<PAGE>   1

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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 (FEE REQUIRED)

                   For the fiscal year ended January 31, 1998

                                       OR

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

Commission File No. 0-17870

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

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

1 Cape May Street, Harrison, New Jersey                     07029-2404
--------------------------------------------------------------------------------
(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. |_|
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<PAGE>   2

      As of April 17, 1998 17,174,286 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 $75,191,663.

      For the purposes of such calculation, all outstanding shares of Common
Stock have been considered held by non-affiliates, other than the 4,375,705
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 18, 1998.

--------------------------------------------------------------------------------
Forward Looking Statements - All statements in this Annual Report on Form 10-K,
including those incorporated herein by reference, that do not reflect historical
information are forward looking statements made in reliance upon the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
Important factors that could cause actual results to differ materially from
those discussed in such forward looking statements include, but are not limited
to, competition, economic downturns, dependence upon product development,
international business risks and seasonality of business.
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<PAGE>   3

Part I

Item  1.        Business.

History

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

      The 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 626 stores (465 Lechters Housewares(R) stores, 161 Famous Brands
Housewares Outlet(R)) in 44 states.

      The Company is currently repositioning both concepts. While both concepts
feature houseware products, Lechters Housewares(R) is enhancing its franchise as
the country's largest specialty retailer of products for the kitchen. Famous
Brands Housewares Outlet(R) is in 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 details of
both concepts' 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>   4

Operating Strategies

A. Merchandising and Marketing

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

Lechters Housewares(R):

      The mission of the Lechters Housewares(R) is to meet its customers needs
for "products for the home at good values" in the following ways:

      1.    Focus on the kitchen and aggressively pursue the frame, storage and
            organization business.

      2.    Offer trend right, moderate to better merchandise that positions
            Lechters as a unique and exciting retailer.

      3.    Provide a friendly, easy to shop store environment in convenient
            locations supported by knowledgeable customer service oriented and
            sales focused associates.

      4.    Build the Company's brand equity through marketing, advertising and
            promotional activities.

      Lechters Housewares(R) stores are merchandised and marketed to a large
cross section of customers typically found in high-traffic, regional shopping
malls having at least two major department stores as "anchors", with at least
200,000 square feet of retail space for specialty stores. City stores and strip
center stores are also operated under this trade name. The Company believes it
appeals to a broad range of customers, with its primary customer being female
with an average household income of $40,000 - $50,000 per year.

      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 61% and 39%, respectively, of 1997 sales.
Of the over 4,000 items in the line, 20% accounted for approximately 75% of
current year sales. No individual item accounted for more than 1%.

      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, Revere 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 38% of Fiscal 1997 net sales.

      The Lechters Housewares(R) division believes that it has unique strengths
in several areas. Market research indicates that 27% of Lechters' customers
purchase gifts and that gift purchases carry a 25% higher average ticket than
non-gift purchases. The Company has developed specific strategies to appeal to
the gift customer including expanded holiday decorative product offerings, gift
baskets and specific advertising and marketing efforts directed at gift giving
periods like Mother's Day.


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<PAGE>   5

      Lechters is also a leader in seasonal products and the development of new
and fresh products through private label as well as branded products. Lechters
strives to insure that new products, 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 promotional events. In addition, the
Lechters Housewares(R) division 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 (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 most items
selling for less than $10.00. All sales are transacted in cash and through
third-party credit cards, which accounted for approximately 63% and 37%,
respectively, of Fiscal 1997 net sales.

      Based upon the success of its 1996 advertising test in selected markets,
the Company expanded its advertising program in 1997. Ten (10) Sunday circulars
were run in 1997 in 8 major markets across the United States. Each circular had
a circulation of over five (5) million copies and impacted approximately 52% of
all Lechters Housewares(R) stores. The 1997 advertising program was successful
and will be continued.

      Funding of the Company's advertising expense is supported in part by
cooperative advertising allowances from suppliers. Net advertising expense was
1.8% of Lechters Housewares(R) sales in 1997 as compared to 1.3% in 1996.

      The Lechters Housewares(R) business is highly seasonal. As a convenience
concept, the chain benefits from the high concentration of traffic about its
stores during certain times of the year. Sales are highest during the year-end
holiday season, followed by a strong back-to-school business, which commences in
late July. In 1997, November/December and back-to-school sales accounted for
approximately 33% and 18%, respectively, of total year sales.

Famous Brands Housewares Outlet(R)

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

      The Company believes it can offer its outlet customers extraordinary
savings opportunities as compared to regular priced retailers through its
ability to purchase off-price housewares. This commitment to off-price
merchandise is a new direction based on a strategic assessment of the market and
Famous Brands Housewares 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 began 1997 with approximately 7% 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 1997, 32% of sales were generated by 


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<PAGE>   6

off-price merchandise. The expectation is that well over half of all sales in
1998 will come from off-price merchandise.

      The assortment of off-price merchandise is broader than the assortment
offered in Lechters Housewares(R). As examples, categories like accent
furniture, lighting and decorative silk flower arrangements as well as expanded
giftware are periodically added as opportunity 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 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 Famous Brands Housewares Outlet(R).

      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 signing, handouts, displays and
participation in mall sponsored promotions. 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 the Lechters Housewares(R) division. 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. The November/December period
represents 27% of the year in Famous Brands Housewares Outlet(R) versus 33% for
Lechters Housewares(R).

B. Purchasing, Warehousing and Distribution

      The Service Office is responsible for virtually all merchandising
decisions to include 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 two buying staffs, one for each store division. The
Lechters Housewares(R) buying staff is comprised of a Vice President - General
Merchandise Manager, two merchandise managers and four buyers. The Famous Brands
buying staff includes a Vice President - General Merchandise Manager, one
merchandise manager and three buyers.

      The buying staffs are supported by a Planning and Allocation staff that
includes a Vice President - Merchandise Replenishment and Logistics, a director
of replenishment, and eight reorder buyers each specializing in certain product
categories.

      The Company purchases its products from over 400 suppliers with no
supplier accounting for more than 7% of Fiscal 1997 sales. Approximately 71% of
its products are purchased in the United States which ensures sufficient
flexibility in the management and flow of merchandise. The


                                       4
<PAGE>   7
 remaining 29% 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 (10) weeks of supply of
Lechters Housewares(R) re-orderable merchandise at the Distribution Center. It
maintains six weeks of supply of off-price merchandise at the Distribution
Center to support Famous Brands.

      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 are
accelerated 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, 1998, the field organization was comprised of four Regional
Vice Presidents and two Regional Managers, each of whom has profit and loss
responsibility for several districts and provides leadership to 40 District
Managers. The District Managers, in turn, are responsible for the day-to-day
operations of the stores. Their supervisory span of control ranges from 8 to 23
stores, averaging approximately 14 stores each. Those Districts Managers at the
high end of the range are supported by Area Managers who are Store Managers with
additional oversight responsibility for 1 to 3 stores. Stores are typically
staffed with a Manager, 2 Assistant Managers and 5 sales/cashier Associates. The
stores schedule their labor from a pool of hourly Associates, the majority of
which are part-time. The number of Associates on hand at any one time is a
function of customer traffic and scheduled store activities, such as training
events and the receipt of merchandise.


                                       5
<PAGE>   8

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

      The Company is committed to the in-store development of its Associates. A
training and evaluation program is provided to new 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 its pay and benefits package is competitive with
retail industry standards. Complemented by the aforementioned training program
and promotional opportunities, it enables the Company to attract and retain a
quality workforce.

      The Company believes that the security measures in its stores are strict,
reflecting the cash orientation of the Company's business. The Company employs 7
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 to include District Manager conducted reviews and Service Office
monitoring of store transaction reports. Particular emphasis is placed on stores
with a history of inventory shrinkages in excess of the norm.

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.

      As shown in the following table, the Company operated 465 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
161 Famous Brands Housewares Outlet(R) stores range in size from 3,000 to 7,500
square feet and average 3,900 square feet.


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<PAGE>   9

<TABLE>
<CAPTION>
                                Lechters Housewares(R)            Famous Brands    Total
                      ------------------------------------------  -------------    -----
                         Malls      Strips      City   Sub-Total     Outlet

<S>                   <C>           <C>       <C>       <C>          <C>        <C>      
February 1, 1997:
   Units                    424          37        24         485        164          649
   Square Feet        1,540,900     140,900   105,300   1,787,100    645,100    2,432,200

1997 Additions:
   Units                      0           4         0           4          3            7
   Square Feet                0      13,400         0      13,400     10,100       23,500

1997 Closings:
   Units                     21           3         0          24          6           30
   Square Feet           75,900      11,800         0      87,700     21,600      109,300

January  31, 1998:
   Units                    403          38        24         465        161          626
   Square Feet        1,465,000     142,500   105,300   1,712,800    633,600    2,346,400(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 is limited and opportunistic given
its high level of penetration of the better performing malls and outlet centers,
and the need to fully implement new merchandising and promotional strategies. In
the near future it perceives the greater opportunity for new store development
to lie in strip centers. The Company's Fiscal 1998 development plan is to open
approximately 25 new stores.

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

      The costs of new store development differ by division and further varies
with the size of the store and site conditions. The costs incurred by the
Company to open an average 3,800 square foot store under typical site conditions
are approximately, as shown below:

<TABLE>
<CAPTION>
                                                         Inventory,
                                                           net of
                             Leasehold      Fixtures      Accounts    Preopening
                            Improvement   & Equipment      Payable      Expense
                            -----------   -----------    ----------     -------
<S>                           <C>           <C>           <C>          <C>     
Lechters Housewares(R)
(Malls)                       $200,000      $ 64,000      $ 80,000     $  8,000
Lechters Housewares(R)
(Strip Centers)               $145,000      $ 64,000      $ 92,000     $  6,000
Famous Brands Housewares
Outlet(R)                     $ 61,000      $ 64,000      $ 80,000     $ 13,000
</TABLE>


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<PAGE>   10

      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 thirty (30) stores in Fiscal Year 1997. In Fiscal Year
1998, the Company plans to close sixty (60) to seventy (70) stores. This
acceleration in closing 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 which are 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 (4) 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 terms where
it is an advantage and longer 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 resides on a combination of platforms connected in an
open system, client/server environment. Over the next several years, 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 1998 the Company will also complete 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


                                       8
<PAGE>   11

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 January 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.

      In 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 1998, the Company
intends to augment the new system with substantial planning, decision support
and report writing capabilities. This system will be fully integrated with the
aforementioned JDA merchandise system when the latter comes on line.

      The Company has aggressively expanded its Electronic Data Interchange
(EDI) capabilities and is currently communicating with 204 of its highest volume
vendors. During 1998, 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 was
revamped in 1997 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, it continuously monitors
activity and developments for feasibility in the future.

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, it's prices
are generally lower than those charged by department stores and are generally
competitive with those charged by general merchandise discount stores.
Nevertheless, there can be no assurance that any or all of the factors listed
above which enable the Company to compete favorably will not be adopted by
companies having greater financial and other resources than the Company.

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


                                       9
<PAGE>   12

Place", "Regent Gallery", "Cooks Club", "Perfect Bake", and "Simple Solutions"
for certain housewares items.

Associates

      On April 1, 1998, the Company employed 6,311 persons, 1,907 of whom were
full-time (30 or more hours per week) and 4,404 of whom were part-time
Associates. Of this total, 483 were located at the Company's Harrison, New
Jersey Service Office and two distribution centers, including 46 as Regional and
District Managers, 7 as Loss Prevention Managers and 44 Associates are located
at the Company's North Las Vegas, Nevada distribution center.

      On April 1, 1998, the 188 non-management distribution and office
Associates at the Harrison, New Jersey facility were represented by UNITE, Local
99, under contracts expiring on March 15, 1999 and June 30, 2000, respectively.
The 5,828 Associates in the Company's 621 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, 1998:

<TABLE>
<CAPTION>
                            Position or Office          Term of Employ-
Name              Age       with the Company            ment Commenced
----              ---       ----------------            --------------
<S>                <C>      <C>                         <C> 
Donald Jonas       68       Chairman of the Board       January 1984
                            Chief Executive
                            Officer and President

Robert J. Harloe   53       Senior Vice President       August 1994
                            - Human Resources

Dennis Hickey      50       Senior Vice President       January 1991
                            - Stores
 
Ira S. Rosenberg   64       Vice President,             January 1984
                            Secretary and
                            Corporate Counsel

James Shea         52       Senior Vice President       November 1994
                            - Marketing and
                            Merchandising
</TABLE>


                                       10
<PAGE>   13

<TABLE>
<CAPTION>
<S>                <C>      <C>                         <C> 
John W. Smolak     49       Senior Vice President       February 1995
                            and Chief Financial
                            Officer

William  Sullivan  54       Senior Vice President       March 1998
                            - Real Estate
</TABLE>

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

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

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

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

      James Shea was elected Senior Vice President - Marketing and Merchandising
of the Company in December 1994. Prior to joining the Company in November 1994,
Mr. Shea served as Senior Vice President, General Merchandise Manager, Homestore
with Kaufmann's, a division of 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.

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


                                       11
<PAGE>   14

      William R. Sullivan was elected Senior Vice President - Real Estate of the
Company in April 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 540,000 square feet of
floor space at this location. Approximately 460,000 square feet are being
utilized for the distribution center, and approximately 80,000 square feet for
the Company's service offices. This lease expires on January 31, 2007 and the
Company has three five-year renewal options.

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

Item 3. Legal Proceedings.

      There is no material litigation currently pending against the Company.

Item 4. Submission of Matters to a Vote of Security Holders.

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

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.


                                       12
<PAGE>   15

      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 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

<CAPTION>
                     Fiscal 1996           High        Low
                     -----------           ----        ---
                     1st Quarter           8-1/8      4-1/4
                     2nd Quarter           7-1/4      4-3/8
                     3rd Quarter           5-3/4      4-1/4
                     4th Quarter           5-1/4      3-7/8
</TABLE>

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

      On April 17,1998, there were approximately 809 holders of record of the
Common Stock. On April 17, 1998, the closing price of the Common Stock was
$5.875.

      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 Notes
to the Consolidated Financial Statements.


                                       13
<PAGE>   16

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 31,     February 1,      February 3,      January 28,  January 29,
                                   1998           1997             1996             1995         1994
---------------------------------------------------------------------------------------------------------

                               (Dollars in thousands, except share, per share and selected perating data)
<S>                           <C>             <C>             <C>             <C>            <C>         
Income Statement Data:
Net sales                     $    445,310    $    441,243    $    432,048    $    399,264   $    350,196
Cost of goods sold
  (including occupancy
   and indirect costs)             325,269         322,110         310,163         282,875        242,833
                              ------------    ------------    ------------    ------------   ------------

Gross profit                       120,041         119,133         121,885         116,389        107,363
Selling, general and,
  Administrative expenses          115,541         110,848         109,414          93,853         83,669
Restructuring expense                   --              --            (217)         11,000             --
Provision for
   asset impairment                  8,746             370              --              --             --
                              ------------    ------------    ------------    ------------   ------------
Operating (loss) income             (4,246)          7,915          12,688          11,536         23,694
Other expenses (1)                   1,952           3,372           5,039           5,838          4,991
                              ------------    ------------    ------------    ------------   ------------

(Loss) Income before
    income tax provision            (6,198)          4,543           7,649           5,698         18,703
Income tax (benefit)
  provision                         (2,440)          1,200           3,146           2,336          7,623
                              ------------    ------------    ------------    ------------   ------------

Net (loss) income                   (3,758)          3,343           4,503           3,362         11,080

Preferred stock dividend
   requirement                       1,010             842              --              --             --
                              ------------    ------------    ------------    ------------   ------------

Net (loss) income available
   to common shareholders     $     (4,768)   $      2,501    $      4,503    $      3,362   $     11,080
                              ============    ============    ============    ============   ============

Net (loss) income
  per share (2)(3)
   Basic                      $      (0.28)   $       0.15    $       0.26    $       0.20   $       0.66
   Diluted                    $      (0.28)   $       0.15    $       0.26    $       0.20   $       0.65

Weighted average common
  shares outstanding (3)(4)
   Basic                        17,159,000      17,155,000      17,147,000      16,898,000     16,768,000
   Diluted                      17,159,000      17,155,100      17,154,000      16,989,000     17,095,000
</TABLE>


                                       14
<PAGE>   17

<TABLE>
<CAPTION>
                                          Fifty-Two             Fifty-Three            Fifty-Two
                                         Weeks Ended            Weeks Ended           Weeks Ended
                               --------------------------------------------------------------------------
 
                               January 31,     February 1,      February 3,      January 28,  January 29,
                                   1998           1997             1996             1995         1994
---------------------------------------------------------------------------------------------------------

                              (Dollars in thousands, except share, per share and selected operating data)
<S>                           <C>             <C>             <C>             <C>            <C>         
Selected Operating Data:
Stores opened during year                7              16              48              49             61
Stores closed during year               30               9              11              11              7
Stores open at year-end                626             649             642             605            567
Total square feet of store
  space (at year-end) (5)        2,346,400       2,432,200       2,405,100       2,228,195      2,048,916
Sales per average square
  foot of total space (5)(6)  $        186    $        182    $        186    $        187   $        185
Percentage increase
  (decrease) in comparable
  store sales (7)                      0.5%           (0.2%)          (1.6%)           3.2%          (1.2%)

Balance Sheet Data:
Working capital               $    163,998    $    151,954    $    136,113    $    134,785   $    134,695
Total assets                       277,434         272,333         272,312         270,710        256,812
Long-term debt                      60,001          58,853          75,038          77,777         82,859
Shareholders' equity               165,850         170,408         148,642         143,541        136,632
Total debt to total
  Capitalization                      26.6%           25.7%           34.4%           36.0%          38.6%
</TABLE>

(1)   Other expenses 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 1997 and Fiscal 1996 was calculated
      on net (loss) income less the preferred stock dividends requirement.
(3)   All share and per share amounts included herewith have been adjusted to
      give effect to the 2-for-1 stock split in April 1992. The Company has
      never paid any cash dividends on its Common Stock.
(4)   Outstanding shares for the calculation of "basic" net (loss) income per
      share is the weighted average of outstanding shares calculated on a daily
      basis. Outstanding shares for "diluted" net (loss) income per 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 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 1997 exclude sales
      of stores to be closed starting 90 days prior to closing.


                                       15
<PAGE>   18

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

Results of Operations

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 80 basis points 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 will be 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 40 basis points 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 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.


                                       16
<PAGE>   19

      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.

Fiscal 1996 in Comparison with Fiscal 1995

      Net sales for Fiscal 1996, the 52 week period ended February 1, 1997,
increased $9,195,000 to $441,243,000, a 2.1% increase over Fiscal 1995, the 53
week period ended February 3, 1996, primarily as a result of the addition of
seven stores and the impact of the introduction of the Company's advertising
program. For Fiscal 1995, the Company adopted the National Retail Federation's
reporting calendar which resulted in the additional week. On a comparable 52
week basis for both fiscal years, sales increased 3.5% and comparable store
sales decreased 0.2%. At the close of the fiscal year, the Company operated 649
stores compared to 642 stores at close of the previous fiscal year, a net
increase of seven stores or 1.1%. Total retail space increased approximately
27,000 square feet to 2,432,200 at February 1, 1997.

      Gross profit for Fiscal 1996 was $119,133,000, a $2,752,000 decrease from
Fiscal 1995. The resulting gross profit rate of 27.0% was 120 basis points below
that of Fiscal 1995. Gross profit was favorably impacted by an increase of
higher margin merchandise from both foreign and domestic sources. However,
promotional pricing associated with the Company's advertising programs and a
highly competitive retail market place produced price reductions in excess of
last year. Additionally, while inventory shrinkage was at the Company's
historical average, it deteriorated from the exceptional performance of the
prior year. Finally, rent and other occupancy costs were underabsorbed due to
the decline in comparable store sales.

      Selling, general and administrative expenses increased $1,434,000 to
$110,848,000. The expense rate of 25.1% of net sales was 20 basis points below
the rate of Fiscal 1995. While expenses increased due to the net addition of
seven stores and the implementation of the Company's advertising programs,
savings were achieved in variable expenses such as benefits and Service Office
payroll, one less week of operations expense, and the absence of significant
contingent liability provisions as were required last year. The Company
recorded a $370,000 provision for asset impairment during Fiscal 1996.

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

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

Year 2000 Compliance

      The Company is actively addressing the year 2000 issue. All systems have
been reviewed for compliance and where necessary program modifications made.
Alternatively, where also warranted by business functionality requirements,
certain legacy systems have or will be replaced with new software certified to
be year 2000 compliant. Furthermore, the Company has solicited the


                                       17
<PAGE>   20

commitment of its key vendors and service providers to ensure their systems are
capable of operating in the future and hence compatible to the extent necessary.

      The Company does not expect its costs of compliance to be exceptional in
light of its current plan to otherwise upgrade the capabilities of its existing
systems.

Liquidity and Capital Resources

      The combined balances of cash, cash equivalents and marketable securities
at January 31, 1998 as shown on the Consolidated Balance Sheet totaled
$91,142,000, an increase of $30,036,000 over the combined balances of
$61,106,000 at February 1, 1997. As depicted on the Consolidated Statements of
Cash Flows, the increase in cash and cash equivalents was $9,373,000 for the
fifty-two week period ended January 31, 1998 compared with a $2,788,000 increase
for Fiscal 1996.

      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 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 1997 was $38,251,000 compared to $28,604,000 for Fiscal 1996. For Fiscal
1997 there was a net loss of $3,758,000 which reduced cash. Significant offsets
to the net loss which provided cash were depreciation and amortization of
$17,298,000, the aforementioned impairment provision of $8,746,000 and an
increase in accounts payable, accrued salaries, wages and other accrued expenses
of $11,556,000 related to improved management of accounts payable with respect
to the timing of the deduction of vendor allowances. The most significant
operating activity reducing cash flow was the decrease in deferred taxes which
is related to the asset impairment provision which will be deductible for tax
purposes in subsequent fiscal years.

      With respect to investing activities, in addition to the increase in
marketable securities of $20,471,000, capital expenditures were $7,494,000
compared to $8,474,000 for Fiscal 1996. Capital expenditures were principally
for the construction of and fixtures for new and remodeled stores opened in
Fiscal 1997. Other capital expenditures for Fiscal 1997 included significant
amounts for computer hardware and software expenditures related to systems
infra-structure enhancements.

      Planned capital expenditures for Fiscal 1998 are estimated at $15,000,000
- $16,000,000 primarily for new stores, renovations, remodels and information
system enhancements.

      With respect to the Company's line of credit, on March 26, 1998, the
Company entered a new $40,000,000 Credit Agreement to replace the existing
credit facility which was to expire on May 22, 1998. The new 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 new Credit Agreement provides the Company
with continued high levels of liquidity and financial flexibility.

      The term of the new agreement is for three years, with the Letter of
Credit component renewable annually during that period. As of the end of Fiscal
1997, January 31, 1998, there were no outstanding borrowings under the then
existing Credit Agreement. At January 31, 1998 and


                                       18
<PAGE>   21

February 1, 1997 the Company was liable for outstanding Letters of Credit in the
amount of approximately $8,299,000 and $9,219,000, 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.

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 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
This statement effective for fiscal years beginning after December 15,1997,
establishes standards for reporting and display of comprehensive income and its
components.

      Also in June 1997, the Financial Accounting Standards Board issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
This statement is effective for financial statements issued for fiscal years
beginning after December 15, 1997. The statement requires that public
enterprises report certain information about operating segments in complete sets
of financial statements of an enterprise and in condensed financial statements
of interim periods issued to shareholders. It also requires that public
enterprises report certain information about their products and services,
geographic areas in which they operate and major customers.

      In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Post Retirement Benefits."
This statement is effective for fiscal years beginning after December 15, 1997.
The statement standardizes the disclosure requirements for pensions and other
post retirement plans to the extent practicable.


                                       19
<PAGE>   22

      The Company is required to adopt SFAS No. 130, No. 131 and No. 132 in
Fiscal 1998 and the Company's consolidated financial statements will reflect the
appropriate disclosures.

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 18, 1998.

Part IV

Item 14. Exhibits and Reports on Form 8-K.

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

(b)         Reports on Form 8-K.

            None.       

(c)         Exhibits.

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

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

4.1         Preferred Stock Purchase Agreement dated April 5, 1996.
            (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).

10.2        Revolving Credit Agreement dated March 26, 1998. *

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

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


                                       20
<PAGE>   23

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

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

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

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

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

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

10.12       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. *

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. *

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

23          Consent of Deloitte & Touche LLP.*

*Filed herewith.


                                       21
<PAGE>   24

                                   SIGNATURES

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

                                                     LECHTERS, INC.
                                                     (Registrant)

                                                     By: Donald Jonas
                                                         ---------------------
                                                     Chairman of the Board,
                                                     Chief Executive Officer
                                                     and President

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on April 27, 1998 by the following persons in their
respective capacities set forth opposite their names, which includes its
principal executive officer, its principal financial and accounting officer and
a majority of the board of directors.

          Signature                                        Title
          ---------                                        -----

                                        
         DONALD JONAS                 Chairman of the Board, Chief Executive
-------------------------------       Officer, and President and Director 
        (Donald Jonas)                (Principal Executive Officer)

        JOHN W. SMOLAK                Senior Vice President (Principal Financial
-------------------------------       Officer and Principal Accounting Officer)
       (John W. Smolak)               

         MARTIN BEGUN                 Director
-------------------------------
        (Martin Begun)

       CHARLES A. DAVIS               Director
-------------------------------
      (Charles A. Davis)

     BERNARD D. FISCHMAN              Director
-------------------------------
    (Bernard D. Fischman)

         ROBERT KNOX                  Director
-------------------------------
        (Robert Knox)

        ALBERT LECHTER                Director
-------------------------------
       (Albert Lechter)

        ANTHONY MALKIN                Director
-------------------------------
       (Anthony Malkin)

       ROBERTA MANEKER                Director
-------------------------------
      (Roberta Maneker)


                                       22
<PAGE>   25

       NORMAN MATTHEWS                Director
-------------------------------
      (Norman Matthews)

       LEONARD PFEFFER                Director
-------------------------------
      (Leonard Pfeffer)

          JOHN WOLFF                  Director
-------------------------------
         (John Wolff)

      STEVE WESTERFIELD               Director
-------------------------------
      (Steve Westerfield)

                                       23
<PAGE>   26
                         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 31, 1998

    Consolidated Balance Sheets                                   F-3

    Consolidated Statements of Income                             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>   27

MANAGEMENT'S REPORT

To the Shareholders of Lechters, Inc.:

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

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

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

Donald Jonas
Chairman of the Board and
Chief Executive Officer

John W. Smolak
Senior Vice President and
Chief Financial Officer


                                      F-1
<PAGE>   28

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated balance sheets of Lechters, Inc.
and subsidiaries (collectively the "Company") as of January 31, 1998 and
February 1, 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ending January 31, 1998. 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 31, 1998
and February 1, 1997, and the results of their operations and their cash flows
for each of the three years in the period ended January 31, 1998 in conformity
with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

Parsippany, New Jersey
March 18, 1998


                                      F-2
<PAGE>   29

LECHTERS, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                       January 31,  February 1,
                                                                          1998          1997
                                                                          ----          ----
<S>                                                                    <C>           <C>      
ASSETS
CURRENT ASSETS:
   Cash and cash equivalents                                           $  16,395     $   7,022
   Marketable securities (Note 9)                                         74,747        54,084
   Accounts receivable                                                     5,084         5,561
   Merchandise inventories                                                99,034       100,442
   Prepaid expenses                                                        2,145         5,734
                                                                       ---------     ---------
     Total current assets                                                197,405       172,843
                                                                       ---------     ---------
                                                                                     
PROPERTY AND EQUIPMENT:                                                              
   Fixtures and equipment                                                 58,841        66,828
   Leasehold improvements                                                 94,556       102,912
                                                                       ---------     ---------
                                                                         153,397       169,740
   Less accumulated depreciation and amortization                         79,891        74,356
                                                                       ---------     ---------
      Net property and equipment                                          73,506        95,384
                                                                       ---------     ---------
                                                                                     
OTHER ASSETS                                                               6,523         4,106
                                                                       ---------     ---------
TOTAL ASSETS                                                           $ 277,434     $ 272,333
                                                                       =========     =========
                                                                                     
LIABILITIES AND SHAREHOLDERS' EQUITY                                                 
CURRENT LIABILITIES:                                                                 
   Accounts payable                                                    $  10,127     $   3,264
   Dividends payable-preferred stock                                       1,010         1,010
   Salaries, wages and other accrued expenses                             18,102        13,318
   Taxes, other than income taxes                                          1,227         1,318
   Income taxes payable (Note 6)                                           2,941         1,979
   Current portion long-term debt (Note 4)                                    --            --
                                                                       ---------     ---------
     Total current liabilities                                            33,407        20,889
                                                                                     
LONG-TERM DEBT, LESS CURRENT PORTION (Note 4)                             60,001        58,853
                                                                                     
DEFERRED INCOME TAXES (Note 6)                                            11,456        16,454
                                                                                     
OTHER LIABILITIES                                                          6,720         5,729
                                                                                     
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 7 and 8)                                  
                                                                                     
SHAREHOLDERS' EQUITY (Note 3):                                                       
   Convertible preferred stock, $100 par value                                       
       authorized 1,000,000 shares,                                                  
                                                                                     
   Issued and outstanding Series A - 149,999 shares and                              
       Series B - 50,001 shares                                           20,000        20,000
   Common stock, no par value,authorized 50,000,000 shares,                          
       issued and outstanding 17,174,286 and 17,155,086, respectively         58            58
   Unrealized holding gain (loss) on  available for sale securities                  
       (Note 9)                                                               84           (29)
   Additional paid-in capital                                             62,370        62,273
   Retained earnings                                                      83,338        88,106
                                                                       ---------     ---------
     Total shareholders' equity                                          165,850       170,408
                                                                       ---------     ---------
                                                                                     
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                             $ 277,434     $ 272,333
                                                                       =========     =========
</TABLE>

                 See notes to consolidated financial statements.


                                      F-3
<PAGE>   30

LECHTERS, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                       Fifty-Two            Fifty-Two       Fifty-Three
                                                      Weeks Ended          Weeks Ended      Weeks Ended
                                                      January 31,           February 1,     February 3,
                                                         1998                 1997             1996
                                                         ----                 ----             ----
<S>                                                 <C>                 <C>               <C>         
NET SALES                                           $    445,310        $    441,243      $    432,048

COST OF GOODS SOLD (including occupancy
   and indirect costs)                                   325,269             322,110           310,163
                                                    ------------        ------------      ------------
GROSS PROFIT                                             120,041             119,133           121,885

SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (Notes 7 and 8)                                 115,541             110,848           109,414

PROVISION FOR ASSET IMPAIRMENT                             8,746                 370                --

RESTRUCTURING EXPENSE (Note 2)                                --                  --              (217)
                                                    ------------        ------------      ------------

OPERATING (LOSS)/ INCOME                                  (4,246)              7,915            12,688

OTHER EXPENSES (INCOME):
   Interest Expense                                        4,625               5,003             6,920
   Interest Income                                        (2,334)             (1,650)           (1,855)
   Net Investment (Gain/Income) Loss
    (Note 9)                                                (339)                 19               (26)
                                                    ------------        ------------      ------------
                                                           1,952               3,372             5,039
                                                    ------------        ------------      ------------

(LOSS)/ INCOME BEFORE INCOME TAX PROVISION                (6,198)              4,543             7,649

INCOME TAX (BENEFIT) PROVISION (Note 6)                   (2,440)              1,200             3,146
                                                    ------------        ------------      ------------

NET (LOSS)/ INCOME                                        (3,758)              3,343             4,503

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

Net (Loss)/ Income Available to Common
Shareholders                                        $     (4,768)       $      2,501      $      4,503
                                                    ============        ============      ============

NET (LOSS)/ INCOME PER COMMON SHARE

   Basic                                            $      (0.28)       $       0.15      $       0.26
                                                    ============        ============      ============
   Diluted                                          $      (0.28)       $       0.15      $       0.26
                                                    ============        ============      ============

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
   Basic                                              17,159,000          17,155,000        17,147,000
                                                    ============        ============      ============
   Diluted                                            17,159,000          17,155,100        17,154,000
                                                    ============        ============      ============
</TABLE>
                 See notes to consolidated financial statements


                                      F-4
<PAGE>   31

LECHTERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)

<TABLE>
<CAPTION>
                                                      Fifty-Two            Fifty-Two       Fifty-Three
                                                     Weeks Ended          Weeks Ended      Weeks Ended
                                                     January 31,           February 1,     February 3,
                                                        1998                 1997             1996
                                                        ----                 ----             ----
<S>                                               <C>                 <C>               <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income                                 $     (3,758)       $      3,343      $      4,503
  Adjustments to reconcile net (loss)/income
to net cash
     provided by operating activities:
  Provision for asset impairment                         8,746                 370                --
  Restructuring expense                                     --                  --              (217)
  Depreciation and amortization                         17,298              17,113            16,056
  Loss on disposal of property and equipment             1,702               1,067               954
  Deferred income taxes                                 (4,998)               (894)            3,227
  Deferred rent                                            968               1,160             1,020
  Other                                                    265                 927             1,442
Changes in operating assets and liabilities,
  net of effects of restructuring:
  Decrease in accounts receivable                          477                  12             1,095
  Decrease (Increase) in merchandise inventories         1,408               9,456           (12,575)
  Decrease (Increase) in prepaid expenses                3,589                (215)             (918)
  Decrease (Increase) in other assets                       36                 128               (51)
  Increase (Decrease) in accounts payable,
    accrued salaries, wages and other accrued
    expenses and taxes, other than income taxes         11,556              (5,089)           (5,201)
  Increase (Decrease) in income taxes payable              962               1,226                (2)
                                                  ------------        ------------      ------------

Net cash provided by operating activities               38,251              28,604             9,333
                                                  ------------        ------------      ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures                                  (7,494)             (8,474)          (22,626)
  (Increase) Decrease in marketable securities         (20,471)            (16,592)            6,153
                                                  ------------        ------------      ------------

  Net cash used in investing activities                (27,965)            (25,066)          (16,473)
                                                  ------------        ------------      ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Issuance of convertible preferred stock                   --              20,000                --
  Expenses of issuance of convertible 
    preferred stock                                         --                (500)               --
  Repayment of long-term debt                               --             (20,250)           (3,750)
  Exercise of stock options                                 97                  --               350
  Payment of preferred stock dividends                  (1,010)                 --                --
                                                  ------------        ------------      ------------

  Net cash used in financing activities                   (913)              (750)            (3,400)
                                                  ------------        ------------      ------------
NET INCREASE (DECREASE) IN CASH AND CASH
   EQUIVALENTS                                           9,373               2,788           (10,540)

CASH AND CASH EQUIVALENTS, BEGINNING
   OF YEAR                                               7,022               4,234            14,774
                                                  ------------        ------------      ------------

CASH AND CASH EQUIVALENTS, END OF YEAR            $     16,395        $      7,022      $      4,234
                                                  ============        ============      ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
  INFORMATION:
  Unrealized holding gain (loss) on available
    for sale securities                           $        142        $        (50)     $         64
                                                  ============        ============      ============

  Cash paid (refunded) during the year for:
     Interest                                     $      2,073        $      4,616      $      6,031
                                                  ============        ============      ============

     Income taxes                                 $      3,406        $        920      $       (820)
                                                  ============        ============      ============
</TABLE>

                 See notes to consolidated financial statements.


                                      F-5
<PAGE>   32

LECHTERS, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                           Convertible
                                       Common               Preferred
                                    Stock Issued           Stock Issued
                                    ------------           ------------                                   Unrealized
                                                                                Additional                  Holding
                                                                                 Paid-In      Retained       Gain
                                 Shares       Amount      Shares     Amount      Capital      Earnings      (Loss)        Total
                                 ------       ------      ------     ------      -------      --------      ------        -----
<S>                            <C>         <C>            <C>      <C>         <C>          <C>          <C>          <C>       
BALANCE, JANUARY 28, 1995      17,118,646  $       58        --    $     --    $   62,423   $   81,270   $     (210)  $  143,541
Unrealized gain (loss)
   adjustment                          --          --          --          --          --           --          248          248
Exercise of stock
options                            36,440          --          --          --         350           --           --          350

Net income                             --          --          --          --          --        4,503           --        4,503
                               ----------  ----------     -------  ----------  ----------   ----------   ----------   ----------

BALANCE, FEBRUARY 3, 1996      17,155,086          58          --          --      62,773       85,773           38      148,642
Unrealized gain (loss)
    adjustment                         --          --          --          --          --           --          (67)         (67)
Issuance of convertible
  preferred stock
    net of issuance expenses           --          --     200,000      20,000        (500)          --           --       19,500
Net income                             --          --          --          --          --        3,343           --        3,343
Declaration of dividend on
  convertible preferred stock          --          --          --          --          --       (1,010)          --       (1,010)
                               ----------  ----------     -------  ----------  ----------   ----------   ----------   ----------
BALANCE, FEBRUARY 1, 1997      17,155,086          58     200,000      20,000      62,273       88,106          (29)     170,408
Unrealized gain (loss)
   adjustment                          --          --          --          --          --           --          113          113
Exercise of stock options          19,200                                              97           --                        97
Net loss                               --          --          --          --          --       (3,758)          --       (3,758)
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
                               ==========  ==========     =======  ==========  ==========   ==========   ==========   ==========
</TABLE>

                 See notes to consolidated financial statements.


                                      F-6
<PAGE>   33

LECHTERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE FISCAL YEARS ENDED JANUARY 31, 1998

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 31, 1998, the
            Company operated 626 stores in 44 states.

                  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 1997, Fiscal 1996 and Fiscal 1995 mean
            the fiscal year ending on the Saturday closest to the end of
            January. Fiscal year 1997 and Fiscal 1996 were comprised of 52
            weeks. Fiscal year 1995 was comprised of 53 weeks.

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

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

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

<TABLE>
<CAPTION>
                                                 Fiscal Year Ended
                                           ---------------------------
                                           January 31,     February 1,
                                              1998            1997
                                              ----            ----
             <S>                           <C>            <C>         
             Lower of cost
             (first-in, first-out)
             or market as
             determined by the
             retail inventory
             method (stores)               $69,167,000    $ 73,993,000

             Lower of cost (first-in, 
             first-out) or market
             (distribution centers)         29,867,000      26,449,000
                                           -----------    ------------
                                           $99,034,000    $100,442,000
                                           ===========    ============
</TABLE>


                                      F-7
<PAGE>   34

                  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 31, 1998 total indirect costs included as part of inventory
            were approximately $8,500,000. At February 1, 1997, indirect costs
            included as part of inventory were approximately $8,750,000.

      e)          Property and Equipment - Property and equipment are stated at
            cost. Depreciation and amortization are computed principally by the
            straight-line method by charges to earnings in amounts sufficient to
            write-off the cost of depreciable assets over their estimated lives,
            or where applicable, the terms of the respective leases, whichever
            is shorter. During Fiscal 1997, the Company as required by Statement
            of Financial Accounting Standards (SFAS) 121 "Accounting for the
            Impairment of Long-Lived Assets and for Long-Lived Assets to be
            Disposed Of " recorded a $8,746,000 provision for the impairment of
            long lived assets located in stores. In Fiscal 1996 the impairment
            provision was $370,000.

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

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

      h)         Net (Loss) Income per Common Share - In February 1997, the
            Financial Accounting Standards Board issued Statement of Financial
            Accounting Standards (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
            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 1997 computation since
            they would have reduced the loss per common share. With respect to
            the Company's 5% Convertible Subordinated Debentures issued in
            September 1991, the assumed conversion of these securities would
            have had an anti-dilutive effect on the net (loss) income per share
            data presented for Fiscal 1997, Fiscal 1996 and Fiscal 1995. With
            respect to the Company's 5.05% Convertible Preferred Stock issued in
            April 1996, the assumed conversion of the preferred stock would have
            had an anti-dilutive effect on the net (loss) income data presented
            for Fiscal 1997 and Fiscal 1996.


                                      F-8
<PAGE>   35

                  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 31,   February 1,   February 3,
                                           1998         1997          1996
                                           ----         ----          ----
              <S>                       <C>           <C>           <C>       
              Basic:

              Weighted average common                               
                shares outstanding      17,159,000    17,155,000    17,147,000
                                        ==========    ==========    ==========

              Diluted:                                              

              Weighted average common                               
                shares outstanding      17,159,000    17,155,000    17,147,000

              Common share equivalents          --           100         7,000
                                        ----------    ----------    ----------
                                        17,159,000    17,155,100    17,154,000
                                        ==========    ==========    ==========
</TABLE>

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

                  The fair value of the Company's cash and cash equivalents,
            accounts receivable and accounts payable approximate their carrying
            values at January 31, 1998 and February 1, 1997, due to the short
            term maturities of these investments. The fair value of the
            Company's long-term debt at January 31, 1998 and February 1, 1997
            was $53,300,000 and $41,762,500 respectively. The carrying value of
            long-term debt at January 31, 1998 and February 1, 1997 was
            $60,001,000 and $58,853,000, respectively. The fair value of the
            Company's long-term debt is based on market prices or dealer quotes
            (for publicly traded debentures).

      j)          Recent Accounting Pronouncements - In June 1997, the Financial
            Accounting Standards Board issued Statement of Financial Accounting
            Standards (SFAS) No. 130, - " Reporting Comprehensive Income." This
            statement effective for fiscal years beginning after December
            15,1997, establishes standards for reporting and display of
            comprehensive income and its components.


                                      F-9
<PAGE>   36

                  Also in June 1997, the Financial Accounting Standards Board
            issued SFAS No. 131, " Disclosures about Segments of an Enterprise
            and Related Information." This statement is effective for financial
            statements issued for fiscal years beginning after December 15,
            1997. The statement requires that public enterprises report certain
            information about operating segments in complete sets of financial
            statements of an enterprise and in condensed financial statements of
            interim periods issued to shareholders. It also requires that public
            enterprises report certain information about their products and
            services, geographic areas in which they operate and major
            customers.

                  In February 1998, the Financial Accounting Standards Board
            issued SFAS No. 132, "Employers' Disclosures about Pension and Other
            Post Retirement Benefits." This statement is effective for fiscal
            years beginning after December 15, 1997. The statement standardizes
            the disclosure requirements for pension and other post retirement
            plans to the extent practicable.

                  The Company is required to adopt SFAS No. 130, No. 131 and No.
            132 in Fiscal 1998 and the Company's consolidated financial
            statements will reflect the appropriate disclosures.

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

      l)          Reclassifications - Certain reclassifications have been made
            to the financial statements of prior years to conform with the
            classifications used for Fiscal 1997.

2. RESTRUCTURING CHARGE

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


                                      F-10
<PAGE>   37

3. SHAREHOLDERS' EQUITY

      a)          Convertible Preferred Stock - On April 5, 1996, the Company
            issued 149,999 shares of Series A Convertible Preferred Stock, $100
            par value ("Series A Preferred Stock") and 50,001 shares of Series B
            Convertible Preferred Stock, $100 par value ("Series B Preferred
            Stock") at par value. Said shares of Convertible Preferred Stock
            were sold to Prudential Private Equity Investors III, L.P. for
            $20,000,000. 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 Commmon 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 - In October 1995, SFAS No. 123, "Accounting for
            Stock-Based Compensation," was issued and is effective for financial
            statements for fiscal years beginning after December 1995. As
            permitted by this statement, the Company will continue to measure
            compensation cost for stock option plans in accordance with
            Accounting Principles Board Opinion No. 25, "Accounting For Stock
            Issued to Employees." Accordingly, no compensation cost has been
            recognized for the Company's stock option plan.

                  If compensation cost for stock options had been determined
            based on fair values at the grant dates, net income available to
            common shareholders and net income per share would have been reduced
            to the pro forma amounts below, for the fiscal years ended January
            31, 1998, February 1, 1997 and February 3, 1996.


                                      F-11
<PAGE>   38

<TABLE>
<CAPTION>
                                                     Fiscal Year Ended
                                         ---------------------------------------
                                         January 31,    February 1,  February 3,
                                             1998          1997         1996
--------------------------------------------------------------------------------
<S>                                     <C>             <C>          <C>        
Net (loss) income available to common
  Shareholders:
  As reported                           ($4,768,000)    $2,501,000   $ 4,503,000
  Pro-forma                             ($5,133,000)    $2,079,000   $ 4,478,000

Net (loss) income per share:
  As reported                           $     (0.28)    $     0.15   $      0.26
  Pro-forma                             $     (0.31)    $     0.12   $      0.26
</TABLE>

            The pro forma effect of applying FAS 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 31,   February 1,   February 3,
                                      1998          1997         1996
       -------------------------------------------------------------------------
       <S>                            <C>           <C>          <C>    
       Dividend yield                   0%            0%           0%
       Expected volatility             64%           68%          51%
       Risk-free interest rate        6.2%          6.3%         6.0%
       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.

                                      F-12
<PAGE>   39

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

<TABLE>
<CAPTION>
                                           Fiscal 1997                     Fiscal 1996                       Fiscal 1995
                                     ------------------------       --------------------------        ------------------------
                                                 Weighted                          Weighted                        Weighted
                                                  Average                          Average                         Average
                                     Shares    Exercise Price       Shares      Exercise Price        Shares    Exercise Price
                                     ------    --------------       ------      --------------        ------    --------------

<S>                                <C>          <C>                   <C>        <C>                  <C>        <C>        
Beginning Balance                  1,109,320    $     5.36            940,320    $    5.80            908,620    $     13.51
Granted                              505,500          4.87            283,990         5.12          1,135,650           8.04
Exercised                            (19,200)         5.02                 --           --            (36,440)          9.62
Canceled                            (170,710)         4.97           (114,990)        8.34         (1,067,510)         14.62
                                   ---------                        ---------                      ---------- 
Ending balance                     1,424,910    $     5.28          1,109,320    $    5.36            940,320    $      5.80
                                   =========    ==========          =========    =========         ==========    ===========
Reserved for future grant
at year-end                           70,800                          405,590                         574,590

Exercisable                          383,446    $     5.91            213,730    $    6.60            136,560    $      9.48

Weighted average fair
value of options
granted during the
year                                            $     3.15                       $    3.41                       $      4.50
</TABLE>


                                      F-13
<PAGE>   40

            The following table summarizes information concerning stock options
granted under the 1989 Incentive Stock Options Plan which were outstanding at
January 31, 1998:

<TABLE>
<CAPTION>
                                     Options Outstanding                        Options Exercisable
                      -------------------------------------------------  --------------------------------
                                        Weighted Average                   Number
                      Outstanding at       Remaining       Weighted      Exercisable at      Weighted
Number Range of         January 31,       Contractual       Average        January 31,        Average
Exercise Prices            1998          Life in Years   Exercise Price       1998         Exercise Price
---------------       --------------    ---------------  --------------  --------------    --------------
<S>                       <C>                <C>            <C>             <C>            <C>        
$3.625 to $5.00           723,140            8.3            $   4.86        209,156        $      5.00
  5.01 to 8.50            668,720            8.7                5.38        141,920               6.19
 10.00 to 14.50            32,550            1.8               10.47         31,870              10.40
      20.50                   500            4.5               20.50            500              20.50
                        ---------                                           -------      
$3.625 to $20.50        1,424,910                                           383,446
                        =========                                           =======
</TABLE>

4. LONG-TERM DEBT

            Long-term debt outstanding is as follows:

<TABLE>
<CAPTION>
                                                         Fiscal Year Ended
                                                    ----------------------------
                                                    January 31,      February 1,
                                                        1998            1997
                                                        ----            ----
              <S>                                   <C>              <C>        
          Convertible Subordinated Debentures,
              5% due 2001 (a)                       $60,001,000      $58,853,000

          Less current portion (b)                           --               --
                                                    -----------      -----------
                                                    $60,001,000      $58,853,000
                                                    ===========      ===========
</TABLE>

      a)          The 5% Convertible Subordinated Debentures (the "Debentures")
            were issued in 1991 with a yield to maturity of approximately 7.47%.
            At January 31, 1998 and February 1, 1997, the unamortized original
            issue discount was $4,999,000 and $6,147,000, respectively. The
            Debentures are convertible into Common Stock of the Company prior to
            maturity at a conversion of 32.79 shares per $1,000 principal amount
            at maturity. Amounts charged to income for the amortization of
            debenture discount were $1,147,000 and $1,066,000 for Fiscal 1997
            and Fiscal 1996, respectively.

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

      b)          The long-term debt at January 31, 1998 of $60,001,000 is due
            September 27, 2001.

5. LINE OF CREDIT

                  At January 31, 1998, the Company had an unused $40,000,000
            unsecured Credit Agreement with a group of banks. On March 26, 1998,
            the Company entered into a new $40,000,000 Credit Agreement (the
            "Credit Agreement") with a syndicate of banks led by The Chase
            Manhattan Bank and terminated the $40,000,000 facility in existence
            at January 31, 1998. The new 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 Agreement as it


                                      F-14
<PAGE>   41

            relates to the $20,000,000 line of credit for direct borrowings
            expires March 26, 2001 and is unsecured. With respect to the
            $20,000,000 line for Letter of Credit, it expires on March 25, 1999
            and is renewable annually. 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 Agreement requires the
            maintenance of certain earnings and fixed charge coverage ratios,
            and the interest rate payable is adjusted by from 0.0% to 2.0% over
            the above base rate depending on the ratio of consolidated funded
            debt to earnings before interest, taxes, depreciation and
            amortization (EBITDA).

                  At January 31, 1998 and February 1, 1997, the Company was
            liable for outstanding letters of credit in the amount of
            approximately $8,299,000 and $9,219,000, respectively.

6. INCOME TAXES

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

<TABLE>
<CAPTION>
                                              Fiscal Year Ended
                                   ---------------------------------------
                              January 31,       February 1,      February 3,
                                 1998              1997             1996
                                 ----              ----             ----
           <S>               <C>                <C>              <C>        
           Federal:
           Current           $ 1,900,000       $ 1,448,000       $   832,000
           Deferred           (3,803,000)         (625,000)        1,505,000
                             -----------       -----------       -----------

                              (1,903,000)          823,000         2,337,000
                             -----------       -----------       -----------
           State:
           Current               631,000           625,000           630,000
           Deferred           (1,168,000)         (248,000)          179,000
                             -----------       -----------       -----------
           
                                (537,000)          377,000           809,000
                             -----------       -----------       -----------
           
                             ($2,440,000)       $1,200,000       $ 3,146,000
                             ===========       ===========       ===========
</TABLE>


                                      F-15
<PAGE>   42

            A reconciliation of the statutory Federal income tax rate with the
      effective rate is as follows:

<TABLE>
<CAPTION>
                                              Fiscal Year Ended
                                   ---------------------------------------
                                   January 31,   February 1,   February 3,
                                      1998          1997         1996
                                      ----          ----         ----
<S>                                  <C>           <C>           <C>  
Statutory Federal income
   tax rate                          34.0%         34.0%         34.0%

State income taxes, net of
   Federal benefit                    5.7           5.5           7.0
Reversal of prior year                                        
  residual estimated                                          
  liabilities                        (12.4)                        --
Other                                (0.3)         (0.7)          0.1
                                     ----          ----          ----
Effective income tax rate            39.4%         26.4%         41.1%
                                     ====          ====          ====
</TABLE>
                                                               
            Deferred income taxes reflect the net tax effects of temporary
      differences between the carrying amounts of assets and liabilities for
      financial reporting purposes and amounts used for income tax purposes.

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

<TABLE>
<CAPTION>
                                                   Fiscal Year Ended
                                            --------------------------------
                                              January 31,       February 1,
                                                 1998               1997
                                                 ----               ----
                <S>                         <C>                <C>          
                Accelerated tax
                depreciation                $ 13,942,000       $ 18,281,000 
                Reserves not currently
                   deductible                 (2,140,000)          (539,000)
                AMT credit carryovers           (346,000)        (1,288,000)
                                            ------------       ------------
                                            $ 11,456,000       $ 16,454,000
                                            ============       ============
</TABLE>

            The Company files consolidated Federal and state income tax returns.
      Deferred income tax expense during Fiscal 1997, 1996 and 1995 principally
      resulted from the use of accelerated methods of depreciation for tax
      purposes over the straight-line method used for financial reporting
      purposes.

7. LEASES

            At January 31, 1998, the Company leased all of its stores and two
      facilities for its corporate office, warehouse and distribution
      operations. These operating leases expire on varying dates to 2008.


                                      F-16
<PAGE>   43

            At January 31, 1998, aggregate minimum rentals in future periods are
      as follows:

<TABLE>
<CAPTION>
                                              Minimum
                              Fiscal           Rental
                               Year          Commitment
                              ------         ----------
                           <S>               <C>
                               1998          $47,432,000
                               1999          $42,332,000
                               2000          $37,387,000
                               2001          $33,262,000
                               2002          $29,000,000
                           Thereafter        $69,826,000
</TABLE>

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

<TABLE>
<CAPTION>
                              Fiscal
                               Year          Amount
                              ------         ------
                              <S>            <C>
                              1997           $3,061,000
                              1996           $2,320,000
                              1995           $1,913,000
</TABLE>

      Total rent expense was as follows:

<TABLE>
<CAPTION>
                              Fiscal
                               Year          Amount
                              ------         ------
                              <S>            <C>
                              1997           $53,931,000
                              1996           $52,729,000
                              1995           $50,712,000
</TABLE>

8. EMPLOYEE BENEFIT PLANS AND OTHER COMMITMENTS

            Pursuant to collective bargaining agreements, the Company is
      obligated to make contributions to union-administered health and welfare,
      retirement and severance funds which provide benefits for the Company's
      union-represented associates. Payments under these agreements amounted to
      approximately $967,000, $994,000 and $1,070,000 in Fiscal 1997, Fiscal
      1996 and Fiscal 1995, 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 $145,000,
      $154,000 and $181,000 were charged to expense in Fiscal 1997, Fiscal 1996
      and Fiscal 1995, respectively.


                                      F-17
<PAGE>   44

            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 $156,000, $129,000 and
      $134,000 were charged to expense in Fiscal 1997, Fiscal 1996 and Fiscal
      1995, respectively.

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


                                      F-18
<PAGE>   45

9. AVAILABLE FOR SALE SECURITIES

            The following is a summary of the available for sale securities
      which comprise the balance in "marketable securities" at January 31, 1998
      and February 1, 1997:

<TABLE>
<CAPTION>
                                           Gross       Gross
  January 31,                            Unrealized  Unrealized   Estimated
     1998                  Cost            Gains       Losses     Fair Value
----------------           ----            -----       ------     ----------
<S>                     <C>              <C>         <C>         <C>        
Government Bonds        $52,251,000      $  40,000   $ (3,000)   $52,288,000
Other Debt Securities    17,305,000         77,000     (1,000)    17,381,000
Municipal Bonds           5,049,000         29,000         --      5,078,000
                        -----------      ---------   --------    -----------
Total available for
   sale securities      $74,605,000      $ 146,000   $ (4,000)   $74,747,000
                        ===========      =========   ========    ===========
</TABLE>

<TABLE>
<CAPTION>
                                           Gross       Gross
  February 1,                            Unrealized  Unrealized  Estimated
     1997                  Cost            Gains       Losses    Fair Value
----------------           ----            -----       ------    ----------
<S>                     <C>              <C>         <C>        <C>        
Government Bonds        $50,300,000      $     --    $(58,000)  $50,242,000

Municipal Bonds           3,834,000         8,000          --     3,842,000
                        -----------      --------    --------   -----------
Total available
for sale securities     $54,134,000      $  8,000    $(58,000)  $54,084,000
                        ===========      ========    ========   ===========
</TABLE>

            The cost and estimated fair value of debt securities at January 31,
      1998 by contractual maturity are as follows:

<TABLE>
<CAPTION>
                                                             Estimated
                                              Cost           Fair Value
                                              ----           ----------
                   <S>                     <C>              <C>        
                   1998                    $33,573,000      $33,572,000
                   1999                     25,058,000       25,138,000
                   2000                     13,959,000       14,021,000
                   2001                             --               --
                   2002                      2,015,000        2,016,000
                                           -----------      -----------
                   Total available for
                     sale securities       $74,605,000      $74,747,000
                                           ===========      ===========
</TABLE>


                                      F-19
<PAGE>   46

            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 1997, Fiscal 1996 and Fiscal 1995 are as follows:

<TABLE>
<CAPTION>
            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>       
    1997  $ (50,000)      $ 7,000    $ (43,000)    $(296,000)    $(339,000)
    1996  $  (9,000)      $28,000    $  19,000     $       0     $  19,000
    1995  $(114,000)      $88,000    $ (26,000)    $       0     $ (26,000)
</TABLE>
    
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
                                                                Fiscal Quarter Ended
                                    ---------------------------------------------------------------------
                                        May 3,             August 2,        November 1,       January 31,
                                         1997                1997              1997              1998
                                         ----                ----              ----              ----
                                           (Amounts in thousands except share and per share amounts)
<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 share
(a) (b) (d)                         $      (0.29)      $      (0.21)      $      (0.15)      $       0.36
Number of shares used in
computing net income (loss) 
   per share                          17,155,000         17,155,000         17,155,000         17,172,000
</TABLE>


                                      F-20
<PAGE>   47

<TABLE>
<CAPTION>
                                                               Fiscal Quarter Ended
                                    ----------------------------------------------------------------------
                                            May 4,         August 3,        November 2,        February 1,
                                             1996            1996              1996              1997
                                             ----            ----              ----              ----
                                                                                          
                                           (Amounts in thousands except share and per share amounts)
<S>                                 <C>                <C>                <C>                <C>         
Net sales                           $     84,992       $     92,727       $     98,495       $    165,029

Gross profit                              20,614             21,878             25,317             51,324
Provision for asset impairment                --                 --                370                 --
Income (loss) before income
   tax provision                          (5,977)            (4,793)            (2,653)            17,966
Net income (loss)                         (3,526)            (2,828)            (1,565)            11,262
Net income (loss) per share
(a)(b)(c)                           $      (0.21)      $      (0.18)      $      (0.11)      $       0.64
Number of shares used in
computing net income (loss)
per share                             17,155,000         17,155,000         17,155,000         17,155,000
</TABLE>

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

(b)   Diluted net income per share, assuming conversion of the Company's 5%
      Convertible Subordinated Debentures and elimination of the related
      interest costs less applicable income taxes and assuming conversion of the
      5.05% Convertible Preferred Stock and elimination of the related dividend
      was $0.31 for the thirteen weeks ended January 31, 1998 on weighted
      average shares outstanding of 22,680,000 and $0.54 per share for the
      thirteen weeks ended February 1, 1997 on weighted average shares
      outstanding of 22,487,000.

(c)   Difference of $0.01 between full year (loss) income per share and the
      resulting (loss) income per share from the sum of each of the quarters in
      Fiscal 1997 and Fiscal 1996 is due to rounding.


                                      F-21