
                                Outstanding at      Weighted Average           Weighted        Exercisable at
          Range of                January 30,     Remaining Contractual        Average           January 30,    Weighted Average
      Exercise Prices                1999             Life in Years         Exercise Price          1999         Exercise Price
      ---------------           --------------     --------------------     --------------     ---------------  ----------------
<S>               <C>              <C>                     <C>                 <C>                <C>                 <C>
   $2.50    to    $3.875              95,600               9.0                 $  3.22              11,020            $3.74
    4.00    to      5.00             591,060               7.2                    4.94             217,264             4.97
    5.01    to      8.50             538,520               7.6                    5.50             174,040             6.01
   10.00    to      13.7              21,550               0.7                   10.40              21,550            10.40
                                   ---------                                                       -------
   $2.50    to    $13.75           1,246,730                                                       423,874
                                   =========                                                       =======
</TABLE>

c)  1998 Long-Term Incentive Plan - During Fiscal 1998, the Company adopted,
with shareholder approval, the 1998 Long-Term Incentive Plan (the "Plan"). The
purpose of the Plan is to promote success and enhance the value of the Company
by linking the personal interests of the participants to those of the Company's
shareholders and customers. The Plan authorizes the grant of up to 1,000,000
shares of Lechters, Inc. common stock. Shares underlying awards that lapse or
awards that are not paid may be reused for subsequent awards. Only the number of
shares issued net of shares rendered for exercise shall be deemed issued under
the Plan. The Plan is administered by a committee of the Board consisting solely
of two or more members of the Board, ("the Committee"). Persons eligible to
participate in the Plan include all officers, key employees and directors of the
Company and its subsidiaries, consultants and advisors to the Company and its
subsidiaries and other persons or entities providing goods or services to the
Company or its subsidiaries, in each case as determined by the Committee.


                                      F-14
<PAGE>   48
                  During Fiscal 1998, there were no grants of Nonqualified Stock
Option (NQSO), Incentive Stock Options (ISO), Stock Appreciation Rights (SAR),
Restricted Stock Units, Performance Units, Performance Shares or any other
awards under the 1998 Long-Term Incentive Plan.

 4.      LONG-TERM DEBT

                  Long-term debt outstanding is as follows:

<TABLE>
<CAPTION>
                                                                  Fiscal Year Ended
                                                         -----------------------------------
                                                         January 30,             January 31,
                                                            1999                   1998
                                                            ----                   ----
<S>                                                        <C>                   <C>
              Convertible Subordinated Debentures,
                  5% due 2001 (a)                          $61,232               $60,001
                                                           =======               =======
</TABLE>

a)            The 5% Convertible Subordinated Debentures (the "Debentures") were
              issued in 1991 with a yield to maturity of approximately 7.47%. At
              January 30, 1999 and January 31, 1998, the unamortized original
              issue discount was $3,768 and $4,999 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 $1,232 and $1,147 for Fiscal 1998 and
              Fiscal 1997, respectively. The long-term debt at January 30, 1999
              of $61,232 is due September 27, 2001.

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


5.       LINE OF CREDIT

                  At January 30, 1999, the Company had a $40,000 unsecured
         Credit Agreement (the "Credit Agreement") with a syndicate of banks led
         by The Chase Manhattan Bank which was entered into on March 26, 1998.
         The Credit Agreement includes a restrictive covenant, which prohibits
         the payment of dividends on the Company's common stock. The Credit
         Agreement was amended March 23, 1999 waiving operating covenants with
         respect to consolidated net income and leverage ratio as defined by the
         Credit Agreement for Fiscal 1998 and amended the covenants and fee
         structure for the balance of the Credit Agreement. The facility
         consists of a $20,000 line of credit for direct borrowings and a
         $20,000 line for issuance of Letters of Credit. The Credit Agreement as
         it relates to the $20,000 line of credit for direct borrowings expires
         March 26, 2001 and is unsecured. With respect to the $20,000 line for
         Letter of Credit which is renewable annually has been renewed for one
         year expiring on March 24, 2000. 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 Funds Rate plus 1/2%, or (2) an Adjusted
         Eurodollar Rate based on LIBOR. The Credit Agreement requires the
         maintenance of certain earnings and fixed charge coverage ratios, and
         the interest rate payable is adjusted by from 0.0% to 2.5% over the
         above base rate depending on the


                                      F-15
<PAGE>   49
         ratio of consolidated funded debt to earnings before interest, taxes,
         depreciation, amortization (EBITDA) and non cash charges.

                  At January 30, 1999 and January 31, 1998, the Company was
         liable for drawings under outstanding letters of credit in the amount
         of approximately $11,579 and $8,299 respectively.

6.       INCOME TAXES

                  The (benefit)/provision for income taxes consists of the
following:

<TABLE>
<CAPTION>
                                           Fiscal Year Ended
                                    -----------------------------------
                                    January 30, January 31, February 1,
                                        1999       1998       1997
                                        ----       ----       ----
<S>                                   <C>        <C>        <C>
                           Federal:
                           Current    ($2,095)   $ 1,900    $ 1,448
                           Deferred      (696)    (3,803)      (625)
                                      -------    -------    -------

                                       (2,791)    (1,903)       823
                                      -------    -------    -------

                           State:
                           Current         98        631        625
                           Deferred    (1,247)    (1,168)      (248)
                                      -------    -------    -------

                                       (1,149)      (537)       377
                                      -------    -------    -------

                                      ($3,940)   ($2,440)   $ 1,200
                                      =======    =======    =======
</TABLE>


                  A reconciliation of the statutory Federal income tax rate with
the effective rate used for the calculation of the income tax (benefit) 
provision is as follows:

<TABLE>
<CAPTION>
                                                                Fiscal Year Ended
                                                   ----------------------------------------------
                                                   January 30,       January 31,      February 1,
                                                      1999              1998             1997
                                                      ----              ----             ----
<S>                                                    <C>             <C>              <C>
         Statutory Federal income
            tax rate                                   34.0%           34.0%            34.0%

         State income taxes, net of
            Federal benefit                             5.3             5.7              5.5
         Reversal of prior year
           residual estimated liabilities                 -               -            (12.4)

         Other                                          1.4            (0.3)            (0.7)
                                                       ----            ----             ----
         Effective income tax rate                     40.7%           39.4%            26.4%
                                                       ====            ====             ====
</TABLE>


                                      F-16
<PAGE>   50
                  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.

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

<TABLE>
<CAPTION>
                                                               January 30,        January 31,
                                                                   1999               1998
                                                                   ----               ----
<S>                                                              <C>                <C>
                    Accelerated tax depreciation                 $14,648            $15,156
                    Reserves not currently
                       deductible                                 (1,541)            (2,140)
                    State Net Operating Losses                    (1,798)            (1,214)
                    Credit carryovers                               (771)              (346)
                                                                 -------            -------
                                                                 $10,538            $11,456
                                                                 =======            =======
</TABLE>


                  The Company files consolidated Federal and state income tax
         returns. Deferred income tax expense during Fiscal 1998, 1997 and 1996
         principally resulted from the use of accelerated methods of
         depreciation for tax purposes over the straight-line method used for
         financial reporting purposes. The alternative minimum tax credit
         carryforwards can be carried forward indefinitely. The general business
         credit carryforwards have expiration dates ranging from 2017 through
         2018. The Company has state net operating loss carryforwards of
         approximately $37,000 at January 30, 1999 and $24,800 at January 31,
         1998, have which expiration dates ranging from 2003 through 2018. 

7.       LEASES

                  At January 30, 1999, 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 through
         January 31, 2009.

                  At January 30, 1999, aggregate minimum rentals in future
periods are as follows:


<TABLE>
<CAPTION>
                                                                      Minimum
                                         Fiscal                        Rental
                                          Year                       Commitment
                                          ----                       ----------
<S>                                       <C>                          <C>    
                                          1999                         $46,745
                                          2000                         $40,998
                                          2001                         $36,622
                                          2002                         $32,645
                                          2003                         $27,831
                                      Thereafter                       $52,951
</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:


                                      F-17
<PAGE>   51
<TABLE>
<CAPTION>
                                    Fiscal
                                     Year                      Amount
                                     ----                      ------
<S>                                  <C>                       <C>   
                                     1998                      $3,524
                                     1997                      $3,061
                                     1996                      $2,320
</TABLE>

         Total rent expense was as follows:

<TABLE>
<CAPTION>
                                    Fiscal
                                     Year                      Amount
                                     ----                      ------
<S>                                  <C>                       <C>    
                                     1998                      $52,865
                                     1997                      $53,931
                                     1996                      $52,729
</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 $948, $967 and $994 in Fiscal 1998, Fiscal
         1997 and Fiscal 1996, 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 $141,
         $145 and $154 were charged to expense in Fiscal 1998, Fiscal 1997 and
         Fiscal 1996, 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 $160, $156
         and $129 were charged to expense in Fiscal 1998, Fiscal 1997 and Fiscal
         1996, 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 $475 per
         year.


                                      F-18
<PAGE>   52
9.       AVAILABLE FOR SALE SECURITIES

                  The following is a summary of the available for sale
         securities which comprise the balance in "marketable securities" at
         January 30, 1999 and January 31, 1998:

<TABLE>
<CAPTION>
                                                    Gross            Gross
               January 30,                       Unrealized        Unrealized        Estimated
                  1999            Cost              Gains            Losses          Fair Value
      ---------------------       -----             ------           ------          ----------
<S>                                 <C>               <C>               <C>             <C>    
      Government Bonds              $43,512           $116              ($35)           $43,593
      Other Debt Securities          16,051             92                (8)            16,135
      Municipal Bonds                 3,002             20                 -              3,022
                                    -------           ----               ---            -------

      Total available for
         sale securities            $62,565           $228              ($43)           $62,750
                                    =======           ====              =====           =======
</TABLE>

<TABLE>
<CAPTION>
                                                  Gross            Gross
               January 31,                     Unrealized        Unrealized        Estimated
                  1998            Cost            Gains            Losses          Fair Value
      ----------------------      ----            ------           ------          ----------
<S>                               <C>                 <C>             <C>             <C>    
      Government Bonds            $52,251             $40             ($3)            $52,288
      Other Debt Securities        17,305              77              (1)             17,381
      Municipal Bonds               5,049              29                -              5,078
                                  -------            ----              ---            -------
      Total available for
         sale securities          $74,605            $146             ($4)            $74,747
                                  =======            ====              ===            =======
</TABLE>

                  The cost and estimated fair value of debt securities at
         January 30, 1999 by contractual maturity are as follows:

<TABLE>
<CAPTION>
                                                                             Estimated
                                                           Cost              Fair Value
                                                           ----              ----------
<S>                       <C>                            <C>                   <C>    
                          1999                           $23,579               $23,644
                          2000                           $38,986               $39,106
                                                        --------               -------
                          Total available for
                            sale securities              $62,565               $62,750
                                                        ========             =========
</TABLE>

                  Net gains from the sales of available for sale securities are
         reported on the consolidated statement of income as "Net Investment
         (Gain/Income) Loss". The components of Net Investment (Gain/Income)
         Loss for Fiscal 1998, Fiscal 1997 and Fiscal 1996 are as follows:


                                      F-19
<PAGE>   53
<TABLE>
<CAPTION>
                                           Net (Gain) Loss
                    Gross        Gross       on Sale of                   Net Investment
        Fiscal     Realized    Realized      Government      Dividend     (Gain/Income)  
        Year        Gains       Losses       Securities       Income           Loss    
        --------------------------------------------------------------------------------      
<S>     <C>         <C>          <C>          <C>              <C>            <C>   
        1998        ($113)       $ 9          ($104)           ($509)         ($613)
        1997         ($50)       $ 7           ($43)           ($296)         ($339)
        1996          ($9)       $28            $19               $0            $19
</TABLE>

10.      QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                 Fiscal Quarter Ended
                                                          --------------------------------------------------------------------
                                                            May 2,            August 1,         October 31,        January 30,
                                                             1998               1998               1998               1999
                                                             ----               ----               ----               ----
<S>                                                    <C>               <C>                <C>              <C>     
   Net sales                                                 $86,194           $91,422            $95,682           $154,921
   Gross profit                                               21,658            21,560             22,788             44,345
   Provision for asset impairment                                  -                 -                  -              1,543
   Income (loss) before income
      tax provision                                          ($6,163)          ($6,509)           ($6,393)            $9,384
   Net income (loss)                                         ($3,640)          ($3,836)           ($3,772)            $5,507
   Net income (loss) per common share (a) (b)                ($ 0.23)          ($ 0.24)           ($ 0.23)            $ 0.31
   Number of shares used in computing
      net income (loss) per common share                  17,175,000        17,176,000         17,176,000         17,176,000
</TABLE>

<TABLE>
<CAPTION>
                                                                                 Fiscal Quarter Ended
                                                         -------------------------------------------------------------------
                                                            May 3,           August 2,          November 1,        January 31,
                                                             1997               1997               1997               1998
                                                             ----               ----               ----               ----
<S>                                                    <C>               <C>                <C>                <C>     
   Net sales                                                $ 85,129          $ 95,114           $ 99,711           $165,356
   Gross profit                                               19,977            22,848             24,809             52,407
   Provision for asset impairment                                  -                 -                  -              8,746
   Income (loss) before income
      tax provision                                           (7,938)          ($5,550)           ($3,790)            11,080
   Net income (loss)                                         ($4,683)          ($3,275)           ($2,236)            $6,436
   Net income (loss) per common share
      (a) (c) (d)                                            ($ 0.29)          ($ 0.21)           ($ 0.15)             $0.36
   Number of shares used in computing
      net income (loss) per common share                  17,155,000        17,155,000         17,155,000         17,172,000
</TABLE>

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


                                      F-20
<PAGE>   54
(b)      Diluted net income per common share, assuming conversion of the 5.05%
         Convertible Preferred Stock and the elimination of the related dividend
         was $0.27 for the thirteen weeks ended January 30, 1999 on weighted
         average shares outstanding of 20,377,000.
(c)      Diluted net income per common 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 $0.31 per common share for the thirteen weeks
         ended January 31, 1998 on weighted average shares outstanding of
         22,680,000.
(d)      Difference of $0.01 between full year (loss) income per common share
         and the resulting (loss) income per common share from the sum of each
         of the quarters in Fiscal 1997 is due to rounding.

                                      F-21
<PAGE>   55
                                Exhibit Index
                                -------------

Item 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.
                  (Incorporated herein by reference to the Company's Annual
                  Report on Form 10-K for the year ended February 1, 1997.)

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

     10.1         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). (1.)

     10.2         Credit Agreement dated March 26, 1998. (Incorporated herein by
                  reference to Exhibit 10.2 to this Company's Annual Report on
                  Form 10-K for the year ended January 31, 1998).

     10.2.1       First Amendment and Waiver to Credit Agreement dated March 23,
                  1999.*

     10.3         Form of Deferred Compensation Agreement (Incorporated herein
                  by reference to Exhibit 10.5 to the Registration Statement).
                  (1.)

     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). (1.)

     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). (1.)


<PAGE>   56
                                Exhibit Index
                                -------------

Item No.                           Description

     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). (1.)

     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). (1.)

     10.8         Form of Consulting Agreement (Incorporated herein by reference
                  to Exhibit 10.9.1 to the Registration Statement). (1.)

     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). (1.)

     10.10        Agreement between the Company and Local 99, UNITE to a
                  collective bargaining agreement covering warehouse employees
                  dated March 16, 1996. (Incorporated herein by reference to the
                  Company's Annual Report on Form 10-K for the year ended
                  February 1, 1997).

     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).

     10.11.1      Lease Modification Agreement dated June 19, 1995 involving the
                  Distribution Center and Office space in Harrison, NJ. *

     10.11.2      Lease Modification Agreement dated July 22, 1998 involving the
                  Distribution Center and Office space in Harrison, NJ. *

     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).

     10.13        Agreement dated March 27, 1998 between the Company and Local
                  99, UNITE, covering office employees for a term from July 1,
                  1997 to June 30, 2000. (Incorporated herein by reference to
                  Exhibit 10.13 to the Company's Annual Report on Form 10-K for
                  the year ended January 31, 1998).

     10.14        Memoranda of Agreement dated March 27, 1998 between the
                  Company and Local 99, UNITE, amending, respectively, Agreement
                  dated March 16, 1996 covering warehouse employees and
                  Agreement dated March 27, 1998 covering office employees.
                  (Incorporated by reference to Exhibit 10.14 to the Company's
                  Annual Report on Form 10-K for the year ended January 31,
                  1998).

     10.15        Lechters Long-Term Incentive Plan. (Incorporated herein by
                  reference to Exhibit 10.1 to the Company's Form 10-Q for the
                  period ended August 1, 1998). (1.)



<PAGE>   57
                                Exhibit Index
                                -------------


Item No.                          Description

     21           Subsidiaries of the Company. *

     23           Consent of Deloitte & Touche LLP.*

     27           Financial Data Schedule *

*Filed herewith.
(1.) Management Compensatory Plan.