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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K

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

                   For the fiscal year ended February 3, 2001

                           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                     (I.R.S. Employer
      of Incorporation)                         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 SK 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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         As of April 16, 2001, 15,334,986 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 $3,839,000. On April 16, 2001,
there were approximately 792 holders of record of the Common Stock. The common
stock was suspended from inclusion in the NASDAQ National Market System on April
16, 2001. On April 16, 2001, the closing price of the Common Stock was $0.35.
The common stock is currently traded on the Over-The-Counter Bulletin Board.

         For the purposes of such calculation, all outstanding shares of Common
Stock have been considered held by non-affiliates, other than the 4,365,761
shares beneficially owned by directors and executive officers of the Registrant
and a principal shareholder. 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.
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                              SAFE HARBOR STATEMENT
                     UNDER THE PRIVATE SECURITIES LITIGATION
                               REFORM ACT OF 1995

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

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

- Availability of vendor and bank credit;
- Outcome of discussions relating to the claims of landlords of closed stores;
  credit arrangement and others;
- Consumer acceptance of the upgraded merchandise assortment;
- Ability to refinance the 5% Convertible Subordinated Debentures;
- Economic and geographic factors including political and economic risks;
- Changes in and compliance with environmental and safety laws and policies;
- Weather conditions;
- Population growth rates and demographic patterns;
- Competition for retail customers;
- Market demand, including structural market changes;
- Changes in tax rates or policies or in rates of inflation;
- Changes in project costs;
- Unanticipated changes in operating expenses and capital expenditures;
- Capital market conditions;
- Legal and administrative proceedings (whether civil or criminal) and
  settlements that influence the business and profitability of the Company;
- Availability of vender and bank credit;
- Outcome of discussions relating to landlord claims; credit arrangement and
  others.


Any forward-looking statement speaks only as of the date on which such statement
is made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time and it is not possible for management to
predict all of such factors, nor can it assess the impact of any such factor on
the business or the extent to which any factor, or combination of factors, may
cause results to differ materially from those contained in any forward-looking
statement.
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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 stores were known for
the breadth of their assortment and the convenience of their locations. In 1990,
the Company created the Famous Brands Housewares Outlet(R) concept with the
intent of offering housewares manufacturers not otherwise having a retail
presence in outlet malls, a venue experiencing substantial customer traffic and
rapid new center development.

         The Company continued to reposition its basic concepts. While both
concepts feature houseware products, Lechters Housewares(R) has been enhancing
its franchise as one of the country's largest specialty retailer of products for
the kitchen. Famous Brands Housewares Outlet(R) continued the process of
transitioning the greater portion of its assortment to off-price, special buy
merchandise in an effort to establish the exceptional value proposition expected
in outlet mall locations. The outcome of the repositioning resulted in the
evolution of the Company into two major segments, Specialty Housewares,
comprised of Lechters Housewares(R) and Lechters Kitchen Place(R), and Off-Price
Home Business, comprised of Famous Brands Housewares Outlet(R) and Cost Less
Home Store(SM), a concept that was subsequently discontinued. In addition to an
expanded offering of the Company's base housewares assortment, the concept added
items including domestics, home textiles, ready-to-assemble furniture, home
decor and gifts.

         Fiscal 2000, the 53 weeks ended February 3, 2001, started with positive
sales performance for the first two months. However, sales performance
deteriorated over the balance of the fiscal year. During the fourth quarter, the
Company engaged outside consultants to evaluate the Company's financial
condition and develop a plan for the Company's future. On February 9, 2001, the
Company announced a Strategic Restructuring Plan which resulted in the closing
of all of the Cost Less Home Store(SM) stores, as well as closing 27 Famous
Brands Housewares Outlet(R) stores and 128 Lechters Housewares(R) stores. The
major initiatives of the Plan included the following: (1) exit the Cost Less
Home Store(SM) business; (2) close unprofitable stores; (3) reduce support areas
associated with the Off-Price Home Business; (4) re-align and consolidate the
merchandising and store operation support areas; and (5) reduce all Corporate
support areas reflecting the reduction of stores in operation. As a result of
the adoption of the Plan, the Specialty Housewares segment was reduced by 128
stores and the Off-Price Home segment was reduced by 38 stores (11 Cost Less
Home Stores(SM) and 27 Famous Brands Housewares Outlet(R) stores.) As a result
of closing of

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the 166 stores and the consolidation and re-alignment of corporate support
function, the Company estimated that 725 full-time positions would be
eliminated. These stores were assigned to Gordon Brothers Retail Partners, LLC,
who conducted the liquidation sale. See Note 2 to the Consolidated Financial
Statements.

         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 491 stores (370 Lechters Housewares(R) stores, 110 Famous Brands
Housewares Outlet(R) stores and 11 Cost Less Home Store(SM) stores in 41 states
and the District of Columbia. After the Strategic Restructuring Plan, the
Company store count was 325 stores comprised of 242 Lechters Housewares(R)
stores and 83 Famous Brands Houseware(R) Outlet stores in 36 states and the
District of Columbia.

         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 was formerly listed on NASDAQ. On April 16, 2001, the Company's common
stock commenced trading on the Over-The-Counter Bulletin Board under the symbol
LECH.

OPERATING STRATEGIES

A. MERCHANDISING AND MARKETING

The Company regularly evaluates its business and operations to more effectively
position itself in the markets in which it competes.

         The Company continues to focus on the following strategic priorities:

                  -        Redeployment of assets into retail concepts to
                           perform at above average levels resulting in
                           stakeholder (customers, employees, investors, and
                           vendors) satisfaction with anticipated returns.

                  -        Re-energizing the existing Lechters Housewares(R)
                           business with fewer but more profitable stores.

                  -        Complete migration of Lechters Housewares(R)
                           assortment to a good-better-best strategy and the
                           introduction of the brand Lechters thinkkitchen.

                  -        Famous Brands Housewares Outlet(R) sales will be
                           derived from a smaller core of profitable stores in
                           viable markets.

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

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

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BUSINESS SEGMENTS

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

SPECIALTY HOUSEWARES

         The Specialty Housewares segment is the largest business segment and
accounted for 76.5% of total sales in Fiscal 2000 and 77.3% in Fiscal 1999. This
segment currently operates under two store names: Lechters Housewares(R) and
Lechters Kitchen Place(R), which are virtually identical in merchandise offering
but differ cosmetically in fixturing and finish-out.

           LECHTERS HOUSEWARES(R)

                    Lechters Housewares(R) operates in two different size
                    categories; a prototype 3,000 square foot Lechters
                    Housewares(R) store and a prototype 6,000 square foot Super
                    Lechters Housewares(R) store. The 3,000 square foot Lechters
                    Housewares(R) store offers customers an edited assortment of
                    products for the kitchen and home at moderate prices while
                    Super Lechters Housewares(R) stores have a more extensive
                    merchandise assortment. The Company ended the fiscal year
                    with 283 Lechters Housewares(R) stores, 81 Super Lechters
                    Housewares(R) stores and 6 Kitchen Place(R) Stores. After
                    the Strategic Restructuring Plan, the Company will operate
                    178 Lechters Housewares(R) stores, 59 Super Lechters
                    Housewares(R) stores and 5 Kitchen Place(R) stores.

OFF-PRICE HOME BUSINESS

         The Off-Price Home Business segment accounted for 23.5% of total sales
in Fiscal 2000 and 22.7% in Fiscal 1999. During Fiscal 2000, this segment was
comprised of Famous Brands Housewares Outlet(R), Cost Less Home Store(SM), and
Lechters Housewares Outlet(SM). For Fiscal 2001, after the Strategic
Restructuring Plan, this segment will be comprised of Famous Brands Housewares
Outlet(R) and Lechters Housewares Outlet(SM).

           FAMOUS BRANDS HOUSEWARES OUTLET(R) AND LECHTERS HOUSEWARES OUTLET(SM)

                    Famous Brands is a 3,000 to 7,500 square foot specialty
                    retailer of off-price, special buy housewares and products
                    for the home. These stores are located in outlet centers.
                    The Company operated 110 stores under the Famous Brands or
                    Lechters Housewares Outlet names at the end of Fiscal 2000.
                    The Strategic Restructuring Plan has reduced the store count
                    to 83, 78 operating as Famous Brands and 5 operating as
                    Lechters Housewares Outlets.

           COST LESS HOME STORE(SM)

                    This concept did not perform up to the Company's
                    expectations and the Company has exited this concept,
                    closing all 11 of the stores which comprised Cost Less Home
                    Store(SM). The

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                    typical Cost Less Home Store(SM) was approximately 18,400 -
                    25,000 square feet devoted to the sales of housewares,
                    linens and domestics, kitchen textiles, gifts, home
                    furnishing, furniture, gourmet food and seasonal items.
                    During Fiscal 2000, the Company opened 6 locations which
                    brought the total number of stores to 11, which have been
                    closed.


SPECIALTY HOUSEWARES

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

ASSORTMENT MIGRATION

         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 and frames) which accounted for 64% and 36%, respectively, of Fiscal
2000 sales. Of the over 4,000 items in the line, no individual item accounted
for more than 1% of Fiscal 2000 sales. Throughout the course of the first
through the third quarter of Fiscal 2001, Lechters will engage in a complete
upgrading of its merchandise assortment. Some items will remain in the Lechters
assortment - those deemed to be kitchen-focused and of a high enough quality and
value to merit stocking. Thousands of additional kitchen focused items and many
more brands will be added to the assortment throughout the first through the
third quarter. Thousands of items will be discontinued in the same time period.
At the point of completion of the assortment migration the Lechters
Housewares(R) product line will contain approximately 4,000 items.

         All products sold by the Company are either private label or national
brand names including but not limited to Rubbermaid, Cuisinart, Ecko,
Farberware, Henckels, Krups, OXO, Pyrex, Wearever Anchor Hocking and TFal. The
Company's own brands include Cooks Club(R) (cookware, gadgets and utensils),
Simple Solutions(R) (storage and organization) and Regent Gallery(R) (frames and
accessories). Private label merchandise accounted for approximately 21% of
Fiscal 2000 net sales. Brands to be added during the upgrading of the assortment
include Circulon, KitchenAid, Weber, Braun and Oneida.

         The Lechters Housewares(R) concept has unique strengths in several
areas. The Company believes that this concept has a strong customer franchise.
Research indicates that the Lechters name is known by 58% of consumers in the
markets in which it does business. The Lechters name is known by over 80% of
mall shoppers. Over 23 million customer transactions were conducted last year in
the Lechters stores and those customers purchased over 57 million items.
Lechters has a loyal core of customers who know, trust and shop the store on a
recurring basis.

         Lechters Housewares(R) believes that its core strength lies in its
assortments of kitchen gadgets and good-to-better kitchen housewares. Lechters
Housewares(R) also believes that its complete assortment of


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value priced kitchen products, merchandised in conveniently located compact
stores, offers a meaningful alternative to its competitors. In addition, as the
impact of assortment migration continues, the Company expects its established
customer base will respond positively to the better goods and better brands
available in Lechters for the first time.

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

         National brand merchandise is generally priced at department store and
specialty retailer "sale prices" everyday. The value of these products is
further enhanced by periodic sales and promotional events. Lechters
Housewares(R) offers unique value through its specially designed private label
program.

         Items generally range in price from $2.00 to $250.00. All sales are
transacted in cash and through third party credit cards, which accounted for
approximately 52.2% and 47.8%, of Fiscal 2000 net sales, respectively.

         The Company runs an advertising campaign consisting of circulars,
free-standing newspaper inserts, run-of-press newspaper advertising, direct
mail, and email promotions. Currently, the company has a database of email
addresses numbering in excess of 600,000 which it has collected in stores since
July of 2000. As the assortment and brand migrations mature, the Company expects
to emphasize advertising venues that offer a high degree of targeting capability
and provide the lowest cost of message delivery; hence email and direct
marketing will play increasingly larger roles in Lechters advertising.

         Funding of the Company's advertising expense is supported in part by
cooperative advertising allowances from suppliers. Net advertising expense was
2.2% of Specialty Housewares(R) sales in Fiscal 2000 and 1.9% of sales in Fiscal
1999.

         The Lechters Housewares(R) business is highly seasonal. As a
convenience concept, the segment 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. Specialty Housewares also experiences a strong
back-to-school business, which commences in late July. In Fiscal 2000,
November/December and back-to-school sales accounted for approximately 31.1% and
21.0%, respectively, of total year sales.

BRAND MIGRATION

         The launch of Lechters thinkkitchen heralds the assortment
migration of land-based Lechters Housewares(R) business. To an equal degree it
heralds the migration of Lechters' brand. Beginning in the second quarter of
Fiscal 2001, customers will be exposed more and more to the brand Lechters
thinkkitchen when they visit a Lechters store or receive Lechters advertising
messages. Although it will be clear that the customer is in a Lechters or is
receiving advertising from Lechters, thinkkitchen will be used


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to represent the new, better brands and items and (because advertising promotes
the new and better merchandise) Lechters thinkkitchen will become the most often
seen brand other than the name over the door. The new, combined logo Lechters
thinkkitchen best represents both the brand equity and customer loyalty enjoyed
by Lechters and the new, highly kitchen-focused assortment of thinkkitchen.

thinkkitchen STORES

         Starting in the second quarter of Fiscal 2001, Lechters is scheduled to
convert a handful of existing locations from Lechters to thinkkitchen branded
stores. thinkkitchen stores are planned to have an entirely new design with a
different look and feel from Lechters stores. thinkkitchen stores merchandise
assortment will be similar to the fully migrated Lechters assortment. The
purpose of these conversions is to test a pure, non-Lechters branded store.

OFF-PRICE HOME BUSINESS

         The goal of Famous Brands Housewares Outlet(R) of the Company's
Off-Price Home Business segment is to become the leading retailer of off-price
housewares and home related products in the outlet centers in which it operates
and the preferred retailer for U.S. housewares manufacturers to liquidate their
excess, discontinued and slow selling inventory.

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

         Famous Brands Housewares Outlet(R) began Fiscal 2000 with approximately
60% of sales generated by off-price merchandise. The remainder of the assortment
was similar to the Lechters Housewares(R) assortment with limited reductions in
pricing. At the end of Fiscal 2000, approximately 65% of sales were generated by
off-price merchandise.

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

         Famous Brands Housewares Outlet(R) stores typically have lower
occupancy expenses and leasehold improvement requirements than stores located in
malls, city locations and strip centers. The lower cost structure supports the
lower price points of the outlet environment.

         Given the geographic dispersion of customers who frequent outlet
centers, the marketing strategy to drive the Famous Brands Housewares Outlet(R)
business will continue to rely primarily on in-store signs, handouts, displays
and participation in promotions sponsored by malls. The location of these
centers


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outside the Company's advertised markets preclude the use of traditional print
media, although Famous Brands could benefit from direct marketing and email
efforts as Lechters is able to identify the store in which a customer originally
signed up for email.

         The seasonality of the Famous Brands Housewares Outlet(R) business
differs slightly from that of Lechters Housewares(R). The summer season
represents a greater portion of the annual sales in Famous Brands Housewares
Outlet(R) given the increase in leisure travel and the proximity of outlet
centers to major routes and vacation destinations. In Fiscal 2000, the
November/December period represented 24.9% of total year sales in Famous Brands
Housewares Outlet(R) versus 31.1% for Lechters Housewares(R).

         During Fiscal 2000 the Company closed 7 Famous Brands Housewares
Outlet(R) stores. The Company plans to continue to reduce the number of Famous
Brands Housewares Outlet(R) stores, with the intention of operating a core group
of profitable stores in viable outlet malls.

         Cost Less Home Store(SM) was developed as a new concept that was an
outgrowth of the off-price special buy strategy started in the Famous Brands
Housewares Outlet(R) stores. The first Cost Less Home Store(SM) was opened in
November of Fiscal 1998. Four Cost Less Home Store(SM) were opened in Fiscal
1999. Six more locations were opened in Fiscal 2000.

         During the third and fourth quarter of Fiscal 2000, it became apparent
that the Cost Less Home Store(SM) could not produce the projected sales volume
to provide the Company with sufficient return to justify the expansion of or the
continuation of this concept. As part of the Strategic Restructuring Plan, the
Company has abandoned this concept and closed all Cost Less Home Store(SM)
stores.

B. PURCHASING, WAREHOUSING AND DISTRIBUTION

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

         The Company has a dedicated buying staff in the Service Office. As of
March 31, 2001, reporting to the Chief Merchandising Officer were 3 Vice
Presidents, 4 senior buyers and 2 buyers, and their staff of associate buyers
and assistant buyers.

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

         The Company purchases its products from over 400 major suppliers with
no supplier accounting for more than 2.4% of Fiscal 2000 receipts. Approximately
80% of its products are purchased in the United States. The remaining 20% is
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 warehouses in Harrison, New Jersey and North Las
Vegas, Nevada where it is held until reshipment to the Company's stores. During
2000, the Company opened a new distribution center in Hazleton, Pennsylvania to
handle the storage and distribution of product for the Company's special buy,
off-price merchandise for


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stores east of the Mississippi, including Costless stores. As part of the
Strategic Restructuring Plan, the new facility was phased out in April 2001, due
to the closure of all the Cost Less Home Store(SM) stores and 27 Famous Brands
Houseware Outlet(R) stores. The remaining Famous Brands stores east of the
Mississippi are being serviced by the warehouse in Harrison, New Jersey.

         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. Most stores are supplied with
merchandise on a bi-weekly basis, but the highest sales volume stores are
supplied weekly or twice weekly. Shipment frequencies are increased during peak
sales periods. 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 that 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 Operations 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 March 31, 2001, the field organization was comprised of 2 Vice
Presidents-Stores; each with profit and loss responsibility for several
districts and providing leadership to 20 District Managers. The District
Managers are responsible for the day-to-day operations of 12 to 20 stores,
supported by Area Managers who are Store Managers with additional oversight
responsibility for 1 to 3 additional stores. Stores are typically staffed with a
Manager, 2 Assistant Managers and 5 sales/cashier Associates. The stores
schedule their labor from a pool of hourly Associates, the majority of whom are
part-time. The number of Associates on hand at any one time is a function of
customer traffic and scheduled store activities, such as training events and the
receipt of merchandise.

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

         The Company believes that the security measures in its stores are
strict, reflecting the cash orientation of the Company's business. Audit
programs that include District Manager conducted reviews and Service Office
monitoring of store transaction reports provide the loss prevention structure
for the


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Company. Particular emphasis is placed on stores with a history of inventory
shrinkage in excess of the norm.

D. REAL ESTATE

         The Company considers obtaining and retaining attractive, high-traffic
store locations a critical element of its business. Lechters Housewares(R) mall
stores are located primarily in high-traffic regional enclosed malls while strip
centers and city stores are located in dominant strip centers or downtown areas
as defined by market analysis. Famous Brands Housewares Outlet(R) stores are
located in the dominant outlets nationally. The six Lechters Kitchen Place(R)
stores are located in mall locations. Nine of the eleven Cost Less Home
Store(SM) stores which were opened were located in power strip centers and one
was located in a 2-level enclosed outlet mall.

         As shown in the following table, the Company operated 370 Lechters
Housewares(R) stores which included 6 Lechters Kitchen Place(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 110 Famous Brands
Housewares Outlet(R) stores range in size from 3,000 to 7,500 square feet and
average 3,900 square feet. The Company's Cost Less Home Store(SM) locations
averaged 21,000 gross square feet and ranged in size from 18,400 to 25,000
square feet.

         The following table reflects the impact of the Strategic Restructuring
Plan announced on February 9, 2001. (Square foot amounts are estimates):

<TABLE>
<CAPTION>


                                                                                             FAMOUS        COST
                                                      LECHTERS HOUSEWARES                    BRANDS        LESS
                                                      -------------------                  HOUSEWARES      HOME
                                            MALLS    STRIPS          CITY     SUB-TOTAL     OUTLET(R)     STORE(SM)       TOTAL
                                            -----    ------          ----     ---------     ------        -------         -----
<S>                                      <C>         <C>          <C>        <C>             <C>          <C>         <C>
January 29, 2000:
   Units.............................          320        52           29          401           117            5           523
   Square Feet.......................    1,206,400   183,200      119,200    1,508,800       464,200      105,000     2,078,000
2000 Additions:
   Units.............................            2         3            0            5             0            6            11
   Square Feet.......................        6,400    12,100            0       18,500             0      128,700       147,200
2000 Closings:
   Units.............................           33         3            0           36             7            0            43
   Square Feet.......................       93,800    11,300            0      105,100        26,100            0       131,200

February 3, 2001:
   Units.............................          289        52           29          370           110           11           491
   Square Feet.......................    1,119,000   184,000      119,200    1,422,200       438,100      233,700     2,094,000(1)

Closed Under
Strategic Restructuring Plan
    Units.............................         109        17            2          128            27           11           166
    Square Feet......................      399,500    57,500        5,300      462,300       101,400      233,700       797,400
Continuing Stores
    Units.............................         180        35           27          242            83            -           325
    Square Feet.....................       719,500   126,500      113,900      959,900       336,700            -     1,296,600(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.



                                       9
<PAGE>   13
         The Company's present plans will focus on enhancing its Lechters
Kitchen Place(R), Lechters Housewares(R) strip center locations and Lechters
Housewares(R) City locations. The Company's plans also call for the conversion
of 5 existing locations to Lechters thinkkitchen(R) stores. The estimated cost
for a thinkkitchen store under typical site conditions are approximately:

<TABLE>
<CAPTION>

                                                                             INVENTORY,
                                                                               NET OF
                                             LEASEHOLD         FIXTURES &      ACCOUNTS         PRE-OPENING
                                           IMPROVEMENTS        EQUIPMENT       PAYABLE           EXPENSE
                                           ------------        ---------       -------           -------

<S>                                        <C>               <C>             <C>               <C>
thinkkitchen(R).........................   $    273,000      $   145,000     $    160,000      $  14,000
</TABLE>

         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 terminate its lease agreement upon expiration of
the term or will exercise a volume termination provision, if any.

         The Company closed forty-three (43) stores in Fiscal 2000. The Company
closed 3 stores early in Fiscal 2001 and will continue to evaluate the remaining
store locations. As previously mentioned, the Company closed 166 stores pursuant
to the Strategic Restructuring Plan.

         The majority of the Company's store leases expire or will be subject to
termination over the next three years.

E. INFORMATION TECHNOLOGY

         The Company relies heavily on technology to conduct its business. It is
continually reevaluating and upgrading its systems capabilities and technology
infrastructure to support the current and future needs of the business.

         On July 10, 2000, the Company outsourced its systems staff (but not its
equipment) to Electronic Data Systems Corp. ("EDS"). The existing IT staff were
all offered positions with EDS and since that time, most of the staff has been
redeployed at other EDS accounts. Most of Lechters' systems are developed and
operated by EDS staff in Canada, supplemented by a small group at the Service
Office in Harrison, New Jersey. The outsourcing contract with EDS runs for 10
years, and provides for earlier termination under certain circumstances. EDS'
fees are based on the number of personnel assigned to Lechters, adjusted
periodically for changes in the Consumer Price Index, and other considerations.

         Given the extreme competition for talented systems people, the limited
career opportunities for these people at Lechters and the need for a wide
variety of technical skills, Lechters suffered excessive turnover and suboptimal
performance from its home-grown systems organization. EDS offers the skills of
more than 100,000 people, dedicated to technical services, who have many career
opportunities for growth within EDS.

                                       10
<PAGE>   14
         The Company's data resides on a combination of platforms using IBM
equipment in an IBM AS400 and an IBM RS6000 open system, client server
environment, in addition to servers manufactured by Compaq and other firms. To
reduce cost and improve service, the Company re-evaluates and improves its
systems continuously. Certain key systems are based on JDA's ODBMS, Oracle, and
various Microsoft products, as well as proprietary code.

         In-Store Systems consist of IBM 4684 and 4694 point of sale registers
and Symbol Technology scanners. The software is largely supplied by CRS Retail
Systems, Inc. Although the company conducted a project to select new software
and hardware for its store systems, no replacement system was elected, due to
financial considerations.

         The Company controls the level and distribution of merchandise in the
distribution centers and stores through the use of an internally developed
replenishment system. Since acquiring JDA's Open Database Merchandising System
(ODBMS) in September 1997, the Company implemented certain modules of the new
system and conversely converted some of its operation from legacy systems to the
new technology.

         The Company's distribution centers are internally operated using an
automated warehouse management system operating on the IBM AS400, which also
incorporates radio frequency technology. In September 1998 the Company acquired
JDA's warehouse management system (WCC) which is an open system, client server
solution that works in conjunction with the JDA merchandising systems (ODBMS).
The Company ran the new warehouse management system in the Hazleton and North
Las Vegas facilities as well as for supplies and fixtures in its Harrison
warehouse in 2000, but discontinued all use of the WCC system in 2001.

         In Fiscal 1997 the Company successfully installed its new financial
system which is an open system, client server solution provided by Oracle
Corporation. In Fiscal 1998 the Company augmented the new system with
substantial planning, decision support and report writing capabilities provided
by Oracle Corporation. At one point the company expected to integrate JDA's
merchandising system's financial applications, including stock ledger, sales
audit, and invoice reconciliation, which was planned to work in conjunction with
the Oracle financial system. All work on this integration project has been
halted, because in the opinion of management, there is insufficient payback to
the expected cost. As a result, the amounts previously recorded were impaired in
the fourth quarter of Fiscal 2000.

         The Company maintains a website at: www.lechters.com. The website
features descriptive Company information, upcoming sales promotions in the
stores and the basic investor relations materials.

         In a continuing effort to enhance the technology infrastructure, in
2000 the Company acquired and installed a new telephone PBX system to replace
its old technology system.

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,


                                       11
<PAGE>   15
the Company also competes with mail order companies and other specialty
retailers of home related products. However, the Company believes that it
competes favorably with such retailers because the Company offers a broader
assortment of housewares merchandise than most of its competitors. Furthermore,
its prices are generally lower than those charged by department stores and are
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", "Famous Brands Housewares Outlet" "Lechters
thinkkitchen" for retail services, and its trademarks ,"The Kitchen Place",
"Regent Gallery", "Cooks Club", "Perfect Bake", "Perfect Grip" "Simple
Solutions" and "Cable Cop" for certain houseware items. In addition, the Company
has applied for registration of other marks used in the operation of its
business, and those applications are pending.

ASSOCIATES

         On March 31, 2001, the Company employed a total of 4,145 persons, 1,788
of whom were fulltime (30 or more hours per week) and 2,357 of whom were
part-time Associates. The total includes 1,108, who were employed in the stores
in the process of closing related to the Strategic Restructuring Plan. Of the
Company's total employees, 343 were located at the Company's Harrison, New
Jersey Service Office and three distribution centers. Included in this total, 22
were Regional and District Managers, and 32 were Associates located at the
Company's North Las Vegas, Nevada distribution center.

         On March 31, 2001, the 133 non-management distribution and office
Associates at the Harrison, New Jersey facility were represented by UNITE, Local
99. On April 26, 1999, the Company and UNITE, Local 99 entered into an agreement
as to the terms and conditions of a contract covering the distribution
Associates for the period from March 16, 1999 to March 15, 2002. The contract
covering office employees, which was renewed on August 8, 2000, expires on June
30, 2003. The 3,802 Associates in the Company's retail stores are nonunion.

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

         In connection with the Strategic Restructuring Plan, the Company
adopted a retention plan pursuant to which key personnel, including certain
officers, earn additional payments for remaining in the employ of the Company
through specified dates in Fiscal 2001.



                                       12
<PAGE>   16
EXECUTIVE OFFICERS

         The following table shows information regarding executive officers of
the Company as of April 20, 2001:

<TABLE>
<CAPTION>
                                                                                                           TERM OF
                                                POSITION OR OFFICE                                       EMPLOYMENT
NAME                                AGE          WITH THE COMPANY                                         COMMENCED
----                                ---          ----------------                                        ----------
<S>                                 <C>   <C>                                                           <C>
David K. Cully...................   48    President and Chief Executive Officer                         January 2000

Daniel L. Anderton.............     52    Senior Vice President-Chief Financial Officer                 August 1999
                                                          and Treasurer

Allan Coviello...................   54    Senior Vice President -Chief Merchandising                    January 2000
                                                          Officer

Dennis Hickey....................   53    Senior Vice President-Stores                                  January 1991

David Hisbrook...................   49    Senior Vice President-Marketing                               June 2000

Sheon Karol......................   43    Senior Vice President-General Counsel                         May 1999

Mark I. Lilien...................   47    Senior Vice President-Operations                              March 2000
</TABLE>
         Donald Jonas retired as an Executive Officer of the Company on April 1,
2001. He remains a Director and the non-executive Chairman of the Board. Mr.
Jonas has served as Chairman of the Board and as a Director of the Company or
its former parent since 1979. From 1979 to January 1994, and from January 1996
until November 2000, Mr. Jonas was Chief Executive Officer of the company. He
also served as President from January 1996 to February 1999. He is also a
Director of Dress Barn, Inc.

         David K. Cully was elected President and Chief Executive Officer in
November 2000. He joined the Company as President, Chief Operating Officer in
January 2000. From 1993 to 2000, he served in various senior management
capacities including Vice President, GMM of Barnes & Noble Retail Stores and
President, Barnes & Noble Distribution. His other retail experience includes
senior management roles at both Egghead Discount Software and Waldenbooks.

         Daniel L. Anderton joined Lechters in August, 1999 as a Vice President
of Finance. In January, 2001, Mr. Anderton was named Senior Vice President-Chief
Financial Officer and Treasurer. Prior to joining Lechters, he served as Vice
President, Treasurer and Financial Planning at the Caldor Corporation from 1997
to 1999. His other retail experience includes senior management roles at both
Petrie Retail and Crystal Brands.

                                       13
<PAGE>   17

         Allan Coviello joined the Company in February 2000 as President and
Chief Operating Officer of Lechters.com. In November 2000, he assumed additional
responsibilities as Chief Merchandising Officer for the entire company. Prior to
joining the company, from 1983 to 2000, Mr. Coviello was the President, Chief
Executive Officer of Kitchen Etc. which he co-founded. Prior to Kitchen Etc.,
Mr. Coviello was General Manager of Thetford Corporation.

         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., Inc.

         David Hisbrook joined the Company in July 2000 as Senior Vice
President-Marketing responsible for all marketing, advertising, brand
management, in-store messaging and public relations for the Company. Prior to
joining Lechters, from 1998 to 2000, Mr. Hisbrook was a marketing executive for
an internet start-up firm. Previous experience included, from 1995 to 1997, Vice
President-Marketing for Barnes & Noble and Vice President-Marketing for
Bookstop, Inc. which was acquired by Barnes & Noble. Mr. Hisbrook started his
career in sales and marketing with Random House and Simon & Schuster.

         Sheon Karol was elected Senior Vice President-General Counsel in June
2000. He joined the Company in May 1999 as Vice President-General Counsel. Prior
to that he was employed by the Caldor Corporation from 1995 to 1999 as Assistant
General Counsel. Mr. Karol previously held positions with the New York law firms
of Parker Chapin Flattau & Klimpl and Kaye, Scholer, Fierman, Hays and Handler.

         Mark I. Lilien joined the Company as Senior Vice President-Operations
in March 2000. Prior to that he was Executive Vice President, Chief Operating
Officer of Wilton Industries from 1997 to 2000. From 1994 to 1996 Mr. Lilien was
employed by the McGraw-Hill Companies as Vice President, Administration,
Distribution and Production. From 1992 to 1994 Mr. Lilien was employed by
Lechters, Inc. as Vice President-Planning and Distribution and Logistics. Mr.
Lilien was employed by Barnes and Noble Bookstores from 1989 to 1991 as Vice
President-Systems and Distribution, from 1991 to 1992 and as Vice President
Strategic Planning.


ITEM 2. Properties.

         The general offices of the Company are located at 1 Cape May Street,
Harrison, New Jersey. The Company leases approximately 550,000 square feet of
floor space at this location. Approximately 460,000 square feet are being
utilized for the distribution center, and approximately 90,000 square feet for
the Company's service offices. This lease expires on January 31, 2007 and the
Company has three five-year renewal options.

         The Company leases a distribution center of approximately 155,000
square feet in North Las Vegas, Nevada. Approximately 151,000 square feet are
being utilized for the distribution center and approximately 4,000 square feet
for administrative offices. Constructed and opened in 1993, the facility is

                                       14
<PAGE>   18
     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.

         In March 2000 the Company entered into a lease for a new distribution
center in Hazleton, Pennsylvania. This facility handled the distribution of
products for the Company's special buy, off-price merchandise for stores east of
the Mississippi. Part of this facility was in use from July 2000 to April 2001.
As part of the Strategic Restructuring Plan, all Hazleton operations ceased in
April 2001 due to the shutdown of all the Cost Less Home Store (SM) stores and
27 Famous Brands Housewares Outlet(R) stores. The remaining Famous Brands
Housewares Outlet(R) stores east of the Mississippi are being serviced by the
Harrison warehouse.

         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.
Cost Less Home Store(SM) lease terms were generally 10 years in duration with
three 5-year options.

         For additional information concerning the Company's leases, see the
section of Item 1. entitled Real Estate and Note 8 to the Consolidated Financial
Statements of the Company included elsewhere herein.

ITEM 3. Legal Proceedings.

         The Company and certain of its subsidiaries are defendants in actions
commenced by vendors, customers, former employees and others that are incidental
to the normal course of its business. The Company believes that the ultimate
outcome of the foregoing actions pending will not have a material adverse effect
on its consolidated financial position, results of operations or liquidity. The
Company continues in discussion with a committee of Landlords of stores closed
pursuant to the Strategic Restructuring Plan regarding their claims. But there
can be no assurance that such discussions will be successful or that the Company
will be able under its credit arrangement to effect any settlement reached. See
Note 8 to the Consolidated Financial Statement of the Company included elsewhere
herein.

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

         None.

                                       15
<PAGE>   19

PART II

ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
        Matters.

         Until April 16, 2001, the Common Stock was traded on the
over-the-counter market and included in the National Market System of the
National Association of Securities Dealers Automated Quotation System
("NASDAQ"). On April 16, 2001, the Company's Common Stock was suspended from the
NASDAQ National Market System. The stock is currently traded on the
Over-The-Counter Bulletin Board under the symbol LECH.

         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 2000                                                                               HIGH                    LOW
-----------                                                                               ----                    ---
<S>                                                                                     <C>                       <C>
1st Quarter...........................................................                   1-3/4                    1-3/8
2nd Quarter...........................................................                   1-5/8                      1/4
3rd Quarter...........................................................                  1-7/16                    27/32
4th Quarter...........................................................                   29/32                     3/16
</TABLE>

<TABLE>
<CAPTION>
FISCAL 1999                                                                            HIGH                       LOW
<S>                                                                                     <C>                       <C>
1st Quarter...........................................................                   2-5/8                  1-17/32
2nd Quarter...........................................................                   3-5/8                  1-25/32
3rd Quarter...........................................................                 2-23/32                    1-3/4
4th Quarter...........................................................                       2                  1-15/32
</TABLE>

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

         On April 16, 2001, there were approximately 792 holders of record of
the Common Stock. On April 16, 2001, the closing price of the Common Stock
was $0.35.

         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 Senior Secured Revolving Credit
Facility contains certain covenants that restrict the ability of the Company to
pay dividends. See Note 6 to the Consolidated Financial Statements of the
Company included elsewhere herein.


                                       16
<PAGE>   20

ITEM 6. Selected Financial Data

SELECTED FINANCIAL DATA

         The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and notes thereto set
forth elsewhere herein.

<TABLE>
<CAPTION>
                                                  FIFTY-THREE                          FIFTY-TWO
                                                  WEEKS ENDED                          WEEKS ENDED
                                                   FEBRUARY 3,        JANUARY 29,       JANUARY 30,     JANUARY 31,    FEBRUARY 1,
                                                     2001                2000             1999             1998           1997
                                                   ------------      ------------      ------------    ------------    ------------
                                                        (AMOUNTS IN THOUSANDS, EXCEPT SHARE, PER SHARE AND SELECTED OPERATING DATA)
<S>                                                    <C>               <C>             <C>               <C>             <C>
INCOME STATEMENT DATA:
Net sales ........................................     $405,033          $420,123        $428,219          $445,310        $441,243
Cost of goods sold (including occupancy
and indirect costs) ..............................      321,544           311,602         317,868           325,269         322,110
                                                   ------------      ------------    ------------      ------------    ------------
Gross profit .....................................       83,489           108,521         110,351           120,041         119,133
Selling, general and administrative expenses .....      149,419           125,979         118,606           115,541         110,848
Restructuring expense ............................       36,092                --              --                --              --
Provision for asset impairment ...................          270             2,685           1,543             8,746             370
                                                   ------------      ------------    ------------      ------------    ------------
Operating (loss) income ..........................     (102,292)          (20,143)         (9,798)           (4,246)          7,915
Other expense (income) (1) .......................        3,077             1,250            (117)            1,952           3,372
                                                   ------------      ------------    ------------      ------------    ------------
(Loss) income before income tax provision and
  extraordinary item .............................     (105,369)          (21,393)         (9,681)           (6,198)          4,543
Income tax (benefit) provision ...................       (2,605)           (8,547)         (3,940)           (2,440)          1,200
                                                   ------------      ------------    ------------      ------------    ------------
Net (loss) income before extraordinary item ......     (102,764)          (12,846)         (5,741)           (3,758)          3,343
Extraordinary gain on early retirement
  of debentures, net of tax ......................        1,947               398              --                --              --
                                                   ------------      ------------    ------------      ------------    ------------
Net (loss) income ................................     (100,817)          (12,448)         (5,741)           (3,758)          3,343
Preferred stock dividend requirement .............        1,010             1,010           1,010             1,010             842
                                                   ------------      ------------    ------------      ------------    ------------
Net (loss) income available to common
     shareholders ................................    ($101,827)         ($13,458)        ($6,751)          ($4,768)         $2,501
                                                   ============      ============    ============      ============    ============
Net (loss) income per common share (2)(3)
  Basic and diluted
     (Loss) income before extraordinary item .....       ($6.62)           ($0.81)         ($0.39)           ($0.28)          $0.15
     Extraordinary item ..........................        $0.12              0.02              --                --              --
                                                   ------------      ------------    ------------      ------------    ------------

     Net (loss) income ...........................       ($6.50)           ($0.79)         ($0.39)           ($0.28)          $0.15
                                                   ============      ============    ============      ============    ============
Weighted average common shares
  outstanding (3)(4)
  Basic ..........................................   15,673,000        16,956,000      17,176,000        17,159,000      17,155,000
                                                   ============      ============    ============      ============    ============
  Diluted ........................................   15,673,000        16,956,000      17,176,000        17,159,000      17,155,100
                                                   ============      ============    ============      ============    ============
</TABLE>

                                       17
<PAGE>   21

<TABLE>
<CAPTION>
                                                    FIFTY-THREE                               FIFTY-TWO
                                                    WEEKS ENDED                              WEEKS ENDED
                                                     FEBRUARY 3,      JANUARY 29,      JANUARY 30,    JANUARY 31,    FEBRUARY 1,
                                                        2001              2000            1999           1998           1997
                                                      ---------         ---------      ---------      ---------        ---------
                                                        (AMOUNTS IN THOUSANDS, EXCEPT SHARE, PER SHARE AND SELECTED OPERATING DATA)
<S>                                                   <C>               <C>              <C>            <C>              <C>
SELECTED OPERATING DATA:
Stores opened during year ........................           11                14               20              7               16
Stores closed during year(5) .....................           43                69               68             30                9
Stores open at year-end(5) .......................          491               523              578            626              649
Total square feet of store space (at year-end)(5)     2,094,000         2,078,000        2,188,900      2,346,400        2,432,200
Sales per average square foot of total space(5)(6)         $197              $197             $189           $186             $182
Percentage increase(decrease) in
  comparable store sales(7) ......................         (3.3%)             1.2%            (1.1%)          0.5%            (0.2%)

BALANCE SHEET DATA:
Working capital ..................................       $7,736          $148,224         $164,474       $163,998         $151,954
Total assets .....................................      142,489           249,521          267,644        277,434          272,333
Long-term debt ...................................       10,908            57,804           61,232         60,001           58,853
Shareholders' equity .............................       40,638           144,161          159,134        165,850          170,408
Total debt to total capitalization ...............         53.8%             28.6%            27.8%          26.6%            25.7%
</TABLE>

(1)      Other expense (income) includes interest expense net of interest
         income, net gains realized on the sale of government securities and
         investment income, primarily dividends from marketable securities.

(2)      Net (loss) income per share for Fiscal 2000, Fiscal 1999, Fiscal 1998,
         Fiscal 1997 and Fiscal 1996 was calculated on net (loss) income less
         the preferred stock dividend requirement.

(3)      The Company has never paid any cash dividends on its Common Stock.

(4)      Outstanding shares for the calculation of "basic" net (loss) income per
         common share is the weighted average of outstanding shares calculated
         on a daily basis. Outstanding shares for "diluted" net (loss) income
         per common share includes incremental shares for the Company's
         incentive stock option plan. The incremental shares represent the
         average of incremental shares included in the calculation of net (loss)
         income per common share for each quarter.

(5)      Approximately 90% of total store space represents selling area. The
         balance is storage and office space. The Strategic Restructuring Plan
         will reduce the number of stores open by 166 to 325 locations with an
         estimated total square feet of 1,297,000.

(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 all Fiscal years
         including Fiscal 2000 which included 53 weeks are reported on a 52-week
         basis. Comparable store sales for Fiscal 2000, Fiscal 1999, Fiscal 1998
         and Fiscal 1997 exclude sales of stores closed starting 90 days prior
         to closing. With respect to the Company's Cost Less Home StoreSM
         concept, comparable store sales calculation started when a store was
         open for 65 weeks.


                                       18
<PAGE>   22


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

RESULTS OF OPERATIONS

FISCAL 2000 IN COMPARISON WITH FISCAL 1999

         Sales for Fiscal 2000, the fifty-three week period ended February 3,
2001, decreased $15.1 million to $405.0 million, a 3.6% decrease from Fiscal
1999, the fifty-two week period ended January 29, 2000. Sales of $5.4 million
occurred during week 53 of Fiscal 2000. Adjusting for the sales which occurred
during the fifty-third week, the sales decrease on a fifty-two week basis was
4.9%. The decrease in sales was due to the closing of 43 stores during the year,
which was partially offset by the opening of 11 stores. On a 52 week basis,
comparable store sales decreased 3.3%. Total sales for the Specialty Housewares
segment comprised of Lechters Housewares(R) and Lechters Kitchen Place(R)
decreased 4.5% to $310.0 million while sales for Off-Price Home Business segment
comprised of Famous Brands Housewares Outlet(R) and Cost Less Home Store(SM)
decreased 0.6% to $95.0 million. By segment, on a 52 week basis, comparable
store sales, for the Specialty Housewares decreased 2.5% while the Off-Price
Home Business decreased 6.2%. At the close of the fiscal year, the Company
operated 491 stores compared with 523 stores in operation at the end of Fiscal
1999.

         Gross profit for Fiscal 2000 was $83.5 million, a $25.0 million
decrease from the prior fiscal year. The gross profit rate for Fiscal 2000 was
20.6% of sales, which was a 5.2% lower as a percent of sales. Contributing
factors to the deterioration of gross profit performance were the reduction of
sales previously mentioned, a higher proportion of sales from the special buy
categories, and increased price reductions. The Strategic Restructuring Plan
unfavorably impacted cost of sales by $5.9 million representing the loss on the
liquidation of merchandise located in the stores to be closed. The gross profit
rate decline was caused by the factors mentioned previously and was also reduced
due to the underabsorption of occupancy costs given the comparable stores sales
decrease.

         By segment, the Specialty Housewares segment's gross profit rate was
19.5% compared to 24.5% for the prior fiscal year. The Off-Price Home Business
segment had a gross profit rate of 24.1% for Fiscal 2000 compared to 30.4% for
the prior fiscal year. As in the past, the Off-Price Home segment has a higher
gross profit rate due to a lower occupancy expense rate than Specialty
Housewares. The larger year-to-year decline in gross profit rate of 6.3% of
sales for the Off-Price Home segment is related to the increase in sales of
lower margin special buy product which was primarily sold in this segment.

         Selling, general and administrative expenses increased $23.4 million to
$149.4 million. The expense rate was 36.9% of sales, which was 6.9 percentage
points higher than the prior fiscal year. While the number of stores declined
from the previous fiscal year, due to the opening of six Cost Less Home StoreSM
stores, store operating expenses such as payroll, benefits, variable expenses
such as pre-opening costs and advertising expense to support the new store
locations increased reflecting the larger sales staff, sales volumes and
advertising requirements of this new concept. With respect to Corporate related
expenses, total payroll was reduced as the Company engaged a third party
provider to operate its Information Technology function. However, consulting
fees related to this third party increased more than

                                       19
<PAGE>   23
offsetting the payroll savings. Finally, the Company's initiatives to develop an
e-commerce capability, incurred expense of $6.2 million, all of which was
incremental to the prior fiscal year.

         The Company recorded a non-cash provision for asset impairment of $0.3
million for Fiscal 2000 as required by Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
for and Long-Lived Assets To Be Disposed Of" ("SFAS No. 121"). The provision was
determined by a comparison of each store's operating cash flow performance
versus the carrying value of the assets at that location. In cases where the
undiscounted cash flows produced by the store were not sufficient to recover the
carrying value of the long-term assets at the location, the store's assets are
adjusted to their estimated fair value. The fair value was estimated by applying
a discount rate to the undiscounted cash flows. For Fiscal 1999 the asset
impairment provision determined in the same manner was $2.7 million.

         During the fourth quarter of Fiscal 2000, the Company developed and
adopted a Strategic Restructuring Plan which included the closing of 166 stores,
re-alignment of support functions to reduce expense and the impairment of store
and corporate assets. The total charge to operations was $42.0 million comprised
of $5.9 million as additional cost of sales previously mentioned and $36.1
million as restructuring expense. The major components of the restructuring
expense by type of cost are: (1) lease termination costs of $14.9 million; (2)
asset impairment of $21.6 million; (3) a credit of $1.9 million from the
reversal of deferred rent liabilities for the closed stores; and (4)
miscellaneous write-offs and fees of $1.5 million. Severance and retention costs
estimated at $3.1 million will be reflected in the first quarter of Fiscal 2001.

         For Fiscal 2000, net other expense (income) was a net expense of $3.1
million versus net expense of $1.3 million for Fiscal 1999. Interest expense was
$0.5 million lower than the prior fiscal year at $4.1 million due to the
prepayment of $28.0 million of the Convertible Subordinated Debentures prior to
their due date. Interest income decreased $1.9 million from the prior year to
$0.9 million while other net investment income decreased $0.4 million to $0.1
million. Throughout Fiscal 2000 the Company had lower invested balances
producing the unfavorable performance compared to the prior year.

         By operating segment Specialty Housewares had a loss before income
taxes of $26.5 million and the Off-Price Home Business had a loss before income
taxes of $15.7 million. Corporate and other expenses were $60.1 million for
Fiscal 2000. See Note 3 to the Consolidated Financial Statements of the Company
included elsewhere herein.

         Due to the operating loss for Fiscal 2000, which was a continuation of
the trend of the most recent fiscal years, the Company has reduced its tax
provision rate for the year to 2.5%. The adjustment was the result of an
increase in valuation allowances against the available deferred tax assets
currently recorded on the Company's financial statements. For the foreseeable
future, due to the need for 100% valuation allowance against any deferred tax
assets created by net operating losses, the tax rate will be 0%.

                                       20
<PAGE>   24

         The Company recognized an extraordinary gain of $1.9 million, net of
tax, from the repurchase during Fiscal 2000 of $23.1 million of Convertible
Subordinated Debentures prior to their due date of September 27, 2001.

         The net loss for Fiscal 2000 was $100.8 million compared to a net loss
for Fiscal 1999 of $12.4 million. The increased loss was primarily the result of
lower sales, increased price reductions, merchandise mix issues, and higher
selling, general and administrative expenses in support of the Company's
e-commerce initiatives coupled with the restructuring expense recorded as a
result of the adoption of the Strategic Restructuring Plan.


RECENT DEVELOPMENTS

         On February 9, 2001, the Company announced a Strategic Restructuring
Plan which resulted in the closing of 166 stores and one distribution center.
The Strategic Restructuring Plan also involves an upgrading of the merchandise
assortment in the Company's remaining stores and the conversion of a handful of
existing locations to thinkkitchen branded stores. While none of the
thinkkitchen branded stores have been reopened, the Company reopened three fully
re-merchandised Lechters stores in late April 2001. The Company expects that the
average dollar amount per sales transaction in these stores will be
substantially higher than in pre-re-merchandised Lechters stores, but there can
be no assurance that re-merchandised stores will generate significantly greater
profit contributions.

         In connection with the implementation of the Strategic Restructuring
Plan, the Company engaged DJM Asset Management, LLC ("DJM") to assist the
Company in obtaining lease dispositions for the stores it closed. With the
assistance of DJM, the Company has conducted negotiations with a Committee of
the Company's landlords and such Committee's counsel in an effort to negotiate
lease terminations on terms affordable by the Company.

         Also in connection with the implementation of the Strategic
Restructuring Plan, the Company entered into an amendment of its Amended and
Restated Loan and Security Agreement with Fleet Retail Finance, Inc. ("Fleet")
and certain other financial institutions (the "Amended Credit Facility"). As a
result of the Company commencing relationships with many new vendors in
connection with the upgrading of its merchandise assortment and vendor concern
regarding the Company's financial condition, the Company is receiving less
vendor credit than anticipated and a substantial majority of the Company's
purchases are being made on a COD or paid in advance basis. As a result of this
and other factors, larger amounts were borrowed under the Amended Credit
Facility during the first quarter of Fiscal Year 2001, and the Company currently
believes that it is likely to be in default under one or more of the covenants
and restrictions of the Amended Credit Facility during the second or third
quarter of Fiscal 2001. Accordingly, the Company has renewed discussions with
Fleet concerning its ongoing credit needs.


                                       21
<PAGE>   25
FISCAL 1999 IN COMPARISON WITH FISCAL 1998

         Sales for Fiscal 1999, the fifty-two week period ended January 29,
2000, decreased $8.1 million to $420.1 million, a 1.9% decrease from Fiscal
1998, the fifty-two week period ended January 30, 1999. The decrease in sales
was due to the closing of 69 stores during the year, which was partially offset
by the opening of 14 stores during Fiscal 1999. The decrease was also offset by
the 1.2% increase in comparable store sales for Fiscal 1999. Total sales for the
Specialty Housewares segment decreased 3.3% to $324.5 million while sales for
Off-Price Home Business segment increased 3.1% to $95.6 million. By segment,
comparable store sales for the Specialty Housewares increased 0.5% while the
Off-Price Home Business increased 4.3%. At the close of the fiscal year, the
Company operated 523 stores compared with 578 stores in operation at the end of
Fiscal 1998.

         Gross profit for Fiscal 1999 was $108.5 million, a $1.8 million
decrease from the prior fiscal year. The gross profit rate was 25.8% of sales,
which was flat against the prior year. By segment, the gross profit rates were
24.5% for Specialty Housewares and 30.4% for the Off-Price Home segment. The
difference in gross profit rate between segments was due to lower occupancy
costs in the Off-Price Home Business segment. The major contributing factor to
the decrease in gross profit was the reduction in sales, which was partially
offset by reduced occupancy costs, such as common area maintenance, real estate
taxes, depreciation and utilities due to fewer stores in operation.

         Selling, general and administrative expenses increased $7.4 million to
$126.0 million. The expense rate was 30.0% of sales, which was 2.3 percentage
points higher than the prior fiscal year. Store operating expenses increased
over the prior year primarily in the area of advertising due to the increase of
two additional circulars and costs associated with the promotion of the
Company's Cost Less Home Store(SM) concept. Expenses of the Service Office were
higher than the prior fiscal year due to additional resources supporting the
Company's new concepts and initiatives, increased payroll expense in the
distribution centers related to the additional handling needed for special buy
merchandise and increased occupancy costs at the distribution centers.
Information technology costs increased at the Service Office due to the ongoing
design and installation of new merchandise systems scheduled for completion in
Fiscal 2001 and consultant fees for Year 2000 software remediation.

         The Company recorded a non-cash provision for asset impairment of $2.7
million for Fiscal 1999 as required by Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
for and Long-Lived Assets To Be Disposed Of" ("SFAS No. 121"). The provision was
determined by a comparison of each store's operating cash flow performance
versus the carrying value of the assets at that location. In cases where the
undiscounted cash flows produced by the store were not sufficient to recover the
carrying value of the long-term assets at the location, the store's assets are
adjusted to their estimated fair value. The fair value was estimated by applying
a discount rate to the undiscounted cash flows. For Fiscal 1998 the asset
impairment provision determined in the same manner was $1.5 million.

         For Fiscal 1999, net other expense (income) was a net expense of $1.3
million versus net income of $0.1 million for Fiscal 1998. Interest expense was
$0.08 million higher than the prior fiscal year at $4.6 million due to increased
debt discount amortization. Interest income decreased $1.2 million from the
prior year to $2.8 million while other net investment income decreased $0.09
million to $0.5 million.

                                       22
<PAGE>   26
Throughout Fiscal 1999 the Company had lower invested balances producing the
unfavorable performance compared to the prior year.

         By operating segment Specialty Housewares contributed income before
income taxes of $8.1 million and the Off-Price Home Business contributed income
before income taxes of $5.2 million, which were offset by Corporate and other
expenses of $33.4 million for Fiscal 1999. See Note 2 to the Consolidated
Financial Statements of the Company included elsewhere herein.

         Income taxes for Fiscal 1999 were at an effective rate of 40.0%. The
income tax provision for Fiscal 1999 and 1998 is a "benefit" due to the reported
loss for the fiscal year.

         The Company recognized an extraordinary gain of $0.4 million, net of
tax, from the repurchase of $4.9 million of Convertible Subordinated Debentures
prior to their due date of September 27, 2001.

         The net loss for Fiscal 1999 was $12.4 million compared to a net loss
for Fiscal 1998 of $5.7 million. The increased loss was primarily the result of
higher selling, general and administrative expenses needed to support the
Company's new strategies initiatives including Y2K remediation. In addition the
higher net loss was also due to reduced sales and gross profit, and the net
effect of other contributing factors noted above.


LIQUIDITY AND CAPITAL RESOURCES

         The combined balances of cash, cash equivalents and marketable
securities at February 3, 2001 as shown on the Consolidated Balance Sheet
totaled $3.2 million, a decrease of $72.0 million over the combined balances of
$75.2 million at January 29, 2000. As depicted on the Consolidated Statements of
Cash Flows, the decrease in cash and cash equivalents was $6.7 million for the
fifty-three week period ended February 3, 2001 compared with a $25.6 million
decrease for Fiscal 1999. During Fiscal 2000, the Company liquidated its
portfolio of marketable securities.

         Cash flows from operating activities consist primarily of the net loss
adjusted for certain non-cash charges such as depreciation and amortization,
deferred taxes, loss on disposal of fixed assets, restructuring expense 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 used in operating
activities for Fiscal 2000 was $45.9 million compared to net cash used in
operating activities of $9.0 million for Fiscal 1999. For Fiscal 2000 there was
a net loss of $100.8 million. Significant offsets to the net loss, were
depreciation and amortization of $15.8 million, the restructuring charge of
$36.1 million, and the decrease in inventory of $20.8 million. The most
significant operating activities reducing cash flow were the increase in other
assets of $8.5 million due to the increased investments in information
technology software, relating to Lechters.com the decrease in deferred income
taxes of $2.7 million and the decreases in accounts payable and accrued expenses
of $6.2 million.

         With respect to investing activities, capital expenditures were $14.0
million compared to $7.3 million for Fiscal 1999. Capital expenditures were
principally for the construction and fixtures for new and remodeled stores
opened in Fiscal 2000 and the construction of the Hazleton warehouse facility.
The

                                       23
<PAGE>   27
Company liquidated its portfolio of marketable securities during Fiscal 2000,
which provided $65.4 million of cash.

         Planned capital expenditures for Fiscal 2001 are estimated at $6.0
million to $8.0 million primarily for new stores, renovations, remodels and
computer hardware.

         Cash flows from financing activities decreased cash by $12.2 million.
The repurchase of treasury stock used $1.8 million and the repurchase of $23.1
million face value of the Company's Convertible Subordinated Debentures used
$20.3 of cash. Borrowing under the Company's revolving credit facility provided
cash of $10.9 million.

         During Fiscal 2000 and early in Fiscal 2001, the Company revised and
amended its credit facility. On November 30, 1999, the Company entered into a
new $120 million senior secured revolving credit facility with BankBoston Retail
Finance Inc. and other financial institutions, replacing the Company's credit
agreement which was to expire on March 26, 2001. On November 14, 2000, the
Company entered into an amended and restated loan and security agreement with
Fleet Retail Finance Inc. (formerly BankBoston Retail Finance Inc.) and
other financial institutions. On February 9, 2001, the Company further amended
its credit facility to reflect the Strategic Restructuring Plan which was
announced on that date. The amended and restated loan and security agreement of
November 14, 2000 and the amendment to that agreement dated February 9, 2001
comprise the Amended and Restated Loan and Security Agreement (the "Amended
Credit Facility"). The Amended Credit Facility includes a $30 million sublimit
for the issuance of letters of credit (both standby and documentary). The
proceeds of the credit facility may be used for: (i) on-going working capital
requirements; (ii) the replacement, refinancing or retirement of certain of the
Company's securities, as described below; and/or (iii) other general corporate
purposes. The credit facility is scheduled to mature on November 30, 2003. The
Amended Credit Facility is secured by a security interest in substantially all
the Company's assets.

         The Amended Credit Facility permits the Company to repurchase the 5.00%
Convertible Subordinated Debentures in whole but and not in part. Such
repurchase cannot occur before August 16, 2001. To be permitted to repurchase
the 5.00% Notes, availability as defined by the Amended Credit Facility on
August 15, 2001 must be in excess of $48.0 million and on such date all
indebtedness of the Company for the purchase of goods or services which are not
subject to reasonable dispute shall be in accordance with current trade terms.
Additionally, availability on average during the period from and including the
date of repurchases shall be in excess of $48.0 million and on each day during
such period shall be in excess of $40.0 million. Finally availability on a pro
forma basis, for the 12 months after the repurchase shall not be less than $10.0
million.

         The Company's maximum borrowing (the "Borrowing Base") under the credit
facility may not exceed the lesser of (a) $85 million made up of $80.0 of
Tranche A Loan ceiling and $5.0 million of Tranche B Loan which was funded on
February 12, 2001 or (b) the total of (i) a stipulated proportion ranging from
77.2% to 88.2%, dependent on the fiscal month, of the cost value of the
Company's acceptable inventory, including eligible letter of credit inventory;
plus (ii) 80% of the Company's acceptable credit card receivable; plus (iii) 95%
of the Company's cash and acceptable investments held in

                                       24
<PAGE>   28
a Fleet custody account; minus (iv) applicable reserves. As of April 30, 2001,
availability under the Amended Credit Facility was approximately $18.3 million.

         The Amended Credit Facility contains certain covenants, including
limitations on capital expenditures, indebtedness and transactions with
affiliates and a prohibition on the payment of dividends, other than scheduled
payments of preferred dividends by the Company and dividends paid to the Company
by its subsidiaries.

         Advances under the Amended Credit Facility will bear interest per annum
at the Fleet base rate plus the applicable margin (0.25% to 0.75%) or the
Eurodollar rate plus the applicable margin (2.25% to 2.75%), at the Company's
option. The applicable margins are determined based upon the Company's excess
availability under the credit facility. As of February 9, 2001, the date of the
Amended Credit Facility, the base rate applicable margin was 0.75% and the
Eurodollar rate applicable margin was 2.75%. At February 3, 2001, the interest
rate on outstanding borrowing was 8.75%. As of February 9, 2001, the rate under
the Amended Credit Facility increased to 9.25%.

         The $5.0 million Tranche B Loan from Back Bay Capital Funding, LLC, was
drawn on the execution of the Amendment to the Amended and Restated Loan and
Security Agreement. The rate of interest for the Tranche B Loan is 13.50% per
annum with payment in kind interest occurring at 2.25% per annum payable upon
maturity. The Tranche B Loan also has annual fees of 3.0% payable on April 28,
2001 and 2.0% payable on April 28, 2002.

         The Company will pay an unused line fee of 0.50% per annum on the
unused portion of the credit facility, a standby letter of credit fee equal to
the then applicable Eurodollar margin less 25 basis points per annum of the
total face amount of each outstanding letter of credit, a documentary letter of
credit fee equal to 1.25% per annum of the total face amount of each outstanding
letter of credit and certain other fees.

         As of February 3, 2001, $10.9 million was outstanding under the Amended
Credit Facility. As of January 29, 2000 there were no outstanding borrowings. As
of April 30, 2001, borrowings under the Amended Credit Facility were $26.3
million. At February 3, 2001 and January 29, 2000, the Company was liable for
drawings under outstanding letters of credit in the amount of approximately $4.2
million and $7.6 million, respectively.

         The cash requirements of merchandising the Company's remaining stores
for the important fall and holiday season under the Strategic Restructuring Plan
are currently projected to require the Company to further restructure its credit
arrangements. While the Company is in discussions with Fleet in this regard,
there can be no assurance that these discussions will be successful. In
addition, the Company continues in discussion with a Committee of its landlords
regarding their claims, but there can be no assurance that such discussions will
be successful or that the Company will be able under its credit arrangements to
effect any settlement reached. The Company is exploring all of its options,
which include, in addition to revising its credit arrangements, revising its
merchandising plans and seeking protection under Chapter 11 of the Bankruptcy
Code.

                                       25
<PAGE>   29

         With respect to the Company's 5% Convertible Subordinated Debentures,
due September 27, 2001, these debt securities have been classified as current
liabilities on the Consolidated Balance Sheet. The Company is reviewing its
options with respect to the debentures.

INFLATION

         The low rate of 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.

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 11 of Notes to Consolidated
Financial Statements of the Company included elsewhere herein.



RECENT ACCOUNTING PRONOUNCEMENTS

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



ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

         The Company imports about 20% of its merchandise from the Far East,
which subjects it to the market risk of currency fluctuations. However, the
Company uniformly utilizes purchase contracts and letters of credit denominated
in US dollars to mitigate this risk. Additionally, there are multiple suppliers,
both foreign and domestic, for its products. The Company liquidated its
portfolio of marketable securities during Fiscal 2000. With respect to
marketable securities, the Company was subject to the variations in the
investment markets. It mitigated this risk by employing the services of an
investment

                                       26
<PAGE>   30
management firm, which with the Company's oversight, invested solely in the
highest quality securities and allocated the market risk among various types of
securities with varying maturities.

         The Company has borrowed funds under the Credit Agreement during Fiscal
2000. The interest rate is subject to market conditions at the time of the
borrowing.



ITEM 8. Financial Statement and Supplementary Data

         See the consolidated financial statements of the company and
Subsidiaries attached hereto and listed on the index to consolidated financial
statements set forth in Item 14. of this Form 10-K.

ITEM 9. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosures

         None.



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.


PART IV

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

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

(b)      Reports on Form 8-K.

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

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

(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 - as amended April 11, 1991, January 11, 1994,
         December 13, 1995 and November 15, 2000.*

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.)

                                       27
<PAGE>   31

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     Amended and Restated Loan and Security Agreement dated November 14,
         2000 among the Fleet Retail Finance Inc. and Back Bay Capital Funding
         LLC. (Incorporated herein by reference to the Company's Form 10-Q for
         the period ended October 28, 2000).

10.1.1   First Amendment to Amended and Restated Loan and Security Agreement
         dated February 9, 2001 among Fleet Retail Finance Inc. and Back Bay
         Capital Funding, LLC. (Incorporated herein by reference to the
         Company's Form 8-K filed April 3, 2001.)

10.2     1989 Stock Option Plan and Form of Agreement pursuant to 1989 Stock
         Option Plan. (Incorporated herein by reference to Exhibit 10.3 to the
         Registration Statement). (1.)

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

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

10.5     Amendment No. 2 to Deferred Compensation Agreement, dated August 15,
         1989. (Incorporated herein by reference to the Company's Annual Report
         on Form 10-K for the year ended January 26, 1991). (1.)


10.6     Amendment No. 3 to Deferred Compensation Agreement, dated June 15,
         1995. (Incorporated herein by reference to the Company's Form 10-Q for
         the period ended July 29, 1995). (1.)

10.7     Amendment No. 4 to Deferred Compensation Agreement between the Company
         and Donald Jonas dated April 8, 1996. (Incorporated herein by reference
         to the Company's Annual Report on Form 10-K for the year ended February
         3, 1996). (1.)

10.8     Amendment No. 5 to the Deferred Compensation Agreement between the
         Company and Donald Jonas dated February 2, 2001.*(1)

10.9     Employment Agreement between the Company and David K. Cully dated
         January 3, 2000. (Incorporated herein by reference to the Company's
         Annual Report on Form 10-K for the year ended January 29, 2000). (1.)

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

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

10.12    Agreement between the Company and Local 99, UNITE to a collective
         bargaining agreement covering warehouse employees dated March 16, 1996.
         (Incorporated herein by

                                       28
<PAGE>   32
         reference to the Company's Annual Report on Form 10-K for the year
         ended February 1, 1997).

10.12.1  Memorandum of Agreement dated April 26, 1999 between the Company and
         Local 99, UNITE extending the term of Agreement covering warehouse
         employees dated March 16, 1996 to March 15, 2002. (Incorporated herein
         by reference to the Company's Form 10-K for the year ended January 30,
         1999).

10.12.2  Memorandum of agreement dated August 8, 2000 between the Company and
         Local 99, UNITE, covering office employees for a term from July 1, 2000
         to June 30, 2003. (Incorporated herein by reference to Exhibit 10.10.3
         to the Company's Form 10-Q for the quarter ended July 29, 2000).

10.13    Lease for Distribution Center space dated December 23, 1991 covering
         the Distribution and office space in Harrison, NJ (Incorporated herein
         by reference to Exhibit 1 to the Company's Current Report on Form 8-K,
         dated January 2, 1992).

10.13.1  Lease Modification Agreement dated June 19, 1995 covering the
         Distribution Center and Office space in Harrison, NJ. (Incorporated
         herein by reference to the Company's Form 10-K for the year ended
         January 30, 1999).

10.13.2  Lease Modification Agreement dated July 22, 1998 covering the
         Distribution Center and Office space in Harrison, NJ. (Incorporated
         herein by reference to the Company's Form 10-K for the year ended
         January 30, 1999).

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

10.14.1  Lease for Distribution Center located in Hazleton, Pennsylvania, dated
         March 23, 2000. (Incorporated herein by reference to the Company's
         Annual Report on Form 10-K for the year ended January 29, 2000).

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

21       Subsidiaries of the Company.*

23       Consent of Deloitte & Touche LLP.*

*        Filed herewith.

(1.)     Management Compensatory Plan.

                                       29
<PAGE>   33
                                   SIGNATURES

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

LECHTERS, INC.
(Registrant)

By: /s/ David K. Cully
President, Chief Executive Officer

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


<TABLE>
<CAPTION>

SIGNATURE                                    TITLE                                                           DATE
<S>                                        <C>                                                   <C>
/s/  DONALD JONAS                          Chairman of the Board and Director                    May 3, 2001
-------------------------------------                                                            --------------------------
(DONALD JONAS)

/s/ DAVID K. CULLY                         President, Chief Executive Officer                    May 3, 2001
--------------------------------------     and Director                                          --------------------------
(DAVID K. CULLY)                           (Principal Executive Officer)

/s/ DANIEL L. ANDERTON                     Senior Vice President-Chief Financial Officer         May 3, 2001
--------------------------------------     and Treasurer                                         --------------------------
(DANIEL L. ANDERTON)

/s/ MARTIN BEGUN                           Director                                              May 3, 2001
--------------------------------------                                                           --------------------------
(MARTIN BEGUN)

/s/ BERNARD D. FISCHMAN                    Director                                              May 3, 2001
--------------------------------------                                                           --------------------------
(BERNARD D. FISCHMAN)

/s/ANTHONY MALKIN                          Director                                              May 3, 2001
--------------------------------------                                                           --------------------------
(ANTHONY MALKIN)

/s/ROBERTA MANEKER                         Director                                              May 3, 2001
--------------------------------------                                                           --------------------------
(ROBERTA MANEKER)

/s/ STEVE WESTERFIELD                      Director                                              May 3, 2001
--------------------------------------                                                           --------------------------
(STEVE WESTERFIELD)

/s/JOHN WOLFF                              Director                                              May 3, 2001
--------------------------------------                                                           --------------------------
(JOHN WOLFF)
</TABLE>

                                       30
<PAGE>   34


                         LECHTERS, INC. AND SUBSIDIARIES

                                TABLE OF CONTENTS

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

INDEPENDENT AUDITORS' REPORT.....................................................................                F-2

FINANCIAL STATEMENTS AS OF FEBRUARY 3, 2001 AND FOR THE THREE
YEARS ENDED FEBRUARY 3, 2001
Consolidated Balance Sheets......................................................................                F-3

Consolidated Statements of Operations............................................................                F-4

Consolidated Statements of Cash Flows............................................................                F-5

Consolidated Statement of Shareholders' Equity...................................................                F-6

Notes to Consolidated Financial Statements.......................................................            F-7 - F-23
</TABLE>

                                       31
<PAGE>   35
                               MANAGEMENT'S REPORT




To the Shareholders of Lechters, Inc.

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

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

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


David K. Cully
President and Chief Executive Officer

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



                                       F-1
<PAGE>   36
                          INDEPENDENT AUDITORS' REPORT



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

         We have audited the accompanying consolidated balance sheets of
Lechters, Inc. and subsidiaries (the "Company") as of February 3, 2001 and
January 29, 2000 and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended February 3, 2001. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

         In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of February
3, 2001 and January 29, 2000, and the results of their operations and their cash
flows for each of the three years in the period ended February 3, 2001 in
conformity with accounting principles generally accepted in the United States of
America.

         The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has experienced
recurring losses from operations and anticipates a loss from operations and
negative cash flow from operations for the year ending February 2, 2002.
Additionally, the Company has not yet reached a settlement of terminated leases
with its landlords, anticipates that it may not have sufficient liquidity to
redeem its Convertible Subordinated Debentures due September 27, 2001, and
projects that it may default under the covenants and restrictions of its Amended
Credit Facility and may need to seek protection under Chapter 11 of the
Bankruptcy Code. These matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

Deloitte & Touche LLP
Parsippany, New Jersey
April 2, 2001

                                       F-2




<PAGE>   37
                         LECHTERS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
           (Amounts in thousands, except share and per share amounts)
<TABLE>
<CAPTION>

                                                                                           FEBRUARY 3,               JANUARY 29,
                                                                                              2001                      2000
                                                                                              ----                      ----
<S>                                                                               <C>                      <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.........................................................  $             3,235    $               9,917
Marketable securities.............................................................                  - -                   65,301
Accounts receivables..............................................................                1,706                    2,881
Merchandise inventories...........................................................               82,299                  103,100
Prepaid expenses..................................................................                2,242                    2,043
                                                                                  ---------------------    ---------------------
   Total current assets...........................................................               89,482                  183,242
                                                                                  ---------------------    ---------------------
PROPERTY AND EQUIPMENT:
Fixtures and equipment............................................................               53,783                   56,194
Leasehold improvements............................................................               86,915                   92,368
                                                                                  ---------------------    ---------------------
                                                                                                140,698                  148,562
Less accumulated depreciation and
   amortization...................................................................              101,469                   93,780
                                                                                  ---------------------    ---------------------
Net property and equipment........................................................               39,229                   54,782
                                                                                  ---------------------    ---------------------
OTHER ASSETS......................................................................               13,778                   11,497
                                                                                  ---------------------    ---------------------
TOTAL ASSETS......................................................................$             142,489    $             249,521
                                                                                  =====================    =====================

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................................................$               6,479    $              16,305
Dividends payable preferred stock.................................................                1,010                    1,010
Salaries, wages and other accrued expenses........................................               19,488                   15,662
Estimated restructuring liabilities...............................................               16,336                      - -
Taxes, other than income taxes....................................................                2,085                    2,041
5% Convertible Subordinated Debentures............................................               36,348                      - -
                                                                                  ---------------------    ---------------------
   Total current liabilities......................................................               81,746                   35,018
LONG-TERM DEBT
Borrowings under revolving credit facility........................................               10,908                      - -
5% Convertible subordinated debentures............................................                  - -                   57,804
DEFERRED INCOME TAXES.............................................................                  - -                    2,556
OTHER LIABILITIES.................................................................                9,197                    9,982
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Convertible preferred stock, $100 par value authorized 1,000,000 shares, issued
   and outstanding Series A 149,999
   shares and Series B 50,001 shares..............................................               20,000                   20,000
Common stock, no par value, authorized 50,000,000
   shares, issued and outstanding 17,176,286
   and 17,176,286, respectively...................................................                   58                       58
Accumulated other comprehensive loss..............................................                  - -                     (65)
Additional paid in capital........................................................               62,380                   62,380
Retained (deficit) earnings.......................................................              (38,698)                  63,129
                                                                                  ----------------------   ---------------------
                                                                                                 43,740                  145,502
Less: Treasury Stock-
Common Stock - 1,841,300 and 684,000 shares at cost, respectively.................               (3,102)                 (1,341)
                                                                                  ---------------------    ---------------------
Total shareholders' equity........................................................               40,638                  144,161
                                                                                  ---------------------    ---------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................................$             142,489    $             249,521
                                                                                  =====================    =====================

</TABLE>

                See notes to consolidated financial statements.


                                      F-3
<PAGE>   38
                         LECHTERS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
           (Amounts in thousands, except share and per share amounts)
<TABLE>
<CAPTION>

                                                                                          FISCAL YEAR ENDED
                                                                                          -----------------
                                                                       FEBRUARY 3,            JANUARY 29,          JANUARY 30,
                                                                          2001                   2000                 1999
                                                                          ----                   ----                 ----

<S>                                                             <C>                    <C>                    <C>
NET SALES.......................................................$           405,033    $          420,123     $        428,219
COST OF GOODS SOLD
(including occupancy and indirect costs)........................            321,544               311,602              317,868
                                                                -------------------    ------------------     ----------------
GROSS PROFIT....................................................             83,489               108,521              110,351
SELLING, GENERAL AND ADMINISTRATIVE
   EXPENSES.....................................................            149,419               125,979              118,606
RESTRUCTURING EXPENSE...........................................             36,092                   - -                  - -
PROVISION FOR ASSET IMPAIRMENT..................................                270                 2,685                1,543
                                                                -------------------    ------------------     ----------------
OPERATING LOSS..................................................           (102,292)              (20,143)              (9,798)
                                                                -------------------    ------------------     ----------------
OTHER EXPENSE (INCOME):
Interest expense................................................              4,070                 4,556                4,474
Interest income.................................................               (868)               (2,787)              (3,978)
Net investment gain/income......................................               (125)                 (519)                (613)
                                                                -------------------    ------------------     ----------------
Total other expenses (income)...................................              3,077                 1,250                 (117)
                                                                -------------------    ------------------     -----------------
LOSS BEFORE INCOME TAX BENEFIT..................................           (105,369)              (21,393)              (9,681)
INCOME TAX BENEFIT..............................................             (2,605)               (8,547)              (3,940)
                                                                -------------------    ------------------     ----------------
NET LOSS BEFORE EXTRAORDINARY ITEM..............................           (102,764)              (12,846)              (5,741)
EXTRAORDINARY ITEM gain on early extinguishment of
 debentures (net of income tax of  $49 and $265 respectively)...              1,947                   398                  - -
                                                                -------------------    ------------------     ----------------
NET LOSS........................................................           (100,817)              (12,448)              (5,741)
Preferred stock dividend requirement............................              1,010                 1,010                1,010
                                                                -------------------    ------------------     ----------------
Net loss available to common shareholders.......................$          (101,827)   $          (13,458)    $         (6,751)
                                                                ===================    ==================     ================
NET LOSS PER COMMON SHARE
Basic and diluted
   Loss before extraordinary item...............................$             (6.62)   $            (0.81)     $         (0.39)
   Extraordinary item...........................................                .12                   .02                  - -
                                                                -------------------    ------------------     ----------------
   Net Loss.....................................................$             (6.50)   $            (0.79)     $         (0.39)
                                                                ===================    ==================     ================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - Basic and Diluted.................................         15,673,000            16,956,000           17,176,000
                                                                ===================    ==================     ================
</TABLE>


                See notes to consolidated financial statements.




                                      F-4
<PAGE>   39
                         LECHTERS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Amounts in thousands)
<TABLE>
<CAPTION>

                                                                                           FISCAL YEAR ENDED
                                                                                           -----------------
                                                                           FEBRUARY 3,           JANUARY 29,         JANUARY 30,
                                                                              2001                  2000                  1999
                                                                              ----                  ----                  ----
<S>                                                                        <C>                   <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.........................................................          ($100,817)             ($12,448)            ($ 5,741)
Adjustments to reconcile net loss to net cash (used in)
   provided by operating activities:
       Restructuring expense.....................................             36,092                   - -                  - -
       Provision for asset impairment............................                270                 2,685                1,543
       Depreciation and amortization.............................             15,835                17,164               16,676
       Loss on disposal of property and equipment................                489                 1,538                1,580
       Gain on repurchase of debentures..........................             (1,996)                 (663)                 - -
       Deferred income taxes.....................................             (2,556)               (7,860)                (936)
       Deferred rent.............................................               (182)                2,125                1,075
       Other.....................................................               (246)                  429                 (751)
   Changes in operating assets and liabilities:
       Decrease in accounts receivable...........................              1,175                 1,304                  899
       Decrease /(increase) in merchandise inventories...........             20,801               (13,876)               9,810
       (Increase)/decrease in prepaid expenses...................               (199)                 (309)                 411
       Increase in other assets..................................             (8,451)               (5,163)              (3,433)
       (Decrease)/increase in accounts payable,
         accrued salaries, wages and other accrued
         expenses and taxes, other than income taxes.............             (6,218)                6,096               (1,544)
       Increase/ (decrease) in income taxes payable..............                124                   - -               (2,941)
                                                                 -------------------    ------------------     -----------------
   Net cash (used in) provided by operating
       activities................................................            (45,879)               (8,978)              16,648
                                                                 -------------------    -------------------    ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures..........................................            (14,013)               (7,348)              (8,580)
   Decrease/(increase) in marketable securities..................             65,412                (2,847)              12,040
                                                                 -------------------    -------------------    ----------------
   Net cash provided by (used in) investing
       activities................................................             51,399               (10,195)               3,460
                                                                 -------------------    -------------------    ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Exercise of stock options.....................................                - -                   - -                   10
   Borrowing under Revolving Credit Facility.....................             10,908                   - -                  - -
   Payment of preferred stock dividends..........................             (1,010)               (1,010)              (1,010)
   Purchase of treasury stock....................................             (1,761)               (1,341)                 - -
   Repurchase of debentures......................................            (20,339)               (4,062)                 - -
                                                                 -------------------    -------------------    ----------------
   Net cash used in financing activities.........................            (12,202)               (6,413)              (1,000)
                                                                 -------------------    ------------------     ----------------
(DECREASE)/INCREASE IN CASH AND CASH
EQUIVALENTS......................................................             (6,682)              (25,586)              19,108
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR..........................................................              9,917                35,503               16,395
                                                                 -------------------    ------------------     ----------------
CASH AND CASH EQUIVALENTS, END OF YEAR...........................$             3,235    $            9,917     $         35,503
                                                                 ===================    ==================     ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
   Interest......................................................$             3,615    $            3,324     $          2,769
                                                                 ===================    ==================     ================
   Income taxes..................................................$                75    $               95     $          2,296
                                                                 ===================    ==================     ================
</TABLE>


                See notes to consolidated financial statements.



                                      F-5
<PAGE>   40
                        LECHTERS, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                             (Amounts in thousands)
<TABLE>
<CAPTION>


                                                                                ACCUMULATED
                                           CONVERTIBLE  ADDITIONAL   RETAINED     OTHER                              COMPREHENSIVE
                               COMMON       PREFERRED    PAID-IN    (DEFICIT)  COMPREHENSIVE  TREASURY                  INCOME
                                STOCK         STOCK      CAPITAL     EARNINGS      INCOME       STOCK        TOTAL      (LOSS)
                              ---------    ----------   ---------   ---------    ---------    ---------    ---------   ---------

<S>                           <C>           <C>         <C>         <C>         <C>          <C>          <C>         <C>
BALANCE January 31, 1998      $      58     $  20,000   $  62,370   $  83,338    $      84    $      --    $ 165,850

Net loss                             --            --          --      (5,741)          --           --       (5,741)  $  (5,741)
Other comprehensive income,
   (loss) net of tax:
   Unrealized gain on
   available for sale
   securities                        --            --          --          --           25           --           25          25
Exercise of stock options            --            --          10          --           --           --           10          --
Declaration of dividend on
   convertible preferred
   stock                             --            --          --      (1,010)          --           --       (1,010)         --
                              ---------     ---------   ---------   ---------    ---------    ---------    ---------   ---------
BALANCE January 30, 1999             58        20,000      62,380      76,587          109           --      159,134   $  (5,716)
                                                                                                                       =========

Net loss                             --            --          --     (12,448)          --           --      (12,448)   $(12,448)
Other comprehensive income,
   (loss) net of tax:
   Unrealized loss on
   available for sale
   securities                        --            --          --          --         (174)          --         (174)       (174)
Purchase of Treasury Stock .         --            --          --          --           --       (1,341)      (1,341)         --
Declaration of dividend on
   convertible preferred
   stock                             --            --          --      (1,010)          --           --       (1,010)         --
                              ---------     ---------   ---------   ---------    ---------    ---------    ---------   ---------
BALANCE, January 29, 2000            58        20,000      62,380      63,129          (65)      (1,341)     144,161   $ (12,622)
                                                                                                                       =========

Net loss                             --            --          --    (100,817)          --           --     (100,817)  $(100,817)
Other comprehensive income,
   (loss) net of tax:
Realized loss on
   available for sale
   securities                        --            --          --          --           65           --           65          65
Purchase of treasury stock .         --            --          --          --           --       (1,761)      (1,761)         --
Declaration of dividend on
   convertible preferred
   stock                             --            --          --      (1,010)          --           --       (1,010)         --
                              ---------     ---------   ---------   ---------    ---------    ---------    ---------   ---------
BALANCE, February 3, 2001 .   $      58     $  20,000   $  62,380   $ (38,698)   $      --    $  (3,102)   $  40,638   $(100,752)
                              =========     =========   =========   =========    =========    =========    =========   =========
</TABLE>

                See notes to consolidated financial statements.



                                      F-6
<PAGE>   41
                         LECHTERS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE THREE FISCAL YEARS ENDED FEBRUARY 3, 2001
           (Amounts in thousands, except share and per share amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a)       Business: Lechters, Inc. and its subsidiaries (collectively, the
         "Company") is a specialty retailer of primarily brand name basic
         housewares and decorative housewares. The Company operates two business
         segments which are Specialty Housewares and Off-Price Home Business
         (See note 2). As of February 3, 2001, the Company operated 491 stores
         in 41 states and the District of Columbia.

         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)       Basis of Presentation and Management's Plans: The accompanying
         Consolidated Financial Statements have been prepared on a going concern
         basis which contemplates continuity of operations, realization of
         assets, and liquidation of liabilities in the ordinary course of
         business and do not reflect adjustments that might result if the
         Company is unable to continue as a going concern. Due to the Company's
         continued operating losses and the anticipated operating loss and
         negative cash flow for the year ending February 2, 2002 combined with
         the uncertainty with respect to the negotiations of lease terminations
         with the group of landlords impacted by the Strategic Restructuring
         Plan (See Note 2) and the likelihood of default under the covenants and
         restrictions under the Amended Credit Facility, there is uncertainty as
         to whether the Company will have sufficient liquidity to continue
         operations, to settle outstanding issues with the landlords or to
         retire the outstanding Convertible Subordinated Debentures on their due
         date of September 27, 2001.

         To address the Company's liquidity issues, the Company has renewed
         discussions with Fleet Retail Finance Inc. concerning its on-going
         credit needs. Additionally, the Company is working with the group of
         landlords impacted by the Strategic Restructuring Plan adopted in the
         Fourth quarter of Fiscal 2000, regarding reduction of or extension of
         payment terms over a period of up to several years for the lease
         termination fees contemplated in the restructuring expense recorded.
         With respect to the Company's 5% Convertible Subordinated Debentures,
         due September 27, 2001, these debt securities have been classified as
         current liabilities on the Consolidated Balance Sheet. Given the
         difficulties in projecting future availability or market conditions,
         the Company is uncertain as to its ability to maintain sufficient
         liquidity, to settle with the landlords, or to repay or refinance the
         5% Convertible Subordinated Debentures and, therefore, may need to seek
         protection under Chapter 11 of the Bankruptcy Code.

c)       References to Fiscal 2000, Fiscal 1999, and Fiscal 1998 mean the fiscal
         year ending on the Saturday closest to the end of January. Fiscal Year
         2000 was comprised of 53 weeks. Fiscal Year 1999 and Fiscal Year 1998
         were each comprised of 52 weeks.

                                      F-7
<PAGE>   42
d)       Cash and Cash Equivalents and Marketable Securities: The Company
         considers cash on hand in stores, deposits in banks and all highly
         liquid debt instruments, with original maturities of 90 days or less
         when purchased, as cash and cash equivalents. Marketable securities are
         cash investments, primarily U.S. Government securities, with original
         maturities exceeding 90 days at time of purchase.

         The Company classifies marketable securities as "Available for Sale"
         which are carried at fair value, with any unrealized gains and losses
         excluded from earnings and reported as a component of other
         comprehensive income (See Note 10).

e)       Merchandise Inventories: Merchandise inventories are stated on the
         following methods:
<TABLE>
<CAPTION>

                                                                                      FEBRUARY 3,               JANUARY 29,
                                                                                         2001                      2000
                                                                                         ----                      ----
<S>                                                                          <C>                         <C>
Lower of cost (first-in, first-out) or
   market as determined by the retail
   inventory method (stores)................................................ $            52,225         $          64,229
Lower of cost (first-in, first-out)
   or market (distribution centers).........................................              30,074                    38,871
                                                                             -------------------         -----------------
                                                                             $            82,299         $         103,100
                                                                             ===================         =================

</TABLE>


         The Company includes as inventoriable costs, certain indirect costs,
         principally purchasing, warehousing and distribution costs, which are
         necessary to bring inventory to the point of sale. At February 3, 2001
         total indirect costs included as part of inventory were approximately
         $5,800. At January 29, 2000, indirect costs included as part of
         inventory were approximately $8,200.

f)       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 of
         3 to 10 years, or where applicable, the terms of the respective leases,
         whichever is shorter. As required by Statement of Financial Accounting
         Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived
         Assets and for Long-Lived Assets to Be Disposed Of", the Company
         evaluates each stores' performance and measures the carrying value of
         each locations' fixed assets, principally leasehold improvements and
         fixtures, versus its estimated undiscounted future cash flows. When the
         evaluation of a store location indicates that the undiscounted cash
         flows are not sufficient to recover the carrying value of the long-term
         assets at the store, the store assets are adjusted to their fair
         values. The fair value is estimated by applying a discount rate to the
         undiscounted cash flows. During Fiscal 2000, the Company recorded a
         $270 provision for the impairment of long-lived assets located in
         stores. The asset impairment provisions recorded in Fiscal 1999 and
         Fiscal 1998 were $2,685 and $1,543, respectively. As a result of the
         asset impairment provisions recorded, depreciation and amortization
         expenses for the store locations, which have been impaired, will be
         reduced in future years.



                                      F-8
<PAGE>   43
g)       Other Assets:

Other assets consist of the following:
<TABLE>
<CAPTION>

                                                                                         FEBRUARY 3,               JANUARY 29,
                                                                                            2001                      2000
                                                                                            ----                      ----
<S>                                                                             <C>                         <C>
Cash surrender value of key person life
insurance policies............................................................  $             2,017         $           2,904
Prepaid loan expense..........................................................                1,876                     1,055
Other deferred charges........................................................                  939                     1,241
Security deposits.............................................................                  555                       383
Capitalized software..........................................................               13,816                     9,570
Amortization of software......................................................               (5,425)                   (3,656)
                                                                                ------------------------    -----------------
Total other assets............................................................  $            13,778         $          11,497
                                                                                ===================         =================
</TABLE>


h)       Preopening Costs: The expense of start-up activities are expensed as
         incurred.

i)       Income Taxes: In accordance with SFAS No. 109, "Accounting for Income
         Taxes", the Company uses the asset and liability method for financial
         accounting and reporting for income taxes. A valuation allowance is
         established, when necessary, to reduce the deferred tax assets to their
         estimated realizable amounts. (See Note 7.)

j)       Net (Loss) Income per Common Share: In February 1997, the Financial
         Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings per
         Share", which amended the manner in which net (loss) income per share
         is calculated and presented on financial statements. In accordance with
         SFAS No. 128, "basic" net (loss) income per share data were computed by
         dividing net (loss) income less the dividend requirements for the
         Company's Convertible Preferred Stock by the weighted average of common
         shares outstanding during each period presented. For the computation of
         "diluted" earnings per share, potential shares of common stock related
         to the Company's 1989 Incentive and Non-Qualified Stock Option Plan and
         1998 Long-Term Incentive Plan were excluded from the Fiscal 2000,
         Fiscal 1999, and the Fiscal 1998 computations since they would have
         been antidilutive. With respect to the Company's 5% Convertible
         Subordinated Debentures issued in September 1991, the assumed
         conversion of these securities would also have had an antidilutive
         effect on the net (loss) income per share data presented for Fiscal
         2000, Fiscal 1999 and Fiscal 1998. With respect to the Company's 5.05%
         Convertible Preferred Stock issued in April 1996, the assumed
         conversion of the preferred stock would also have had an antidilutive
         effect on the net (loss) income data presented for Fiscal 2000, Fiscal
         1999 and Fiscal 1998.

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

                                      F-9
<PAGE>   44
         The fair value of the Company's cash and cash equivalents, accounts
         receivable and accounts payable approximate their carrying values at
         February 3, 2001 and January 29, 2000, due to the short term maturities
         of these items. The fair value of the Company's 5% Convertible
         Subordinated Debentures and borrowings under the revolving credit
         facility at February 3, 2001 and January 29, 2000 was $38,591 and
         $51,047, respectively. The carrying value of 5% Convertible
         Subordinated Debentures and borrowings under the revolving credit
         facility at February 3, 2001 and January 29, 2000 was $47,256 and
         $57,804, respectively. The fair value of the Company's long-term debt
         is based on market prices or dealer quotes (for publicly traded
         debentures).

l)       Comprehensive Income: During Fiscal 1998, the Company adopted SFAS No.
         130, "Reporting Comprehensive Income". Comprehensive income, which is
         reported in the Statements of Consolidated Shareholders' Equity, is
         defined as the total change in shareholders' equity during the period
         other than from transactions with shareholders. For the Company,
         comprehensive income consists of net income or loss and the net change
         in unrealized gains and losses, net of taxes, on securities classified
         for SFAS No. 115 purposes as held available for sale. Accumulated other
         comprehensive income consists of the accumulated unrealized gains and
         losses, net of applicable income taxes and net of reclassification
         adjustments for gains and losses included in net income.

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

n)       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.



                                      F-10
<PAGE>   45
2.       RESTRUCTURING EXPENSE

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

         In connection with the Plan, the Company has recorded a charge to
         operations of $41,963, $5,871 as cost of goods sold and $36,092 as
         restructuring expense. The asset impairment consists mainly of
         leasehold improvements and capitalized software. The major components
         of the restructuring expense and the related liability were as follows:

<TABLE>
<CAPTION>

                                            Deferred           Asset
                      Lease Termination       Rent          Impairment      Miscellaneous      Total
                      -----------------       ----          ----------      -------------      -----

    <S>               <C>                  <C>              <C>              <C>              <C>
    Provision              $ 14,922        $ (1,922)        $ 21,579         $  1,513         $ 36,092
    Paid or charged        $     --        $  1,922         $(21,579)        $    (99)        $(19,756)
                           --------        --------         --------         --------         --------
    Balance                $ 14,922        $     --         $     --         $  1,414         $ 16,336
                           ========        ========         ========         ========         ========
</TABLE>


         Severance for the estimated 725 full-time employees and retention costs
         associated with the Plan are estimated to be $3.1 million. These
         expenses will be reflected in the first quarter of Fiscal 2001.


3.       SEGMENT INFORMATION

         The Company adopted SFAS No. 131, "Disclosures about Segments of an
         Enterprise and Related Information," effective with the Fiscal year
         ended January 30, 1999. The statement requires companies to disclose
         segment data based on how management makes decisions about allocating
         resources to segments and measuring their performance. The Company
         defines its principal business into two segments, the Specialty
         Housewares segment which operates as Lechters Housewares(R) and
         Lechters Kitchen Place(R), and the Off-Price Home Business segment
         which operates as Famous Brands Housewares Outlet(R) and Cost Less Home
         Store(SM). The contribution of these segments, as well as "corporate
         and other" for Fiscal 2000, 1999, and 1998 are summarized below.
         Corporate and other includes general corporate expenses, principally
         service office expense and distribution centers as well as interest
         income and expense.


                                      F-11
<PAGE>   46
         The Company's segment disclosures are as follows:

<TABLE>
<CAPTION>

                                                                                  FISCAL YEAR ENDED
                                                                                  -----------------
                                                                FEBRUARY 3,          JANUARY 29,         JANUARY 30,
                                                                   2001                 2000                1999
                                                                   ----                 ----                ----
<S>                                                       <C>                    <C>                <C>
SALES
Specialty Housewares......................................$         310,014      $       324,537    $         335,483
Off-Price Home Business...................................           95,019               95,586               92,736
                                                          -----------------      ---------------    -----------------
Total Sales...............................................$         405,033      $       420,123    $         428,219
                                                          =================      ===============    =================
(LOSS) INCOME BEFORE INCOME TAX BENEFIT
Specialty Housewares......................................$         (26,465)     $         8,054    $          17,023
Off-Price Home Business...................................          (15,687)               5,168                 (418)
Corporate and Other.......................................          (60,140)             (33,365)             (26,403)
                                                          ------------------     ---------------    -----------------
Operating Loss............................................         (102,292)             (20,143)              (9,798)
Interest Expense/(Income).................................            3,077                1,250                 (117)
                                                          -----------------      ---------------    ------------------
Total Loss before income
   tax benefit............................................($        105,369)     ($       21,393)   ($          9,681)
                                                          =================      ===============    =================

DEPRECIATION AND AMORTIZATION EXPENSE
Specialty Housewares......................................$           8,096      $         9,296    $           9,580
Off-Price Home Business...................................            1,660                1,740                1,639
Corporate and Other.......................................            6,079                6,128                5,457
                                                          -----------------      ---------------    -----------------
Total Depreciation and Amortization Expense...............$          15,835      $        17,164    $          16,676
                                                          =================      ===============    =================
CAPITAL ADDITIONS
Specialty Housewares......................................$           3,497      $         4,387    $           5,974
Off-Price Home Business...................................            3,993                1,561                  940
Corporate and Other.......................................            6,523                1,400                1,666
                                                          -----------------      ---------------    -----------------
Total Capital Additions...................................$          14,013      $         7,348    $           8,580
                                                          =================      ===============    =================
TOTAL ASSETS
Specialty Housewares......................................$          71,043      $        91,256    $          93,571
Off-Price Home Business...................................           18,585               23,505               20,574
Corporate and Other.......................................           52,861              134,760              153,499
                                                          -----------------      ---------------    -----------------
Total Assets..............................................$         142,489      $       249,521    $         267,644
                                                          =================      ===============    =================
</TABLE>

4.       SHAREHOLDERS' EQUITY

a)       Convertible Preferred Stock: On April 5, 1996, the Company issued
         149,999 shares of Series A Convertible Preferred Stock, $100 par value
         ("Series A Preferred Stock") and 50,001 shares of Series B Convertible
         Preferred Stock, $100 par value ("Series B Preferred Stock") at par
         value. Said shares of Convertible Preferred Stock were sold to
         Prudential Private Equity Investors III, L.P. for $20,000. Expenses of
         the private placement were charged to Additional Paid-In Capital.
         Series A Preferred Stock and Series B Preferred Stock are convertible
         to Common Stock at a conversion price of $6.25 per share. The Company
         may at any time require the conversion of all of the outstanding Series
         A Preferred and all of the outstanding Series B Preferred into shares
         of Common Stock if the closing price of the Common Stock based on
         trading in the NASDAQ National Market, or such other stock market on
         which the Common Stock is then traded, as reported in the Wall Street
         Journal averages not less than $15.625 over the 60 trading days ending
         on the date immediately preceding the date of the Company's election to
         cause such mandatory conversion. The Company must convert all of the
         outstanding shares of both the Series A Preferred and Series B
         Preferred simultaneously. Any such mandatory conversion shall only be
         effected upon written notice delivered to all holders of Series A
         Preferred and Series B Preferred within 10 days following the date on
         which the Company elects to cause such conversion.

                                      F-12
<PAGE>   47
         Series A Preferred Stock is convertible to 2,399,984 shares of common
         stock and has voting rights equivalent to that number of common shares.
         Series B Preferred Stock is convertible to 800,016 of shares of common
         stock but has no voting rights. Both Series A Preferred Stock and
         Series B Preferred Stock receive a dividend of 5.05% payable annually.

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

b)       Stock Options: As permitted by SFAS No. 123, "Accounting for Stock
         Based Compensation," the Company will continue to measure compensation
         cost for stock option plans in accordance with Accounting Principles
         Board Opinion No. 25, "Accounting For Stock Issued to Employees."
         Accordingly, no compensation cost has been recognized for the Company's
         stock option plan.

         If compensation cost for stock options had been determined based on
         fair values at the grant dates, net loss available to common
         shareholders and net loss per share would have been reduced to the pro
         forma amounts below, for the fiscal years ended February 3, 2001,
         January 29, 2000, and January 30, 1999.
<TABLE>
<CAPTION>

                                                                     FISCAL YEAR ENDED
                                                                     -----------------
                                                    FEBRUARY 3,          JANUARY 29,      JANUARY 30,
                                                      2001                 2000             1999
                                                      ----                 ----             ----

<S>                                               <C>                 <C>                <C>
Net loss available to common shareholders:
  As reported                                     ($  101,827)        ($  13,458)        ($  6,751)
  Proforma                                        ($  102,435)        ($  13,804)        ($  7,166)
Net loss per common share:
  As reported                                     ($     6.50)        ($    0.79)        ($   0.39)
  Proforma                                        ($     6.54)        ($    0.81)        ($   0.42)
</TABLE>

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

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

<TABLE>
<CAPTION>

                                                                                         FISCAL YEAR ENDED
                                                                                         -----------------
                                                                   FEBRUARY 3,              JANUARY 29,           JANUARY 30,
                                                                      2001                     2000                  1999
                                                                      ----                     ----                  ----

<S>                                                                <C>                   <C>                      <C>
Dividend yield...................................................            0%               0%                    0%
Expected volatility..............................................           76%               88%                   62%
Risk free interest rate..........................................          6.3%               5.9%                  5.4%
Expected life of options.........................................       6 years               6 years               6 years
</TABLE>


                                      F-13
<PAGE>   48
         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 expires in 10 years.

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

                                                 FISCAL 2000                        FISCAL 1999                       FISCAL 1998
                                                 -----------                        -----------                       -----------
                                                   WEIGHTED                           WEIGHTED                         WEIGHTED
                                                    AVERAGE                            AVERAGE                          AVERAGE
                                                   EXERCISE                           EXERCISE                         EXERCISE
                                 SHARES             PRICE           SHARES             PRICE         SHARES              PRICE

<S>                            <C>               <C>              <C>               <C>            <C>               <C>
Beginning Balance              1,018,820         $   4.87         1,246,730         $   5.18       1,424,910         $      5.28
Granted                               --               --            62,500             1.98          96,800                4.25
Exercised                             --                                 --               --          (2,000)               5.00
Canceled                        (370,320)            5.26          (290,410)            5.42        (272,980)               5.32
                              ----------                          ---------                       ----------
Ending balance                   648,500         $   4.65         1,018,820         $   4.87       1,246,730         $      5.18
                              ==========         ========         =========         ========      ==========         ===========
Reserved for future
    grant at year end                 --                                 --                          246,980
Exercisable                      439,220         $   4.86           499,660         $   5.26         423,874         $      5.64
                              ==========         ========         =========         ========      ==========         ===========
Weighted average fair
    value of options
    granted during the
    year                                                                            $   1.29                         $      2.58
                                                                                    ========                         ===========

</TABLE>


         The following table summarizes information concerning stock options
         granted under the 1989 Incentive Stock Option Plan which were
         outstanding at February 3, 2001:
<TABLE>
<CAPTION>

                                             OPTIONS OUTSTANDING
                                             -------------------                        OPTIONS
                                                                                      EXERCISABLE
                                                  WEIGHTED                            -----------
                                                  AVERAGE                        NUMBER
                                 OUTSTANDING     REMAINING       WEIGHTED      EXERCISABLE       WEIGHTED
                                     AT          CONTRACTUAL     AVERAGE           AT            AVERAGE
           RANGE OF               FEBRUARY 3,      LIFE         EXERCISE        FEBRUARY 3,      EXERCISE
        EXERCISE PRICES             2001         IN YEARS         PRICE           2001            PRICE
        ---------------             ----         --------         -----           ----            -----

    <S>                           <C>            <C>           <C>             <C>             <C>
    $    1.75 to $ 3.875          115,500          7.3         $  2.89           43,100        $   3.28
         4.25 to   5.00           385,300          5.2            4.95          300,220            4.96
         5.06 to  13.75           147,700          6.3            5.25           95,900            5.26
                                  -------                                       -------
    $    1.75 to $13.75           648,500                                       439,220
                                  =======                                       =======

</TABLE>


c)       1998 Long-Term Incentive Plan: During Fiscal 1998, the Company adopted,
         with shareholder approval, the 1998 Long-Term Incentive Plan (the
         "Plan"). The purpose of the Plan is to promote success and enhance the
         value of the Company by linking the personal interests of the
         participants to those of the Company's shareholders and customers. The
         Plan authorizes the grant of up to 1,000,000 shares of Lechters, Inc.
         common stock. Shares underlying awards that lapse or awards that are
         not paid may be reused for subsequent awards. Only the number of shares
         issued net of shares rendered for exercise shall be deemed issued under
         the Plan. The Plan is administered by a committee of the Board
         consisting solely of two or more members of the Board of Directors
         ("the Committee"). Persons


                                      F-14
<PAGE>   49
         eligible to participate in the Plan include all officers, key employees
         and directors of the Company and its subsidiaries, consultants and
         advisors to the Company and its subsidiaries and other persons or
         entities providing goods or services to the Company or its
         subsidiaries, in each case as determined by the Committee.

         In June 2000, the Board of Directors amended, and the shareholders
         subsequently approved, the Company's 1998 Stock Option Plan to provide
         that the aggregate number of shares of common stock for granting
         options to officers and key employees be increased from 1,000,000 to
         2,500,000.

         During Fiscal 2000, there were no grants of Non-Qualified Stock Option
         (NQSO), Stock Appreciation Rights (SAR), Restricted Stock Units,
         Performance Units or Performance Shares. Incentive Stock Options (ISO)
         granted during Fiscal 2000 and Fiscal 1999 under the 1998 Long-Term
         Incentive Plan are as follows:
<TABLE>
<CAPTION>

                                                  FISCAL 2000                        FISCAL 1999                        FISCAL 1998
                                                  -----------                        -----------                        -----------
                                                    WEIGHTED                           WEIGHTED                           WEIGHTED
                                                    AVERAGE                            AVERAGE                            AVERAGE
                                                   EXERCISE                           EXERCISE                           EXERCISE
                                 SHARES             PRICE             SHARES           PRICE           SHARES              PRICE
                                 ------             -----             ------           -----           ------              -----
<S>                           <C>                <C>                <C>               <C>            <C>               <C>
Beginning Balance                 517,500               1.61                 --       $      0.00             --                --
Granted                         1,382,700               1.07            517,500              1.61             --                --
Exercised                              --                 --                 --                --             --                --
Canceled                         (180,100)              1.53                 --                --             --                --
                              -----------
Ending balance                  1,720,100               1.19            517,500       $      1.61             --                --
                              ===========        ===========        ===========       ===========    ===========       ===========
Reserved for future
    grant at year end             779,900                               482,500                       1,000,000
                              ===========                           ===========                      ===========
Exercisable                        98,500                                   --                               --
                              ===========                           ===========                      ===========
Weighted average fair
    value of options
    granted during the
    year                                         $       .77                          $      1.23
                                                 ===========                          ===========

</TABLE>



The following table summarizes information concerning stock options granted
under the 1998 Incentive Stock Option Plan which were outstanding at February 3,
2001:

<TABLE>
<CAPTION>

                                                             OPTIONS OUTSTANDING                                  OPTIONS
                                                                  WEIGHTED                                      EXERCISABLE
                                                                   AVERAGE                            NUMBER
                                          OUTSTANDING             REMAINING            WEIGHTED     EXERCISABLE             WEIGHTED
                                              AT                 CONTRACTUAL            AVERAGE         AT                   AVERAGE
RANGE OF                                  FEBRUARY 3,               LIFE               EXERCISE     FEBRUARY 3,             EXERCISE
EXERCISE PRICES                              2001                 IN YEARS               PRICE         2001                   PRICE
---------------                              ----                 --------               -----         ----                   -----

<S>                                       <C>                <C>                   <C>              <C>                     <C>
$ 0.56 to $1.00......................       720,625                  9.8           $      0.63           - -                    - -
$ 1.01 to $1.49......................        82,375                  9.4                  1.29           - -                    - -
$ 1.50 to $1.59......................       431,000                  9.0                  1.58        70,000                   1.59
$ 1.60 to $1.66......................       486,100                  9.0                  1.65        28,500                   1.64
                                          ---------                                                 --------
$ 0.56 to $1.66......................     1,720,100                                                  98,500
                                          =========                                                 ========

</TABLE>


(d)      Lechters.com, Inc. 2000 Stock Option Plan: In September 2000, the
         Company adopted, with approval by the Board of Directors, the
         Lechters.com, Inc. 2000 Stock Option Plan. The purpose of the plan is
         to promote the success of Lechters.com, Inc., by providing incentives
         to employees including officers,


                                      F-15
<PAGE>   50
         whether or not directors, of Lechters.com, Inc. as well as its Parent
         that will link their personal interests to the long-term financial
         success of the company and to growth in shareholder value, and to
         attract, motivate and retain experienced and knowledgeable independent
         directors and consultants. The Plan is designed to provide flexibility
         to Lechters.com, Inc. in their ability to motivate, attract, and retain
         the services of employees, directors and consultants upon whose
         judgement, interest, and special effort the successful conduct of their
         operations is largely dependent. The plan authorizes the grant of up to
         10,000,000 shares of Lechters.com stock. The Plan is administered by a
         committee of the Board consisting solely of two or more members of the
         Board of Directors, ("the Committee"). Persons eligible to participate
         in the Plan include all officers, key employees and directors of the
         Company and its subsidiaries, consultants and advisors to the Company
         and other eligible persons as may be selected by it.

         During Fiscal 2000, there were no grants of Non-Qualified Stock option
         (NQSO), Stock Appreciation Rights (SAR), Restricted Stock Units,
         Performance Units or Performance Shares. The exercise price for the
         options are determined by an independent appraisal of Lechters.com.
         Incentive Stock Options (ISO) granted during Fiscal 2000 under the 2000
         Lechters.com, Inc. Stock Option Plan are as follows:


<TABLE>
<CAPTION>

                                                                                                       FISCAL 2000
                                                                                                       -----------
                                                                                                        WEIGHTED
                                                                                                        AVERAGE
                                                                                                       EXERCISE
                                                                               SHARES                    PRICE
                                                                               ------                    -----

         <S>                                                               <C>                          <C>
         Beginning balance.................................................         - -                       - -
         Granted...........................................................   1,283,725                       .72
         Exercised.........................................................         - -                       - -
         Canceled..........................................................      (2,775)                      .72
                                                                           ------------
         Ending balance....................................................   1,280,950                       .72
                                                                           ============                 =========
         Reserved for future grant at year end.............................   8,719,050
                                                                           ============
         Exercisable.......................................................          --                        --
                                                                           ============
         Weighted average fair value of options granted during the year ...                             $     .51
                                                                                                         =========
</TABLE>


The following table summarizes information concerning stock options granted
under the Lechters.com, Inc. 2000 Stock Option Plan which were outstanding at
February 3, 2001:
<TABLE>
<CAPTION>

                                                             OPTIONS OUTSTANDING                                  OPTIONS
                                                                  WEIGHTED                                      EXERCISABLE
                                                                   AVERAGE                            NUMBER
                                          OUTSTANDING             REMAINING            WEIGHTED     EXERCISABLE             WEIGHTED
                                              AT                 CONTRACTUAL            AVERAGE         AT                   AVERAGE
RANGE OF                                  FEBRUARY 3,               LIFE               EXERCISE     FEBRUARY 3,             EXERCISE
EXERCISE PRICES                              2001                 IN YEARS               PRICE         2001                   PRICE
---------------                              ----                 --------               -----         ----                   -----

<S>                                       <C>                         <C>             <C>           <C>                      <C>
$ 0.72...............................     1,280,950                   9.8             $     .72         --                   $  --

</TABLE>

(e)      Treasury Stock - In May 1999, the Board of Directors authorized the
         repurchase of up to one million shares of the Company's common stock to
         allow the Company to repurchase shares from time to time when warranted
         by market conditions. There have been 1,841,300 shares purchased under
         this authorization through February 3, 2001 at an average cost of $1.68
         per share. The Company repurchased 1,157,300 and 684,000 shares of its
         common stock in Fiscal 2000 and Fiscal 1999, respectively. In March
         2000, the Board of Directors authorized an additional repurchase of up
         to 3 million shares of the Company's common stock. This program
         authorizes the buyback of up to 20.1% of the Company's outstanding


                                      F-16
<PAGE>   51
         common shares. Under the Amended Credit Facility, the Company can no
         longer repurchase its common stock.


5.       CONVERTIBLE SUBORDINATED DEBENTURES

         Convertible subordinated debentures outstanding are as follows:

<TABLE>
<CAPTION>
                                                                                                FISCAL YEAR ENDED
                                                                                                -----------------
                                                                                          FEBRUARY 3,           JANUARY 29,
                                                                                            2001                  2000
                                                                                            ----                  ----

<S>                                                                                    <C>                    <C>
Convertible Subordinated Debentures, 5% due 2001 (a).................................  $    36,348            $   57,804
</TABLE>

a)       The 5% Convertible Subordinated Debentures (the "Debentures") were
         issued in 1991 with a yield to maturity of approximately 7.47%. At
         February 3, 2001 and January 29, 2000, the unamortized original issue
         discount was $562 and $2,251 respectively. At the end of Fiscal 2000,
         the Debentures have been classified as current liabilities. Previously
         the Debentures were classified as long term liabilities. 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 $965 and $1,323 for Fiscal 2000 and Fiscal 1999, respectively.

         The Company repurchased $23,145 and $4,945 of its Convertible
         Subordinated Debentures prior to their due date during Fiscal 2000 and
         1999, respectively. The Company realized an extraordinary gain of
         $1,947 and $398 net of tax on these transactions for Fiscal 2000 and
         Fiscal 1999, respectively.

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

6.       SENIOR SECURED REVOLVING CREDIT FACILITY

         During Fiscal 2000 and early in Fiscal 2001, the Company revised and
amended its credit facility. On November 30, 1999, the Company entered into a
new $120 million senior secured revolving credit facility with BankBoston Retail
Finance Inc. and other financial institutions, replacing the Company's credit
agreement which was to expire on March 26, 2001. On November 14, 2000, the
Company entered into an amended and restated loan and security agreement with
Fleet Retail Finance Inc. (formerly BankBoston Retail Finance Inc.) and
other financial institutions. On February 9, 2001, the Company further amended
its credit facility to reflect the Strategic Restructuring Plan which was
announced on that date. The amended and restated loan and security agreement of
November 14, 2000 and the amendment to that agreement dated February 9, 2001
comprise the Amended and Restated Loan and Security Agreement (the "Amended
Credit Facility"). The Amended Credit Facility includes a $30 million sublimit
for the issuance of letters of credit (both standby and documentary). The
proceeds of the credit facility may be used for: (i) on-going working capital
requirements; (ii) the replacement, refinancing or retirement of certain of the
Company's securities, as described below; and/or (iii) other general corporate
purposes. The credit facility is scheduled to mature on November 30, 2003. The
Amended Credit Facility is secured by a security interest in substantially all
the Company's assets.

                                      F-17

<PAGE>   52
         The Amended Credit Facility permits the Company to repurchase the 5.00%
Convertible Subordinated Debentures in whole but not in part. Such repurchase
cannot occur before August 16, 2001. To be permitted to repurchase the 5.00%
Notes, availability as defined by the Amended Credit Facility on August 15, 2001
must be in excess of $48.0 million and on such date all indebtedness of the
Company for the purchase of goods or services which are not subject to
reasonable dispute shall be in accordance with current trade terms.
Additionally, availability on average during the period from and including the
date of repurchases shall be in excess of $48.0 million and on each day during
such period shall be in excess of $40.0 million. Finally availability on a pro
forma basis, for the 12 months after the repurchase shall not be less than $10.0
million.

         The Company's maximum borrowing (the "Borrowing Base") under the credit
facility may not exceed the lesser of (a) $85 million made up of $80.0 of
Tranche A Loan ceiling and $5.0 million of Tranche B Loan which was funded on
February 12, 2001 or (b) the total of (i) a stipulated proportion ranging from
77.2% to 88.2%, dependent on the fiscal month, of the cost value of the
Company's acceptable inventory, including eligible letter of credit inventory;
plus (ii) 80% of the Company's acceptable credit card receivable; plus (iii) 95%
of the Company's cash and acceptable investments held in a Fleet custody
account; minus (iv) applicable reserves. As of April 30, 2001, availability
under the Amended Credit Facility was $18.3 million.

         The Amended Credit Facility contains certain covenants, including
limitations on capital expenditures, indebtedness and transactions with
affiliates and a prohibition on the payment of dividends, other than scheduled
payments of preferred dividends by the Company and dividends paid to the Company
by its subsidiaries.

         Advances under the Amended Credit Facility will bear interest per annum
at the Fleet base rate plus the applicable margin (0.25% to 0.75%) or the
Eurodollar rate plus the applicable margin (2.25% to 2.75%), at the Company's
option. The applicable margins are determined based upon the Company's excess
availability under the credit facility. As of February 9, 2001, the date of the
Amended Credit Facility, the base rate applicable margin was 0.75% and the
Eurodollar rate applicable margin was 2.75%. As of February 3, 2001, the
interest rate charged on outstanding borrowings was 8.75%. As of February 9,
2001, the rate under the Amended Credit Facility increased to 9.25%.

         The $5.0 million Tranche B Loan from Back Bay Capital Funding, LLC, was
drawn on the execution of the Amendment to the Amended and Restated Loan and
Security Agreement. The rate of interest for the Tranche B Loan is 13.50% per
annum with payment in kind interest occurring at 2.25% per annum payable upon
maturity. The Tranche B Loan also has annual fees of 3.0% payable on April 28,
2001 and 2.0% payable on April 28, 2002.

         The Company will pay an unused line fee of 0.50% per annum on the
unused portion of the credit facility, a standby letter of credit fee equal to
the then applicable Eurodollar margin less 25 basis points per annum of the
total face amount of each outstanding letter of credit, a documentary letter of
credit fee equal to 1.25% per annum of the total face amount of each outstanding
letter of credit and certain other fees.


                                      F-18
<PAGE>   53
         As of February 3, 2001, $10.9 million was outstanding under the Amended
Credit Facility. As of January 29, 2000 there were no outstanding borrowings. At
February 3, 2001 and January 29, 2000, the Company was liable for drawings under
outstanding letters of credit in the amount of approximately $4.2 million and
$7.6 million, respectively.


7.       INCOME TAXES

         The benefit for income taxes before extraordinary item consists of the
following:

<TABLE>
<CAPTION>
                                                      FISCAL YEAR ENDED
                                                      -----------------
                                       FEBRUARY 3,       JANUARY 29,       JANUARY 30,
                                          2001              2000              1999
                                        --------          --------          --------
<S>                                    <C>               <C>               <C>
Federal:
   Current ....................         ($    49)         ($   543)         ($ 2,095)
   Deferred ...................          (35,183)           (7,194)             (696)
                                        --------          --------          --------

                                         (35,232)           (7,737)           (2,791)
                                        --------          --------          --------
State:
   Current ....................               --               120                98
   Deferred ...................           (7,636)           (1,335)           (2,042)
                                        --------          --------          --------
                                          (7,636)           (1,215)           (1,944)
                                        --------          --------          --------
Increase in valuation allowance           40,263               405               795
                                        --------          --------          --------
                                        ($ 2,605)         ($ 8,547)         ($ 3,940)
                                        ========          ========          ========
</TABLE>

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

<TABLE>
<CAPTION>
                                                               FISCAL YEAR ENDED
                                                               -----------------
                                                 FEBRUARY 3,      JANUARY 29,      JANUARY 30,
                                                    2001             2000             1999
                                                   ------           ------           ------
<S>                                              <C>              <C>              <C>
Statutory Federal income tax rate ........           34.0%            34.0%            34.0%
State income taxes, net of Federal benefit             --              3.7             13.5
Increase in valuation allowance ..........          (38.9)            (1.9)            (8.2)
Other ....................................            7.4              4.2              1.4
                                                   ------           ------           ------
Effective income tax rate ................            2.5%            40.0%            40.7%
                                                   ======           ======           ======
</TABLE>

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




                                      F-19
<PAGE>   54
         The components of the non-current deferred tax liability are as
follows:

<TABLE>
<CAPTION>
                                                            FEBRUARY 3,     JANUARY 29,
                                                               2001            2000
                                                             -------         -------
<S>                                                         <C>             <C>
Deferred Tax Assets:
Accounts receivable ................................         $   158         $   232
Inventory ..........................................           1,890              --
Restructuring charges ..............................           9,313              --
Accrued expenses ...................................           3,864           3,369
Software amortization ..............................           1,448              --
Deferred start-up costs ............................           2,556              --
General business and alternative minimum tax credits             872             859
Net operating loss carryforwards - Federal .........          22,953           4,778
Net operating loss carryforwards - State ...........           6,399           3,240
                                                             -------         -------
Total deferred tax assets ..........................          49,453          12,478
Less: Valuation allowance ..........................          41,463           1,200
                                                             -------         -------
Total net deferred tax assets ......................           7,990          11,278
Deferred Tax Liabilities:
Accelerated tax depreciation .......................           7,202          12,518
Inventory ..........................................              --             247
Other, net .........................................             788           1,069
                                                             -------         -------
Total net deferred tax liabilities .................           7,990          13,834
                                                             -------         -------
Net deferred income tax liability ..................         $    --         $ 2,556
                                                             =======         =======
</TABLE>

         The Company has provided a full valuation allowance on the deferred tax
assets, consisting primarily of net operating loss carryforwards, because of
uncertainty regarding its realizability. The Company files consolidated Federal
and separate company state income tax returns. The alternative minimum tax
credit carryforwards can be carried forward indefinitely. The general business
credit carryforwards have expiration dates ranging from 2012 through 2019. The
Company has a Federal net operating loss carryforward of approximately $67,510
at February 3, 2001, which have expiration dates ranging from 2019 through 2020.
The Company has state net operating loss carryforwards of approximately $91,410
at February 3, 2001, which have expiration dates ranging from 2001 through 2020.

         Due to the operating loss of Fiscal 2000, which was a continuation of
the trend of the most recent fiscal years, the Company has reduced its tax
provision rate for the year to 2.5%. The adjustment was the result of an
increase in valuation allowances against the available deferred tax assets
currently recorded on the Company's financial statements.

8.       LEASES

         At February 3, 2001, the Company leased all of its stores and three
facilities for its corporate office, warehouse and distribution operations.
These operating leases expire on varying dates through January 31, 2009.

         At February 3, 2001, aggregate minimum rentals in future periods are as
follows:

<TABLE>
<CAPTION>
                                                            MINIMUM RENTAL
                                   MINIMUM                 COMMITMENT AFTER
FISCAL                             RENTAL                     STRATEGIC
YEAR                             COMMITMENT               RESTRUCTURING PLAN
<S>                           <C>                         <C>
2001 ......................   $        45,918             $           31,900
2002 ......................            41,196                         28,408
2003.......................            36,232                         24,909
2004.......................            29,685                         19,700
2005.......................            22,493                         14,907
Thereafter.................            45,909                         21,374
                              ---------------             ------------------
Total......................   $       221,433             $        141,198
                              ===============             ==================
</TABLE>

         As discussed in Note 2, the Company's Strategic Restructuring Plan
calls for the closing of 166 stores and one distribution center. A provision of
$14,922 has been recorded as management's estimate to settle the related future
lease obligations.

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


                                      F-20
<PAGE>   55
<TABLE>
<CAPTION>
FISCAL
YEAR                          AMOUNT
<S>                           <C>
2000...............           $2,575
1999...............            3,168
1998...............            3,524
</TABLE>


         Total rent expense was as follows:

<TABLE>
<CAPTION>
FISCAL
YEAR                          AMOUNT
<S>                           <C>
2000...............           $51,590
1999...............           $52,959
1998...............           $52,865
</TABLE>

9.       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 $942, $995
and $948 in Fiscal 2000, Fiscal 1999 and Fiscal 1998, 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 $140, $151 and $141 were charged to expense in
Fiscal 2000, Fiscal 1999 and Fiscal 1998, respectively.

         The Company has a Deferred Compensation Plan covering certain key
executives which provides that, at retirement, these executives 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 executives may
receive is being accrued for financial reporting purposes over the employment
period. Approximately $260, $160 and $160 were charged to expense in Fiscal
2000, Fiscal 1999 and Fiscal 1998, respectively.

         The Company has entered into consulting agreements with certain senior
executives whereby, at retirement, these executives will provide consulting and
advisory services for a 10-year period. The maximum aggregate amount payable
under these agreements is approximately $390 per year.

         Various suits and claims arising in the ordinary course of business are
pending against the Company. In the opinion of management, dispositions of these
matters are appropriately provided for and are not expected to materially affect
the Company's financial position, cash flows or results of operations.

                                      F-21
<PAGE>   56
10.      AVAILABLE FOR SALE SECURITIES

         At February 3, 2001, the Company had no available for sale securities.
The following is a summary of the available for sale securities which comprised
the balance in "marketable securities" at January 29, 2000:

<TABLE>
<CAPTION>
                                                                              GROSS          GROSS
               JANUARY 29,                                                 UNREALIZED     UNREALIZED        ESTIMATED
                  2000                                         COST           GAINS         LOSSES         FAIR VALUE
                  ----                                         ----           -----         ------         ----------
<S>                                                       <C>              <C>           <C>             <C>
Government Bonds...................................       $      43,194    $       --    $        (99)   $       43,095
Other Debt Securities..............................              22,218             7             (19)           22,206
                                                          -------------    ----------    -------------   --------------
Total available for sale securities................       $      65,412    $        7    $       (118)   $       65,301
                                                          =============    ==========    ============    ==============
</TABLE>


         Net gains from the sales of available for sale securities are reported
on the consolidated statement of income as "Net Investment (Gain/Income) Loss".
The components of Net Investment (Gain/Income) Loss for Fiscal 2000, Fiscal 1999
and Fiscal 1998 are as follows:

<TABLE>
<CAPTION>
                                                         NET                    NET
                                                     (GAIN) LOSS             INVESTMENT
                             GROSS         GROSS     ON SALE OF                (GAIN
FISCAL                     REALIZED      REALIZED    GOVERNMENT    DIVIDEND   /INCOME)
YEAR                         GAINS        LOSSES     SECURITIES     INCOME      LOSS
----                         -----        ------     ----------     ------      ----
<S>                        <C>           <C>         <C>           <C>       <C>
2000...............        ($    3)      $    68      $     65     ($  190)   ($  125)
1999...............        ($   94)      $    96      $      2     ($  521)   ($  519)
1998...............        ($  113)      $     9     ($    104)    ($  509)   ($  613)
</TABLE>


11.  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
                                                                       FISCAL QUARTER ENDED
                                                                       --------------------
                                                 APRIL 29,         JULY 29,         OCTOBER 28,       FEBRUARY 3,
                                                   2000              2000              2000              2001
                                                   ----              ----              ----              ----
<S>                                            <C>               <C>               <C>               <C>
Net sales ................................      $    83,743       $    84,193       $    85,743       $   151,354
Gross profit .............................      $    19,921       $    19,397       $    18,522       $    25,649
Restructuring expense ....................               --       $        --       $        --       $    36,092
Provision for asset impairment ...........               --                --                --       $       270
Loss before income tax
   provision and extraordinary item ......     ($    10,585)     ($    14,490)     ($    17,831)     ($    62,463)
Net loss-before extraordinary item .......     ($     6,880)     ($     9,418)     ($    22,883)     ($    63,583)
Extraordinary item, net of tax ...........              879                --               944               124
Net loss .................................     ($     6,001)     ($     9,418)     ($    21,939)     ($    63,459)
Net loss per common share before
    extraordinary item (a)(c) ............     ($      0.43)     ($      0.62)     ($      1.51)     ($      4.15)
Extraordinary item .......................             0.05                --       $      0.07       $        --
                                               ------------      ------------      ------------      ------------
Net loss .................................     ($      0.38)     ($      0.62)     ($      1.44)     ($      4.15)
Number of shares used in computing net
   loss per common share basic and diluted       16,401,000        15,618,000        15,363,000        15,335,000
</TABLE>




                                      F-22
<PAGE>   57
<TABLE>
<CAPTION>
                                                                          FISCAL QUARTER ENDED
                                                                          --------------------
                                                      MAY 1,          JULY 31,         OCTOBER 30,        JANUARY 29,
                                                      1999              1999              1999               2000
                                                      ----              ----              ----               ----
<S>                                               <C>               <C>               <C>                <C>
Net sales ...................................      $    83,407       $    90,913       $    94,837       $   150,966
Gross profit ................................      $    21,570       $    20,284       $    23,326       $    43,341
Provision for asset impairment ..............               --                --                --             2,685
(Loss) income before income tax
   provision and extraordinary item .........     ($     7,250)     ($     9,974)     ($     9,090)      $     4,921
Net (loss) income-before
   extraordinary item .......................     ($     4,277)     ($     5,885)     ($     5,364)      $     2,680
Extraordinary item, net of tax ..............               --                --                --       $       398
Net (loss) income ...........................     ($     4,277)     ($     5,885)     ($     5,364)      $     3,078
Net (loss) income per
common share before extraordinary
   item (a)(b)(d) ...........................     ($      0.26)     ($      0.36)     ($      0.33)      $      0.15
Extraordinary item ..........................               --                --                --              0.02
                                                  ------------       -----------       -----------       -----------
Net (loss) income ...........................     ($      0.26)     ($      0.36)     ($      0.33)      $      0.17
Number of shares used in computing net income
(loss) per common share basis and diluted ...       17,176,000        17,098,000        17,048,000        16,500,000
</TABLE>


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

(b)      Diluted net income per common share, assuming conversion of the 5.05%
         Convertible Preferred Stock and elimination of the related dividend was
         $0.16, $0.14 before extraordinary item, for the thirteen weeks ended
         January 29, 2000 on weighted average shares outstanding of 19,706,000.

(c)      Difference of $0.10 between full year loss per common share and the
         resulting loss per common share from the sum of each of the quarter in
         Fiscal 2000 is due to rounding and the fourth quarter charges for
         restructuring expense which occurred in a quarter which had a
         significantly lower number of outstanding shares than the year-to-date
         average.

(d)      Difference of $0.01 between full year (loss) income per common share
         and the resulting (loss) income per common share from the sum of each
         of the quarters in Fiscal 1999 is due to rounding.




                                      F-23
<PAGE>   58
                                 EXHIBIT INDEX

ITEM NO.  DESCRIPTION

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

3.2       By-laws of the Company - as amended April 11, 1991, January 11, 1994,
          December 13, 1995 and November 15, 2000.*

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      Amended and Restated Loan and Security Agreement dated November 14,
          2000 among the Fleet Retail Finance Inc. and Back Bay Capital Funding
          LLC. (Incorporated herein by reference to the Company's Form 10-Q for
          the period ended October 28, 2000).

10.1.1    First Amendment to Amended and Restated Loan and Security Agreement
          dated February 9, 2001 among Fleet Retail Finance Inc. and Back Bay
          Capital Funding, LLC. (Incorporated herein by reference to the
          Company's Form 8-K filed April 3, 2001.)

10.2      1989 Stock Option Plan and Form of Agreement pursuant to 1989 Stock
          Option Plan. (Incorporated herein by reference to Exhibit 10.3 to the
          Registration Statement). (1.)

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

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

10.5      Amendment No. 2 to Deferred Compensation Agreement, dated August 15,
          1989. (Incorporated herein by reference to the Company's Annual Report
          on Form 10-K for the year ended January 26, 1991). (1.)


10.6      Amendment No. 3 to Deferred Compensation Agreement, dated June 15,
          1995. (Incorporated herein by reference to the Company's Form 10-Q for
          the period ended July 29, 1995). (1.)

10.7      Amendment No. 4 to Deferred Compensation Agreement between the Company
          and Donald Jonas dated April 8, 1996. (Incorporated herein by
          reference to the Company's Annual Report on Form 10-K for the year
          ended February 3, 1996). (1.)

10.8      Amendment No. 5 to the Deferred Compensation Agreement between the
          Company and Donald Jonas dated February 2, 2001.*(1)

10.9      Employment Agreement between the Company and David K. Cully dated
          January 3, 2000. (Incorporated herein by reference to the Company's
          Annual Report on Form 10-K for the year ended January 29, 2000). (1.)

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

<PAGE>   59
10.11     Forms of Amendment of Consulting Agreement (Incorporated herein by
          reference to Exhibit 10.9.2 to Amendment No. 1 to the Registration
          Statement). (1.)

10.12     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).

10.12.1   Memorandum of Agreement dated April 26, 1999 between the Company and
          Local 99, UNITE extending the term of Agreement covering warehouse
          employees dated March 16, 1996 to March 15, 2002. (Incorporated herein
          by reference to the Company's Form 10-K for the year ended January 30,
          1999).

10.12.2   Memorandum of agreement dated August 8, 2000 between the Company and
          Local 99, UNITE, covering office employees for a term from July 1,
          2000 to June 30, 2003. (Incorporated herein by reference to Exhibit
          10.10.3 to the Company's Form 10-Q for the quarter ended July 29,
          2000).

10.13     Lease for Distribution Center space dated December 23, 1991 covering
          the Distribution and office space in Harrison, NJ (Incorporated herein
          by reference to Exhibit 1 to the Company's Current Report on Form 8-K,
          dated January 2, 1992).

10.13.1   Lease Modification Agreement dated June 19, 1995 covering the
          Distribution Center and Office space in Harrison, NJ. (Incorporated
          herein by reference to the Company's Form 10-K for the year ended
          January 30, 1999).

10.13.2   Lease Modification Agreement dated July 22, 1998 covering the
          Distribution Center and Office space in Harrison, NJ. (Incorporated
          herein by reference to the Company's Form 10-K for the year ended
          January 30, 1999).

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

10.14.1   Lease for Distribution Center located in Hazleton, Pennsylvania, dated
          March 23, 2000. (Incorporated herein by reference to the Company's
          Annual Report on Form 10-K for the year ended January 29, 2000).

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

21        Subsidiaries of the Company.*

23        Consent of Deloitte & Touche LLP.*

*         Filed herewith.

(1.)      Management Compensatory Plan.