<PAGE>

                                    CONFORMED COPY
                                          
                                    UNITED STATES
                         SECURITIES AND EXCHANGE COMMISSION
                                 WASHINGTON, DC 20549
                                      FORM 10-K
(Mark One)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 
     ACT OF 1934
For the fiscal year ended ....................JANUARY 3, 1998
                                   OR
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES   
EXCHANGE ACT OF 1934
For the transition period from ..................... to ...................... 
Commission file number .......................0-16126

                                S P I E G E L,  I N C.
                (Exact name of registrant as specified in its charter)

     DELAWARE                                     36-2593917
(State of Incorporation)                       (I.R.S. Employer
                                              Identification No.)

     3500 LACEY ROAD                              60515-5432
     DOWNERS GROVE, ILLINOIS                      (Zip Code)
(Address of principal executive offices)

Registrant's telephone number, including area code (630) 986-8800 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:  None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:



                          CLASS A NON-VOTING COMMON STOCK,
                             PAR VALUE, $1.00 PER SHARE
                                  (TITLE OF CLASS)
                                          


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.      YES   X   NO      

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.      X         

The Class B Voting Common Stock is not publicly traded.  Therefore, no market
value information is readily available on this class of stock.

The number of the shares of Registrant's Class A Non-Voting Common Stock and
Class B Voting Common Stock outstanding on March 26, 1998 was 14,683,964 and
117,009,869, respectively.  

DOCUMENTS INCORPORATED BY REFERENCE:  NONE

<PAGE>

                                        PART I

ITEM 1.  BUSINESS

A.  GENERAL DEVELOPMENT OF BUSINESS

Spiegel, Inc., a Delaware corporation, was incorporated in 1965.  Spiegel, Inc.
and its subsidiaries are sometimes referred to collectively in this Form 10-K as
the "Company" or "Spiegel."  The Company and its predecessors date from 1865. 
Since 1905, the Company has operated as a catalog merchandiser.  In 1982, the
Company was purchased by Otto Versand (GmbH & Co) ("Otto Versand"), a
privately-held German partnership that is one of the largest catalog
merchandisers in the world, selling its products in Europe and Asia.  In 1984,
all of the capital stock of the Company was transferred to the partners of Otto
Versand or their designees resulting in common ownership for Spiegel and Otto
Versand.  In this transaction, 65% of the capital stock of the Company was
transferred to Spiegel Holdings, Ltd., an Illinois limited partnership, whose
general partner was Dr. Werner Otto.  Since 1984, additional shares of the
Company's capital stock have been acquired by Spiegel Holdings, Ltd. and its
successor.  In 1986, Spiegel Holdings, Ltd. was converted to Spiegel Holdings,
Inc., a Delaware corporation ("SHI").  Prior to the Company's 1987 initial
public offering of Class A non-voting common stock, all of Spiegel's existing
capital stock was converted into Class B voting common stock.  SHI holds 99.9%
of the Company's Class B voting common stock, affording SHI control of the
Company. 

In 1988, the Company acquired Eddie Bauer, Inc. and certain related Canadian
assets (collectively, "Eddie Bauer").  Eddie Bauer is a leading specialty
retailer serving the casual lifestyle needs of men and women through the sale of
high quality apparel, home furnishings and accessories through catalogs and
specialty retail stores. 

In 1990, the Company acquired First Consumers National Bank ("FCNB").  FCNB is a
special purpose bank limited to the issuance of credit cards, primarily FCNB
Preferred Charge cards for use by Spiegel, Eddie Bauer and Newport News
customers. 

In 1993, the Company acquired substantially all of the assets of New Hampton,
Inc. ("New Hampton") through a bankruptcy proceeding.  In 1995, New Hampton's
name was changed to Newport News, Inc. ("Newport News").  Newport News is a
specialty catalog company offering fashionable women's apparel and household
furnishings at moderate price points. 

In 1997, the Company incorporated its Spiegel Catalog division as a separate
subsidiary parallel to Eddie Bauer and Newport News.  This was done to provide
for greater clarity between the Spiegel brand name and the corporate entity.

C.  NARRATIVE DESCRIPTION OF BUSINESS

PRINCIPAL PRODUCTS, SERVICES, AND REVENUE SOURCES.  The Company has two
principal merchandise categories: apparel and household furnishings and other
merchandise.  The components of net sales by merchandise category for the last
three years were:

<TABLE>
<CAPTION>

                                1997         1996        1995
                                -----        -----      ------
     <S>                        <C>          <C>        <C>
     Apparel                     79%          74%         72%
     Household furnishings
       and other merchandise     21           26          28
                                ----         ----        ----
                                100%         100%        100%
                                ----         ----        ----


</TABLE>


                                          2
<PAGE>

The Company's household furnishings range from traditional to contemporary
styles, including accent pieces, decorative accessories, bedding and bath, home
electronics, window treatments and rugs.  The other merchandise category
includes items such as fitness and personal care equipment, toys, cameras and
luggage.

The following is a discussion of the major operations of the Company: Eddie
Bauer, Spiegel Catalog, Newport News and FCNB:  ($000s omitted on sales data)

     EDDIE BAUER 
     
     Eddie Bauer is a leading specialty retailer serving the casual lifestyle
     needs of men and women through the sale of high quality private-label
     apparel, home furnishings and accessories.  Eddie Bauer presents its retail
     concepts through multiple distribution channels, including 508 stores,
     catalogs and electronic media. Total net sales were $1,750,991 and
     $1,567,750 for the years ended January 3, 1998 and December 28, 1996,
     respectively.  Nearly 75% of total net sales for Eddie Bauer are retail and
     outlet sales.  A key strategy for Eddie Bauer is to leverage synergies
     between its retail and catalog channels of distribution, maximizing
     opportunities for cross-promotion.  This strategy includes referring retail
     customers to catalog stations within stores for additional merchandise and
     size options; utilizing the catalog customer database to help identify
     potential store locations; using catalog space to advertise the retail
     concept; and utilizing retail store mailing lists to help build the catalog
     file.  Eddie Bauer's principal retailing concept is its trademark Eddie
     Bauer Sportswear stores and catalogs, which feature casual apparel and
     accessories. Eddie Bauer also has other specialty retail concepts that
     serve targeted niches through retail stores and catalogs, including Eddie
     Bauer HOME, which offers casual home furnishings and decorative
     accessories; A|K|A EDDIE BAUER, featuring dress sportswear, footwear and
     accessories for men and women; and EBTEK, a store-within-a-store concept
     which provides a line of performance active wear.  
     
     In September 1993, Eddie Bauer entered into a joint-venture arrangement
     with Otto-Sumisho, Inc. to sell its full line of Eddie Bauer sportswear
     products through retail stores and catalogs in Japan.  There are currently
     28 such stores.  During 1995, Eddie Bauer entered into an agreement with
     Handelsgesellschaft Heinrich Heine GmbH and Sport-Scheck GmbH (both
     subsidiaries of Otto Versand) to form a joint venture to sell Eddie Bauer
     products through retail stores and catalogs in Germany. There are currently
     seven such stores.  In 1996, Eddie Bauer entered into a joint-venture
     agreement with Gratten plc (a subsidiary of Otto Versand) to sell Eddie
     Bauer products through retail stores and catalogs in the United Kingdom. 
     There are currently two such stores.  Eddie Bauer has also capitalized on
     selected licensing opportunities, including a current arrangement with Ford
     Motor Company, which uses the Eddie Bauer name and logo on special series
     Ford vehicles, as well as arrangements with The Lane Company, a furniture
     manufacturer, Signature Eyewear, Inc. and Seattle's Best Coffee that
     commenced in 1997. 
     
          EDDIE BAUER RETAIL DIVISION
     
          Eddie Bauer operates 463 retail and 45 outlet stores.  There are 469
          stores in the United States and 39 stores in Canada.  At January 3,
          1998, 34 of these stores were Eddie Bauer HOME Collection and 26 were
          A|K|A EDDIE BAUER stores.  A typical Eddie Bauer store is
          approximately 6,600 gross square feet, and average net sales per gross
          square foot for the retail and outlet stores combined was $409 and
          $414 in 1997 and 1996, respectively.  The retail stores are usually
          located in an upscale regional mall or a high traffic metropolitan
          location, 


                                          3
<PAGE>

          because the company believes that convenience is a primary
          consideration for its target customers.  Most of Eddie Bauer's current
          retail stores are located in large metropolitan markets. Eddie Bauer
          has also begun to open stores in certain smaller markets where it
          believes a concentration of its target customers exists. Eddie Bauer
          believes that these markets have the potential to contribute store
          profit margins comparable to the existing store base. Eddie Bauer
          outlet stores, which offer overstock and end-of-season merchandise,
          are located predominantly in outlet malls and strip centers and
          generally in areas not served by its core specialty retail stores. 
     
          Growth in the retail division has been due principally to new store
          openings. Net store openings in 1997 and 1996, respectively, were 65
          and 32. In 1998, the Company is planning a net of approximately 50 new
          store openings for Eddie Bauer. The average cost of opening a typical
          new Eddie Bauer store in 1997, including inventory, furniture and
          fixtures, pre-opening expenses and net leasehold improvements, was
          approximately $625,000. Eddie Bauer's ability to open and operate new
          stores profitably is dependent on the availability of suitable store
          locations, the negotiation of acceptable lease terms, Eddie Bauer's
          financial resources and its ability to control the operational aspects
          and personnel requirements of its growth. 
     
          EDDIE BAUER CATALOG DIVISION
     
          The Eddie Bauer catalog division distributed over 105 million catalogs
          in 1997 and at January 3, 1998 had approximately 3.4 million active
          customers (customers who have purchased within the last 18 months.) 
          As a corollary to its retail operations, Eddie Bauer catalog concepts
          include its trademark Eddie Bauer Sportswear catalog, Eddie Bauer HOME
          and A|K|A EDDIE BAUER, as well as its largest catalog, Eddie Bauer
          Resource, combining all of its specialty concepts in a single catalog,
          including EBTEK. Eddie Bauer also actively pursues new customers
          within its target market through initiatives including list rentals
          and utilizing names of its retail store customers.

     SPIEGEL CATALOG 
     
     Spiegel Catalog offers apparel, household furnishings and other merchandise
     through its various catalogs and, to a lesser extent, Ultimate Outlet
     retail stores.  Spiegel Catalog net sales were $769,225 and $990,761 for
     the years ended January 3, 1998 and December 28, 1996, respectively.  Sales
     through catalog offerings comprise approximately 85% of the total net
     sales.  Spiegel Catalog is one of the largest catalog companies in the
     United States and in 1997 distributed over 154 million catalogs throughout
     the country.  At January 3, 1998, Spiegel Catalog's customer base included
     4.4 million active customers (customers who have purchased within the last
     18 months). 
     
     Spiegel Catalog's apparel merchandise, which represented 52% of its sales
     in 1997, includes private-label and branded merchandise.  Private-label
     merchandise is developed by its in-house product design teams based on
     emerging fashion trends and customer research.  Spiegel Catalog's household
     furnishings and other merchandise, which represented 48% of its sales in
     1997, are a mixture of private-label and branded merchandise ranging from
     traditional to contemporary styles, including accent pieces, decorative
     accessories, bedding and bath, home electronics, window treatments and
     rugs. 

                                          4
<PAGE>

     In 1997, Spiegel Catalog redefined itself in order to reconnect with its
     target customer, the working woman.  It adopted a new positioning as "the
     lifestyle resource for the working woman," dedicated to creating a
     collection of businesses that focus on function and design to serve the
     living needs and taste preferences of a busy, demanding customer.  To
     support this new positioning, Spiegel Catalog reorganized itself into
     strategic business units, including Portfolio, "OnView" and "elements
     exclusively Spiegel", each focused on satisfying the lifestyle needs of
     customers who have different style preferences as identified through
     extensive research.  This new structure enables Spiegel Catalog to
     understand its customer better and respond to her changing needs more
     effectively. Catalogs include the trademark semiannual Big Book, the
     primary vehicle for Portfolio's branded and private-label product, as well
     as specialty catalogs specific to "OnView" and "elements exclusively
     Spiegel" which emphasize private-label offerings.
          
     NEWPORT NEWS 
     
     Newport News, acquired by the Company in August 1993, is a specialty
     catalog company whose catalogs offer fashionable, moderately priced women's
     apparel as well as home textiles.  Newport News' net sales were $315,081
     for the year ended January 3, 1998, as compared to $292,044 for the year
     ended December 28, 1996.  In 1997, Newport News mailed 169 million catalogs
     to active and prospective customers. Newport News had a customer base of
     3.9 million active customers (customers who have purchased within the last
     18 months) at January 3, 1998.
     
     FCNB 
     
     In an effort to build brand loyalty and to provide additional convenience
     for its customers, the Company offers a credit program for qualifying
     catalog and retail customers in the form of its FCNB Preferred Charge card.
     The card is imprinted with a Spiegel, Eddie Bauer or Newport News logo
     depending on the source of the original application for credit. This card
     allows a customer to purchase products from any Company affiliate,
     regardless of the imprint on the card.  FCNB is the issuer of the Preferred
     Charge card. The accounts are serviced through FCNB's headquarters located
     in Beaverton, Oregon.  FCNB also issues MasterCard credit cards, including
     the co-branded Spiegel MasterCard and the Eddie Bauer MasterCard.
     
     At January 3, 1998, customer receivables serviced were approximately
     $1,684,000, of which 83% were Preferred Charge receivables and 17% were
     FCNB MasterCard receivables.  Approximately 35% of the Company's 1997 total
     net sales were made on the FCNB Preferred Charge card including
     approximately 64% of Spiegel Catalog net sales, 20% of Eddie Bauer's net
     sales, and 45% of Newport News' net sales.  The lower percentage of Eddie
     Bauer sales made on the Preferred Charge card is attributable primarily to
     the relatively higher percentage of retail store sales at Eddie Bauer. 
     Catalog sales generally have a higher percentage of sales made on credit
     compared to retail store sales.  
     
     Deterioration in the credit market, increases in account charge-offs and
     interest rate fluctuations all represent risks to the profitability of the
     Company's credit operations.
     
PRODUCT DEVELOPMENT AND SOURCING

The Company's product development and sourcing teams are a significant element
of its private-label merchandise strategy.  The Company selects manufacturers
based on their ability to produce high quality product on a cost-effective
basis.  The Company's product 

                                          5
<PAGE>

design teams select and source fabrics to be delivered to manufacturers along
with product patterns, specifications and templates used for cutting fabric and
other pre-production work.  Prototype samples are submitted to the Company for
final production approval to ensure manufacturer compliance with specifications.


The Company does not have any manufacturing facilities; all production is done
by third-party contractors. The product development and sourcing teams closely
monitor the timeliness of manufacturers' delivery to the Company's distribution
facilities and provide them with packaging information. The Company believes
this strategy permits maximum flexibility, enhanced inventory management and
consistent quality control without the risks associated with operating its own
manufacturing facilities.  

MERCHANDISE

The Company sells domestically produced and imported merchandise, which it
purchases in the open market from approximately 4,100 suppliers, none of which
supplied as much as 5% of the merchandise purchased during 1997.  A significant
amount of the dollar value of merchandise purchased by the Company is imported
directly from the Far East and Europe.  Consequently, the Company is subject to
the risks generally associated with conducting business abroad.  The Company's
business could be affected by economic events or political instability that
might affect imports, including duties, quotas and work stoppages.  To date,
these factors have not caused any material disruption of the Company's
operations.  As with other companies that denominate purchases in dollars,
declines in the dollar relative to foreign currencies could over time increase
the cost to the Company of merchandise purchased in foreign countries, which
could adversely affect the Company's results of operations.  The Company is
unable to predict the effect, if any, of the above; however, the Company
believes this risk exists for many other retailers.

LICENSES AND TRADEMARKS

The Company utilizes its own trademarks and tradenames including "Spiegel",
"Eddie Bauer", "A|K|A EDDIE BAUER", "Eddie Bauer HOME", "EBTEK" and "Newport
News."  The Company is also licensed to sell goods under the "Together!" and
"Apart" labels.  With the exception of the names "Spiegel", "Eddie Bauer",
"A|K|A EDDIE BAUER", "Eddie Bauer HOME", "EBTEK", "Newport News", "Together!"
and "Apart", the Company believes that loss or abandonment of any particular
trademark would have no significant effect on its business.

SEASONALITY OF BUSINESS  

The Company, like other retailers, has experienced and expects to continue to
experience seasonal fluctuations in its merchandise sales and net earnings. 
Historically, a disproportionate amount of the Company's net sales and a
majority of its net earnings have been realized during the fourth quarter.  If
the Company's sales were materially different from seasonal norms during the
fourth quarter, the Company's annual operating results could be materially
affected.  Accordingly, results for the individual quarters are not necessarily
indicative of the results to be expected for the entire year.

COMPETITION  

The markets in which the Company participates are highly competitive and served
by a significant number of catalog companies and retailers including traditional
department stores, so-called "off-price" and discount retailers and specialty
chains.  The Company's success is highly dependent upon its ability to maintain
its existing customer lists, solicit new customers, identify distinct fashion
trends and continue to address the needs and fashion tastes of its customers.

                                          6
<PAGE>

EMPLOYEES  

During 1997, the Company employed between approximately 13,000 and 16,900
full-time equivalent employees, depending on the time of year, reflecting the
seasonality of the Company's business and the variations in its workforce during
the year.  At February 28, 1998, the Company employed approximately 12,400
full-time equivalent employees.

Spiegel is a party to two collective bargaining agreements with the Warehouse,
Mail Order, Office, Technical and Professional Employees Union, Local 743,
affiliated with the International Brotherhood of Teamsters, Chauffers,
Warehousemen and Helpers of America ("Local 743").  Local 743 represents
approximately 180 full-time headquarters employees under an agreement that
expires on February 28, 1999.  Approximately 60 full-time equivalent Chicago
area Spiegel Catalog outlet store employees are covered by a separate agreement
with Local 743 which expires on May 31, 2000.

The Company considers its relations with its employees to be good and has never
experienced any material interruption of operations due to labor disagreements
with its employees.

ITEM 2.  PROPERTIES

The Company's corporate headquarters is located in leased office space in
Downers Grove, Illinois.  In addition, all of the Company's retail store
locations are leased, with the exception of a downtown Chicago Eddie Bauer
store.  A typical store lease is for a term of 10 years, with options for
renewal.

The Company's Groveport, Ohio catalog fulfillment and distribution facility,
which was constructed on land owned by the Company, was completed in 1994 and
consolidates the majority of catalog fulfillment and distribution functions of
Spiegel Catalog and Eddie Bauer. In 1995, the Company purchased a four million
square-foot facility in Columbus, Ohio, which replaced its previous retail
distribution facilities and performs certain catalog distribution functions.  An
additional retail distribution facility is leased in Toronto, Canada to support
the Eddie Bauer retail stores located in Canada.

Eddie Bauer occupies office space in nine buildings located in and around
Redmond, Washington, two of which are owned and seven of which are under lease.

Spiegel leases a customer order center in Wichita, Kansas and a customer service
facility in Rapid City, South Dakota.  The Company owns its Westmont, Illinois
corporate data center. 

Newport News leases office space in New York, New York.  Its order taking,
customer service and administrative functions are performed in a leased facility
in Hampton, Virginia.  Its distribution function is performed in an owned
facility in Newport News, Virginia.  Newport News also owns approximately 62
acres of vacant land in Hampton, Virginia adjacent to its distribution facility.
At present, there are no plans to either expand upon or dispose of this vacant
land.

FCNB's headquarters is located in leased office space in Beaverton, Oregon
(suburban Portland). 

The Company considers its present space and facilities under development
adequate for anticipated future requirements.  

                                          7
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

The Company is routinely involved in a number of legal proceedings and claims
that cover a wide range of matters.  In the opinion of management, the outcome
of these matters is not expected to have any material adverse effect on the
consolidated financial position or results of operations of the Company.

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

None.

                                          8
<PAGE>

                                       PART II

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

A.  MARKET INFORMATION

The Class A Non-Voting Common Stock is traded on NASDAQ's National Market
System.  The ticker symbol is SPGLA.  Daily trading information is listed in the
stock tables carried by major newspapers as "SPIEGEL."  See Item 8 "Selected
Quarterly Financial Data" for information on the high and low sales prices of
the Class A Non-Voting Common Stock.

On March 26, 1998, the closing market price of the Class A Non-Voting Common
Stock, as quoted on the NASDAQ National Market System, was $5 11/16 per share.

B.  HOLDERS

There were approximately 10,000 Class A Non-Voting Common Stockholders as of
March 26, 1998.  The Company believes that certain of the outstanding shares of
Class A Non-Voting Common Stock are held by nominees for an unknown number of
beneficial stockholders.

The Class B Voting Common Stock of the Company is privately held and is not
publicly traded.  As of the date hereof, there were two Class B Voting Common
Stockholders.

C.  DIVIDENDS

In December 1995, the Company discontinued payment of all cash dividends.
Certain restrictions on dividend payments exist under the Company's debt
covenants based on financial results.  The Company will evaluate its dividend
policy on an ongoing basis. No cash dividends were paid in the years ended
January 3, 1998 and December 28, 1996.  

                                          9
<PAGE>

ITEM 6.  FIVE-YEAR SELECTED FINANCIAL DATA
($000s omitted, except per share amounts)
<TABLE>
<CAPTION>
 


                                           1997           1996           1995           1994         1993 (2)
                                       ------------    -----------    -----------    ----------    ------------
<S>                                    <C>             <C>            <C>            <C>           <C>    
EARNINGS DATA
Net sales and
  other revenues                       $ 3,056,834     $3,014,620     $3,184,184     $3,015,985     $2,596,147
Earnings (loss) before
  income taxes (1)                         (49,406)       (21,276)       (15,807)        47,246         87,363
Net earnings
  (loss)                               $   (33,021)    $  (13,389)    $   (9,481)    $   25,100     $   48,705
Net earnings (loss) per
  common share (3)
  Basic                                $      (.28)    $     (.12)    $     (.09)    $      .23     $      .47
  Diluted                              $      (.28)    $     (.12)    $     (.09)    $      .23     $      .46
Cash dividends per
  common share                         $         -     $        -     $      .20     $      .20     $      .20

BALANCE SHEET AND CASH FLOW DATA
Current assets                         $ 1,244,823     $1,231,535     $1,559,909     $1,928,172     $1,606,158
Total assets                             1,949,554      1,945,625      2,273,982      2,560,287      2,210,591
Current liabilities                        634,729        695,396        666,448        628,346        627,247
Long-term debt,
 excluding
 current maturities                        713,750        676,656      1,014,692      1,300,364        971,683
Stockholders' equity                   $   568,093     $  521,549     $  535,573     $  579,217     $  567,485
Net additions to
 property and equipment                $    55,047     $   45,698     $  131,229     $   84,191     $  104,489
Depreciation and
 amortization                          $    88,062     $   95,278     $   79,047     $   60,555     $   45,766


</TABLE>


(1) Earnings before income taxes for 1993 included a $39,000 charge recorded
in the third quarter to reflect the estimated impact of closing certain of 
the Company's existing catalog distribution facilities.

(2) In August 1993, the Company purchased substantially all of the assets of
Newport News, Inc. for approximately $40 million.  The operating results and
balance sheet data for Newport News are consolidated with the Company's from the
purchase date forward.

(3) Net earnings per common share has been restated in accordance with SFAS No.
128, "Earnings per Share."

                                          10
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS ($000s omitted)


RESULTS OF OPERATIONS

1997 COMPARED WITH 1996
Net sales for the year ended January 3, 1998 were $2,835,297 compared to 
$2,850,555 for the year ended December 28, 1996.  Retail sales of $1,352,564 
increased 10% and represent 48% of total net sales compared to 43% in 1996.  
This increase was driven by Eddie Bauer, where retail sales increased 10% 
over last year due to a higher number of stores open in 1997. Eddie Bauer 
ended the year with 508 stores compared to 443 at year end 1996.  Comparable 
store sales declined 3% from 1996 levels resulting primarily from weakness in 
fall season sales due to lower than expected demand for cold-weather-related 
products.  Total Company catalog sales of $1,482,733 declined 8% from the 
previous year.  The decrease was driven by a 24% decline in Spiegel Catalog's 
sales, which were affected by lower catalog productivity and reduced 
circulation, as well as by the continued effect of tightened credit policies 
on the Company's proprietary credit card.  Catalog circulation at Spiegel 
Catalog was reduced by more than 20% compared to 1996, with further 
circulation reductions planned for 1998.  Spiegel Catalog repositioned its 
operations in 1997 into strategic business units to create more focused, 
targeted catalog offerings and improve operating performance.  Somewhat 
offsetting the Spiegel Catalog decline were catalog sales improvements at 
Newport News and the continued growth of Eddie Bauer's catalog operations. 

For the year ended January 3, 1998, finance revenue was $178,293 compared to 
$111,274 for the year ended December 28, 1996.  This increase was due to an 
incremental pretax gain of $75,141 on the sale of customer receivables 
recognized pursuant to SFAS No. 125.  Finance revenue excluding the gain 
declined compared to 1996 due to a significantly lower level of average owned 
receivables, driven in part by an increase in the average level of sold 
customer receivables, as well as decreases in sales on the Company's 
proprietary credit card.  Other revenue, which includes such items as 
handling charge income and royalty income, was $43,244 and $52,791 for the 
years ended January 3, 1998 and December 28, 1996, respectively. This 
decrease was due in part to the sale of the Company's information and 
technology subsidiary in the first quarter of 1996, as well as declines in 
other revenue categories at Spiegel Catalog which were driven by the lower 
catalog productivity. 

The gross profit margin on net sales was 31.5% for the year ended January 3, 
1998 compared to 34.1% for the year ended December 28, 1996.  The decline in 
margin rate from 1996 was driven by Spiegel Catalog, which experienced a 
higher level of markdowns as part of its continuing efforts to reposition its 
merchandise assortment and eliminate products that do not fit within the 
company's new merchandising plans.  Through its repositioning, Spiegel 
Catalog will strengthen its private-label offerings and develop a more 
profitable product mix aimed at improving margins.  Eddie Bauer contributed 
to the decline in gross margin as well with increased promotional activity in 
the fall season due largely to lower than expected demand for 
cold-weather-related products.  The Company effectively managed inventory 
risk, ending the year with $508,756 of inventory, only 1% over the 1996 
year-end level despite below-plan sales and the addition of 65 Eddie Bauer 
retail stores.

Selling, general and administrative expenses as a percentage of total 
revenues were 35.9% and 35.7% for the years ended January 3, 1998 and 
December 28, 1996, respectively.  Spiegel Catalog experienced a higher 
expense ratio in 1997, as a result of lower productivity from catalog 
offerings as well as approximately $16 million in expenses associated with 
repositioning and restructuring activities. These activities included a 15% 
reduction in the Spiegel Catalog headquarter's work force, the closing of two 

                                          11
<PAGE>

telephone sales centers, and the consolidation of certain operational units 
into the corporate headquarters.  The negative impact Spiegel Catalog had on 
the ratio was offset by greater expense leverage from Newport News and Eddie 
Bauer.  Newport News generated a significant improvement in catalog 
productivity, while Eddie Bauer realized better expense leverage in total.  
In addition, the ratio benefited from lower charge-offs realized in the 
Company's credit division and an incremental pretax gain of $75,141 on the 
sale of customer receivables recognized in 1997 pursuant to SFAS No. 125.  By 
comparison, the 1996 ratio was favorably impacted by the reversal of 
approximately $24 million of the provision for doubtful accounts on sold 
customer receivables, as well as the gain of approximately $8 million 
realized on the sale of the Company's information technology subsidiary in 
the first quarter.

Interest expense was $68,098 and $82,677 for the years ended January 3, 1998 
and December 28, 1996, respectively.  This decrease was due primarily to 
lower average debt levels partially offset by a slightly higher effective 
interest rate compared to 1996.  Average debt in 1997 was $877,698, compared 
to $1,089,056 in 1996.  The decrease in average debt resulted from a lower 
level of owned customer receivables, as well as the $69,972 net proceeds from 
the issuance of Class B voting stock in March 1997.   

The effective tax rate was 33.2% for the year ended January 3, 1998 compared 
to 37.1% for the same period last year.  The Company assesses its effective 
tax rate on a continual basis.  Different earnings levels in the Company's 
individual business units had a profound impact on the consolidated state 
rate.

1996 COMPARED WITH 1995 
For the years ended December 28, 1996 and December 30, 1995, net sales were 
$2,850,555 and $2,886,225, respectively.  Retail sales comprised 43% and 40% 
of total net sales for the Company for the years 1996 and 1995, respectively. 
Eddie Bauer's retail store sales in 1996 were 9% higher than in 1995, 
primarily as a result of an increase in the average number of stores.  
Comparable store sales in 1996 were flat, due primarily to the effects of 
reductions in certain merchandise lines and less promotional activity.  For 
the year ended December 28, 1996, total Company catalog sales comprised 57% 
of total net sales and were 6% lower than the catalog sales for the year 
ended December 30, 1995.  This decrease was the result of planned catalog 
circulation reductions made to reduce the impact of previous paper price 
increases.  Additionally, tighter credit policies and lower productivity 
rates on certain catalog media at Spiegel Catalog contributed to the decline.

Finance revenue for the year ended December 28, 1996 was $111,274 compared to 
$226,941 for the same period of 1995.  This decline was mainly the result of 
significantly lower average owned receivables due to sales of customer 
receivables. Other revenue was $52,791 and $71,018 for the years ended 
December 28, 1996 and December 30, 1995, respectively.  Other revenue 
includes such items as handling charge income and consulting revenue from the 
Company's information technology subsidiary.  The decrease in other revenue 
was primarily attributable to a decline in consulting revenue due to the sale 
of the Company's information technology subsidiary in the first quarter of 
1996.

The gross profit margin on net sales increased to 34.1% from 32.9% for the 
years ended December 28, 1996 and December 30, 1995, respectively.  
Significant margin improvement occurred at Eddie Bauer as a result of 
substantially less clearance and promotional markdown activity in the 1996 
period compared to the 1995 period. Slightly offsetting this increase, 
Spiegel Catalog experienced lower margins in 1996 due to incremental 
markdowns, especially in the fourth quarter, that were taken to liquidate 
merchandise that no longer fit the targeted style assortment planned for the 
future.  Improved inventory management was a focus for the Company overall.  
The total inventory balance was down 12% 

                                          12
<PAGE>

at December 28, 1996 compared to December 30, 1995 despite the addition of 32 
Eddie Bauer stores.

Selling, general and administrative expenses as a percentage of total 
revenues were 35.7% and 36.4% for the years ended December 28, 1996 and 
December 30, 1995, respectively.  The Company continued to pursue cost saving 
measures in all areas of its businesses in 1996.  The lower selling, general 
and administrative expense ratio reflected reductions in several operating 
units' expenses as well as efficiencies being realized from the Company's 
fulfillment and distribution facilities.  Additionally, activities in the 
Company's credit business helped improve the selling, general and 
administrative expense ratio.  In general, the Company's credit business has 
a higher selling, general and administrative expense ratio than other areas 
of the Company and was experiencing higher charge-offs. However, as a result 
of the receivable sales, finance revenues and selling, general and 
administrative expenses for the credit business decreased.  This had a 
favorable impact on the Company's overall ratio.  The 1996 ratio was also 
favorably impacted by the gain of approximately $8 million realized on the 
sale of the Company's information technology subsidiary in the first quarter 
and by approximately $24 million on the reversal of the provision for 
doubtful accounts on the customer receivables sold in 1996. By comparison, 
the 1995 ratio was favorably impacted by the effects of customer receivable 
sales including the $18,637 gain recognized and a reversal of approximately 
$34 million of the provision for doubtful accounts on the receivables sold.  

The Company recorded a $39,000 nonrecurring charge in the third quarter of 
1993, to provide for the estimated impact of closing certain of the Company's 
existing catalog distribution facilities.  The Company added $2,750 and 
$2,400 in 1996 and 1995, respectively, for additional costs in excess of the 
original reserve. Through 1996, approximately $41,650 was used for certain 
termination benefits, the impact on net periodic pension cost, other 
incremental costs incurred for closing the existing facilities and the 
write-off of fixed assets.  The remaining balance of the reserve was used in 
1997.

Interest expense was $82,677 and $103,177 for years ended December 28, 1996 
and December 30, 1995, respectively.  This decrease was mainly due to lower 
average debt levels resulting from a higher level of customer receivables 
sold and the Company's lower inventory levels.

The effective tax rate was 37.1% for the year ended December 28, 1996 
compared to 40.0% for the same period of 1995.  This decrease is the result 
of a change in the relative impact of the amortization of nondeductible 
goodwill as a percentage of loss before taxes and the effect of tax credits.

LIQUIDITY AND CAPITAL RESOURCES 
The Company has historically met its operating and cash requirements through 
funds generated from operations, the sale of customer accounts receivable and 
the issuance of debt and common stock.  Total customer receivables sold were 
$1,292,713 at January 3, 1998 and $1,463,730 at December 28, 1996.

Net cash used in operating activities was $61,535 for the year ended January 
3, 1998 compared to net cash provided by operations of $470,614 for the year 
ended December 28, 1996.  All categories contributed to the net decrease in 
cash provided from operations over the comparable period last year.  However, 
receivable and inventory levels, as well as the effect of receivable sales, 
were the overriding factors.  Without the effects of the sale of customer 
receivable activity, net cash provided by operations would have been $109,482 
and $186,884 for the years ended January 3, 1998 and December 28, 1996, 

                                          13
<PAGE>

respectively.  Reductions in the proprietary credit card portfolio drove the 
source of cash provided in 1997.

Net additions to property and equipment were $55,047 for the year ended 
January 3, 1998 compared to $45,698 for the same period last year.  The 
capital spending in both the 1997 and 1996 periods was primarily related to 
the continued Eddie Bauer retail store expansion and remodeling.  In 1998, 
additions to property and equipment will continue to be primarily for Eddie 
Bauer retail store expansion.

As of January 3, 1998 total debt was $816,650 compared to $785,948 as of 
December 28, 1996.  Total outstanding borrowing under the Company's revolving 
credit agreement was $105,000 at January 3, 1998, with a remaining 
availability of $410,000.  There was no borrowing under the revolving credit 
agreement at December 28, 1996.   

In March 1997, the Company issued 10.3 million shares of Class B voting 
common stock for $70,000 to its majority shareholder, Spiegel Holdings, Inc.  
The Company issued an additional 13.5 million shares of Class B voting common 
stock for $70,000 to Spiegel Holdings, Inc. in March 1998.  The proceeds from 
these issuances, net of related costs, are being used to fund working capital 
and investing needs, including the continued expansion of Eddie Bauer.

In March 1994 and December 1995, Newport News issued shares of non-voting 
preferred stock to certain directors and executive officers of the Company, 
its subsidiaries, and Otto Versand.  The redemption price of the preferred 
stock prior to December 31, 1997 ranged from $40 to $43 per share.  
Subsequent to December 31, 1997, the redemption price is fair market value.  
As of January 3, 1998, 92 shares remain outstanding.  All shares must be 
redeemed by December 31, 1999.

The Company believes that its cash on hand, together with cash flows 
anticipated to be generated from operations, borrowings under its existing 
credit facilities, sales of customer receivables and other available sources 
of funds, will be adequate to fund the Company's capital and operating 
requirements for the foreseeable future.

YEAR 2000 
The Company is currently conducting a comprehensive review of its internal 
systems to mitigate the risks associated with the Year 2000 compliance issue. 
This review includes the inventory of all systems requiring conversion 
programming, the coordination of internal personnel to identify all 
exposures, and the assessment of implications of noncompliance in the 
organization.  Program conversion of systems is under way, with testing being 
completed as systems are converted. In order to simulate year-end 1999 
processing for all operating systems, all internal software modifications 
will be completed by December 31, 1998.  This timetable affords the Company 
one year to conduct any follow-up testing required, test interfaces between 
systems and address any unforeseen system failures.
  
While the Company is acting prudently in addressing the Year 2000 issue, the 
failure of a third party to be compliant could potentially have an adverse 
affect on the Company's ability to operate. Plans are in place to communicate 
to our critical vendors and suppliers our expectations that they attain Year 
2000 compliance in a timely manner. Contingency plans will be in place by 
year-end 1998 to provide alternate solutions if the progress of certain 
significant vendors/suppliers is questionable so as not to jeopardize our 
ability to service our customers.

The Company believes it has taken and will continue to take the appropriate 
steps to minimize the threat of any material technical failure having a 
significant impact on 

                                          14
<PAGE>

operations.  However, it is impossible for any company to ensure Year 2000 
compliance.  While it is certainly possible that there may be some litigation 
arising from the Year 2000 conversion, the Company does not anticipate, nor 
can it estimate, any costs associated with such litigation at this time.  The 
Company is currently looking into the availability and cost of insurance 
covering both business interruption and litigation arising from the Year 2000 
conversion.

The costs associated with this effort are expected to range between $7,000 
and $10,000.  These costs are expensed as incurred, with amounts associated 
with this effort totaling approximately $1.2 million through January 3, 1998.

ACCOUNTING STANDARDS 
SFAS No. 130, "Reporting Comprehensive Income," effective for fiscal years 
beginning after December 15, 1997, establishes standards for the reporting 
and display of comprehensive income and its components in a full set of 
general-purpose financial statements.  The Company is evaluating the 
Statement's provisions to conclude how it will present comprehensive income 
in its financial statements. The Company will adopt the new standard, as 
required, in fiscal year 1998.

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related 
Information," establishes standards for the way public business enterprises 
report financial and descriptive information about reportable operating 
segments in annual financial statements and interim financial reports issued 
to stockholders.  SFAS No. 132, "Employers' Disclosures about Pensions and 
Other Postretirement Benefits," standardizes the disclosure requirements for 
pensions and other postretirement benefit plans.  These standards are 
effective for fiscal years beginning after December 15, 1997.  The Company is 
evaluating these new Statements' provisions to determine the disclosures 
required in its financial statements, if any.  The Company will adopt SFAS 
No. 131 and SFAS No. 132 in fiscal year 1998.

FORWARD-LOOKING STATEMENTS 
This report contains statements which are forward-looking statements within 
the meaning of applicable federal securities laws and are based upon the 
Company's current expectations and assumptions.  Such forward-looking 
statements are subject to a number of risks and uncertainties which could 
cause actual results to differ materially from those anticipated including, 
but not limited to, financial strength and performance of the retail and 
direct marketing industry, changes in consumer spending patterns, dependence 
on the securitization of accounts receivable to fund operations, state and 
federal laws and regulations related to offering and extending credit, the 
impact of competitive activities, inventory risks due to shifts in the market 
demand, risks associated with collections on the Company's credit card 
portfolios, interest rate fluctuations, postal rate, paper or printing cost 
increases, and the success of planned merchandising, advertising, marketing, 
and promotional campaigns, as well as other risks indicated in other filings 
with the Securities and Exchange Commission such as the Company's most recent 
Form 10-K.

                                          15
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
         CONSOLIDATED BALANCE SHEETS
         ($000s omitted, except per share amounts)
<TABLE>
<CAPTION>

                                                   January 3,     December 28,
                                                      1998            1996
                                                 ------------     ------------
<S>                                             <C>              <C>

ASSETS
Current assets:
  Cash and cash equivalents                      $    47,582      $    86,917
  Receivables, net                                   563,376          505,242
  Inventories                                        508,756          502,209
  Prepaid expenses                                    89,137           84,634
  Refundable income taxes                              6,064           16,991
  Deferred income taxes                               29,908           35,542
                                                 -----------      -----------
    Total current assets                           1,244,823        1,231,535
Property and equipment, net                          394,822          399,910
Intangible assets, net                               159,016          166,275
Other assets                                         150,893          147,905
                                                 -----------      -----------
                                                 $ 1,949,554      $ 1,945,625
                                                 ===========      ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current maturities of debt                     $   102,900      $    89,292
  Indebtedness to related parties                          -           20,000
  Accounts payable                                   238,723          270,973
  Accrued liabilities:
    Salaries and wages                                37,305           36,636
    General taxes                                    120,345          127,170
    Allowance for returns                             37,094           41,691
    Other accrued liabilities                         98,362          109,634
                                                 -----------      ------------
    Total current liabilities                        634,729          695,396
Long-term debt, excluding current maturities         713,750          676,656
Deferred income taxes                                 32,982           52,024
                                                 -----------      ------------
    Total liabilities                              1,381,461        1,424,076
                                                 -----------      ------------ 
Stockholders' equity:
 Class A non-voting common stock, $1.00 par
  value; authorized 16,000,000 shares; 
  14,660,464 shares issued and outstanding 
  at January 3, 1998; 14,618,404 shares 
  issued and outstanding at December 28, 1996         14,660           14,618
 Class B voting common stock, $1.00 par value;
   authorized 104,000,000 shares; 103,483,298 
   shares issued and outstanding at January 3,
   1998; 93,141,654 issued and outstanding at 
   December 28, 1996                                 103,483           93,142
  Additional paid-in capital                         271,645          211,828
  Minimum pension liability                                -           (9,365)
  Retained earnings                                  178,305          211,326
                                                 -----------      ------------
    Total stockholders' equity                       568,093          521,549
                                                 -----------      ------------
                                                 $ 1,949,554      $ 1,945,625
                                                ============      ===========

</TABLE>

See accompanying notes to consolidated financial statements.

                                          16
<PAGE>

CONSOLIDATED STATEMENTS OF EARNINGS
Years ended ($000s omitted, except per share amounts)


<TABLE>
<CAPTION>

                                  January 3,    December 28,     December 30,
                                     1998           1996             1995
                                ------------    ------------     ------------
<S>                            <C>             <C>              <C>
NET SALES AND OTHER REVENUES
Net sales                      $  2,835,297    $  2,850,555     $  2,886,225
Finance revenue                     178,293         111,274          226,941
Other revenue                        43,244          52,791           71,018
                                ------------    ------------     ------------
                                  3,056,834       3,014,620        3,184,184

COST OF SALES AND OPERATING EXPENSES
Cost of sales, including buying  
  and occupancy expenses          1,941,307       1,877,859        1,936,366
Selling, general and                
  administrative expenses         1,096,835       1,075,360        1,160,448
                                ------------    ------------     ------------
                                  3,038,142       2,953,219        3,096,814
  Operating income                   18,692          61,401           87,370
Interest expense                     68,098          82,677          103,177
                                ------------    ------------     ------------
  Earnings (loss) before
    income taxes                    (49,406)        (21,276)         (15,807)
Income tax provision (benefit)      (16,385)         (7,887)          (6,326)
                                ------------    ------------     ------------
Net earnings (loss)             $   (33,021)   $    (13,389)     $    (9,481)
                                ============    ============     ============
EARNINGS PER COMMON SHARE
Net earnings (loss) per
common share 
  Basic and diluted             $     (.28)    $       (.12)     $      (.09)
                                ============    ============     ============

</TABLE>

See accompanying notes to consolidated financial statements.

                                          17
<PAGE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
($000s omitted, except per share amounts)

<TABLE>
<CAPTION>
 

                                            Class A         Class B  Additional                  Minimum  
                                         non-voting          voting     paid-in     Retained     pension
                              Total    common stock    common stock     capital     earnings     liability
                          -----------  ------------    ------------  -----------  -----------  -----------
<S>                       <C>           <C>             <C>          <C>          <C>           <C>
BALANCES AT
  DECEMBER 31, 1994       $  579,217    $  15,065       $  93,142    $  215,800   $  255,776    $  (566)

Net loss                      (9,481)            -              -             -       (9,481)          - 
Cash dividends
  ($.20 per share)           (21,580)            -              -             -      (21,580)          -
Issuance of 39,600
  Class A common shares          243            40              -           203            -           - 
Purchase & retirement   
  of 500,000 Class A
  common shares               (4,742)         (500)             -        (4,242)           -           -
Adjustment to minimum
  pension liability           (8,084)            -              -             -            -      (8,084)    
                          ----------    ----------      ---------    ----------   ----------    --------

BALANCES AT
  DECEMBER 30, 1995          535,573        14,605         93,142       211,761      224,715      (8,650)
       
Net loss                     (13,389)            -              -             -      (13,389)          -
Issuance of 13,560
  Class A common shares           80            13              -            67            -           -   
Adjustment to minimum
  pension liability             (715)            -              -             -            -        (715)
                          ----------    ----------      ---------    ----------   ----------    --------

BALANCES AT
  DECEMBER 28, 1996          521,549        14,618         93,142       211,828      211,326      (9,365)    

Net loss                     (33,021)            -              -             -      (33,021)          - 
Issuance of 42,060
 Class A common shares           228            42              -           186            -           -
Issuance of 10,341,644
 Class B common shares        69,972             -         10,341        59,631            -           -
Adjustment to minimum
  pension liability            9,365             -              -             -            -       9,365
                          ----------    ----------      ---------    ----------   ----------    --------

BALANCES AT
  JANUARY 3, 1998         $  568,093    $   14,660      $ 103,483    $  271,645   $  178,305    $      0
                          ==========    ==========      =========    ==========   ==========    ========

</TABLE>

 

See accompanying notes to consolidated financial statements.

                                          18
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended ($000s omitted)
<TABLE>
<CAPTION>
 

                                                January 3,           December 28,         December 30,
                                                  1998                  1996                 1995
                                              ------------          -------------       -------------
<S>                                           <C>                   <C>                  <C>   
CASH FLOWS FROM OPERATING ACTIVITIES                                           
Net earnings (loss)                            $  (33,021)          $  (13,389)          $  (9,481)
Adjustments to reconcile net earnings to 
  net cash provided by (used in) 
  operating activities:
  Depreciation and amortization                    88,062               95,278              79,047
  Net gain on sale of receivables                 (75,141)                   -             (18,637)
  Change in assets and liabilities,
    net of effects of acquisition:
    Increase (decrease) in sold 
      customer receivables                       (171,017)             283,730             700,000
    (Increase) decrease in receivables, net       188,024              (26,493)           (316,752)
    (Increase) decrease in inventories             (6,547)              70,168              25,404
    (Increase) decrease in prepaid expenses        (4,504)              16,691             (20,354)
    Increase (decrease) in accounts payable       (32,250)              14,446              (9,224)
    Increase (decrease) in accrued liabilities     (6,417)              15,644               2,514
    Increase (decrease) in income taxes            (8,724)              14,539               8,976
                                               ----------           ----------           ---------
    Total adjustments                             (28,514)             484,003             450,974
                                               ----------           ----------           ---------
   Net cash provided by (used in)                                     
    operating activities                          (61,535)             470,614             441,493
                                               ----------           ----------           ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net additions to property and equipment           (55,047)             (45,698)           (131,229)
Net additions to other assets                     (23,655)             (39,965)            (21,002)
                                               ----------           ----------           ---------
  Net cash used in investing activities           (78,702)             (85,663)           (152,231)
                                               ----------           ----------           ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of debt                                  105,000              111,250             116,250
Payment of debt                                   (74,298)            (451,666)           (370,570)
Dividends paid                                          -                    -             (21,580)
Purchase and retirement of common shares                -                    -              (4,742)
Issuance of Class A common shares                     228                   80                 243
Issuance of Class B common shares                  69,972                    -                   -
                                               ----------           ----------           ---------
Net cash provided by (used in) 
  financing activities                            100,902             (340,336)           (280,399)
                                               ----------           ----------           ---------
    Net change in cash and cash equivalents       (39,335)              44,615               8,863
Cash and cash equivalents at
  beginning of year                                86,917               42,302              33,439
                                               ----------           ----------           ---------
Cash and cash equivalents
   at end of year                              $   47,582           $   86,917           $  42,302
                                               ==========           ==========           =========

Supplemental cash flow information
 Cash paid during the year for:
    Interest                                   $   69,806           $   84,428           $ 104,426
                                               ----------           ----------           ---------
    Income taxes                               $   16,262           $    6,500           $   6,092
                                               ----------           ----------           ---------


</TABLE>
 

See accompanying notes to consolidated financial statements.

                                          19
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($000s omitted, except per share amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS
Spiegel, Inc. is a leading international, specialty retailer marketing
fashionable apparel and home furnishings through catalogs, more than 500
specialty retail stores and innovative electronic shopping platforms.  The
Company also operates a special purpose bank which offers a proprietary credit
card to the Company's customers as well as MasterCard credit programs.

USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.  Actual results
could differ from those estimates.

PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Spiegel, Inc. and
its wholly owned subsidiaries (the Company).  All significant intercompany
transactions and accounts have been eliminated in consolidation.  The Company's
joint venture investments in Germany, Japan and the United Kingdom with
affiliated companies of Otto Versand, a related party, are accounted for using
the equity method as they are less than 50 percent owned.  The results of these
entities are not material to the consolidated Company.

FISCAL YEAR
The Company operates and reports financial results on a 52/53 week fiscal year
ending on the Saturday closest to December 31. Fiscal years 1996 and 1995 each
consisted of 52 weeks and ended on December 28, 1996 and December 30, 1995,
respectively. Fiscal year 1997 consisted of 53 weeks and ended on January 3,
1998.

REVENUE RECOGNITION
The Company records revenue at the point of sale for retail stores and at the
time of shipment for catalog sales.  The Company provides for returns at the
time of sale based upon projected merchandise returns.  Finance revenue on
customer installment accounts receivables owned is recorded as income when
earned.  The Company recognizes gains on the sale of customer receivables in
accordance with SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities."  These gains are recorded
as Finance Revenue in the Consolidated Statements of Earnings.

CASH EQUIVALENTS
Cash equivalents consist principally of highly liquid institutional money market
investments with original maturities of three months or less.

MARKETABLE SECURITIES
Marketable securities consist of the retained certificates issued by a trust in
conjunction with the securitization of the Company's customer receivables. 
These debt securities are classified as trading and stated at market value.

                                          20
<PAGE>

INVENTORIES 
Inventories, principally merchandise available for sale, are stated at the lower
of cost or market. Cost is determined primarily by the average cost method or by
the first-in, first-out method.

ADVERTISING COSTS 
Costs incurred for the production and distribution of direct response catalogs
are capitalized and amortized over the expected lives of the catalogs, which are
less than one year. Unamortized costs as of January 3, 1998 and December 28,
1996 were $37,988 and $52,795, respectively, and are included in prepaid
expenses. All other advertising costs for both catalog and retail operations are
expensed as incurred.  Total advertising expense in the fiscal years 1997, 1996
and 1995 was $454,240, $448,700 and $439,380, respectively.

STORE PRE-OPENING COSTS 
Pre-opening and start-up costs for new stores are charged to operations as
incurred.

PROPERTY AND EQUIPMENT 
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation of property and equipment is computed using the
straight-line method over the estimated useful lives of the assets. Depreciable
lives range from 5 to 40 years for buildings and improvements and 3 to 10 years
for furniture and equipment. Leasehold improvements are amortized over the
lesser of the term of the lease or asset life.

INTANGIBLE ASSETS
Intangible assets represent principally trademarks and the excess of cost over
the fair market value of net assets of businesses purchased.  On an annual
basis, the Company amortizes these intangibles on a straight-line basis in
relation to the anticipated  benefits to be derived from the businesses
acquired, not to exceed 40 years. Total accumulated amortization of these
intangibles was $65,777 and $70,272 at January 3, 1998 and December 28, 1996,
respectively.  Management periodically considers whether there has been a
permanent impairment in the value of goodwill and trademarks by evaluating
various factors, including current and projected future operating results and
undiscounted cash flows.  The Company does not believe there has been any
material impairment in the carrying value of its goodwill and trademarks.

DERIVATIVE FINANCIAL INSTRUMENTS
The Company's current derivative positions consist of interest rate swaps.  The
accounting treatment for these interest rate swaps is to record the net interest
paid as interest expense on a current basis.  Gains or losses resulting from
market movements are not recognized.

SYSTEMS DEVELOPMENT COSTS
Significant systems development costs are capitalized and amortized on a
straight-line basis over a three-year period.  Costs, net of amortization,
included in other assets as of January 3, 1998 and December 28, 1996 were
$26,726 and $29,511, respectively.  Related amortization expense recognized in
fiscal years 1997, 1996 and 1995 was $16,038, $15,809 and $8,887, respectively. 
Costs associated with the Company's Year 2000 remediation efforts are expensed
as incurred.

EMPLOYEE PENSION PLANS
Company policy is to, at a minimum, fund the pension plans to meet the
requirements of the Employee Retirement Income Security Act of 1974 (ERISA). 

                                          21
<PAGE>

STOCK BASED COMPENSATION
The Company has elected to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations as discussed in Note 5 to the consolidated financial statements.

INCOME TAXES
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. The Company is included in the consolidated federal
income tax return of Spiegel, Inc.'s majority shareholder, Spiegel Holdings,
Inc.

EARNINGS PER SHARE    
Earnings per share are calculated and presented in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share."  Basic and diluted
earnings per share are computed based on the weighted average number of both
classes of common shares outstanding during the year.

RECLASSIFICATIONS
Certain prior year amounts have been reclassified from amounts previously
reported to conform with the 1997 presentation. 

                                          22
<PAGE>

2. RECEIVABLES

Receivables consist primarily of proprietary credit card receivables generated
in connection with the sale of the Company's merchandise as well as receivable
balances generated on the MasterCard credit cards offered by the Company's bank
subsidiary. At January 3, 1998, customer receivables serviced were $1,683,783,
of which 83% related to the Company's proprietary credit card.  The Company's
customer base is diverse in terms of both geographic and demographic coverage.
Due to the revolving nature of the credit card portfolio, management believes
that the current carrying value of credit card receivables approximates fair
value.  The average interest rate collected on the receivables approximates the
current market rates on new accounts.  The allowance for credit card losses is
based upon management's evaluation of the collectability of credit card
receivables after giving consideration to current delinquency data, historical
loss experience and general economic conditions.  This allowance is continually
reviewed by management; however, the actual losses incurred may differ from
these estimates.

Receivables at January 3, 1998 and December 28, 1996 consist of the following:

<TABLE>
<CAPTION>
 

                                                       1997              1996
                                                   -------------    -------------
<S>                                               <C>              <C>
Composition of customer receivable portfolio:
Receivables serviced                              $  1,683,783      $ 1,865,040
Receivables sold                                    (1,292,713)      (1,463,730)
                                                  -------------     ------------
Receivables owned                                      391,070          401,310
                                                  -------------     ------------ 

Composition of receivables owned:
Retained certificates                                  145,732          188,299
Receivables with no certificates issued                245,338          213,011
                                                  -------------     ------------
Receivables owned                                      391,070          401,310
Less allowance for returns on proprietary
    credit card sales                                  (21,247)         (32,243)
Less allowance for doubtful accounts                   (11,757)         (12,270)
Other trade receivables, net                           205,310          148,445
                                                  -------------     ------------
Receivables, net                                  $    563,376      $   505,242
                                                  =============     ============


</TABLE>
 

The Company routinely transfers portions of its customer receivables to trusts
which, in turn, sell certificates representing undivided interests in the trusts
to investors.  The receivables are sold without recourse, and accordingly, no
bad debt reserve related to the net receivables sold is maintained.  Cash flows
generated from the receivables in the trusts are, to the extent allocable to the
investor percentage, applied to payment of interest on the certificates,
reinvestment in additional receivables to maintain the investors' percentage,
and payment of servicing fees to the Company.  Excess cash flows revert to the
Company.  The Company owns the remaining undivided interest in the trusts not
represented by the certificates and will continue to service all receivables for
the trusts.

In addition to the certificates sold, an additional class of investor
certificates, currently held by the Company, was issued by the trust in certain
transactions.  The aggregate principle balances for these retained certificates
were $145,732 and $188,299 as of January 3, 1998 and December 28, 1996,
respectively.  These retained certificates, 

                                          23
<PAGE>

classified as trading and stated at market value, are included in the Company's
balance sheet under "Receivables, net."  Cash flows generated from the
receivables in the trust are expected to be adequate to cover any losses which
may be incurred on uncollectible amounts associated with the receivables
supporting these retained certificates.  Therefore, no bad debt reserve is
maintained on these balances as of January 3, 1998. The Company also held a
total of $59,592 at January 3, 1998 and $55,670 at December 28, 1996 in reserve
funds used as credit enhancement for related receivables sold.  Restricted cash
accounts have been maintained for these reserve funds, none of which has been
utilized as of January 3, 1998. The value of these funds is included in the
Company's balance sheet under "Other assets."  

As a result of these transactions, finance revenue increased by $18,637 in 1995.
In 1997, the Company adopted SFAS No. 125, which requires gain recognition based
on the revolving nature of sold customer receivables.  Incremental gains of
$75,141 were recorded as finance revenue in 1997 pursuant to SFAS No. 125.

3. PROPERTY AND EQUIPMENT

Property and equipment at January 3, 1998 and December 28, 1996 consist of the
following:

<TABLE>
<CAPTION>
 

                                                          1997               1996 
                                                       -----------       -----------
<S>                                                   <C>               <C>
Land                                                  $   19,813        $   20,178
Buildings and improvements                               151,297           142,712
Equipment                                                242,774           233,554
Leasehold improvements                                   169,401           155,309
                                                       -----------       -----------
                                                         583,285           551,753
Less accumulated depreciation and amortization          (205,534)         (164,135)
                                                       -----------       -----------
                                                         377,751           387,618
Construction in process                                   17,071            12,292
                                                       -----------       -----------
Property and equipment, net                           $  394,822        $  399,910
                                                       ===========       ===========

</TABLE>
 

                                          24

<PAGE>

4. LONG-TERM DEBT

The following is a summary of the Company's long-term debt at January 3, 1998
and December 28, 1996:

<TABLE>
<CAPTION>
 

                                                         1997               1996
                                                     -----------         ---------- 
<S>                                                  <C>                 <C>
Notes payable:
  Revolving credit agreement                         $  105,000          $       -
  Term loan agreements, 6.42% to 9.70%, 
   due March 20, 1998 through March 31, 2005            522,900            577,198
  Indebtedness to related parties                             -             20,000
Subordinated notes, 7.19% to 9.35%,
  due June 30, 2000                                     128,750            128,750
Secured notes, 7.25% to 7.35%, 
  due November 15, 2001 through
  November 15, 2005                                      60,000             60,000
                                                     -----------         ---------- 
  Total long-term debt                                  816,650            785,948
Less current maturities of debt                        (102,900)          (109,292)
                                                     -----------         ---------- 
Long-term debt, excluding current maturities         $  713,750         $  676,656
                                                     ===========         ========== 


</TABLE>
 

In March 1996, the Company established a $600,000 revolving credit agreement 
with a group of 23 banks.  The $600,000 commitment amount was permanently 
reduced to $520,000 in December 1996 and $515,000 in September 1997 in 
conjunction with a sale of MasterCard receivable assets totaling $100,000.  
The $515,000 revolving credit agreement expires on March 26, 2000. Fees are 
variable based on the total commitment.  Borrowings under this commitment 
averaged $145,802 with a maximum of $278,500 during 1997.  The effective 
annual interest rate was 6.9% in 1997, excluding the previously mentioned 
fees.

In the second quarter of 1997, the Company made the final $20,000 principal 
payment on the loan from the its majority shareholder, Spiegel Holdings, 
Inc., which existed as of December 28, 1996.  This loan originated in 
November 1995 and bore interest at a variable rate based on LIBOR plus a 
margin.

The Company selectively uses interest rate swap contracts to hedge the 
underlying interest risks on various term loans.  At January 3, 1998, these 
interest rate swap agreements had effective and termination dates from March 
1995 to March 2005.  At year-end 1997 and 1996, the notional principal 
amounts of these agreements totaled $70,000 and $80,000, respectively.  At 
January 3, 1998 and December 28, 1996, the fair value of these swap 
agreements was $4,631 and $4,271, respectively. These values were obtained 
from financial institutions and represent the estimated amount the Company 
would pay to terminate the agreements, taking into consideration current 
interest rates and risk of the transaction. The counterparties are expected 
to fully perform under the terms of the agreements, thereby mitigating the 
risk from these transactions.  These interest rate swaps in total increased 
interest expense by $1,291, $1,008 and $234 in 1997, 1996 and 1995, 
respectively.

Additionally, the Company has letter of credit facilities to support the 
purchase of inventories.  Letter of credit commitments outstanding were 
$95,008 and $130,149 at January 3, 1998 and December 28, 1996, respectively.  
At January 3, 1998, there was an additional $104,992 of commitments available 
for the issuance of letters of credit.  Also 

                                          25
<PAGE>

at January 3, 1998, the Company had an available undrawn standby letter of 
credit facility totaling approximately $13,300 to support a leasing 
arrangement.

The fair value of the Company's long-term debt, based upon the discounting of 
future cash flows using the Company's borrowing rate for loans of comparable 
maturity, approximates the carrying value of such debt at January 3, 1998.

Aggregate maturities of long-term debt for the five years subsequent to 
January 3, 1998 are as follows:  1998, $102,900; 1999, $85,714; 2000, 
$334,464; 2001, $107,714; and 2002 and thereafter, $185,858.

5.  EMPLOYEE BENEFIT PLANS

PROFIT-SHARING AND THRIFT PLANS 
Eligible salaried and hourly employees may participate in these plans. 
Employees may elect to contribute a maximum of 10% of their pre-tax base 
salary and 5% of their earnings after taxes, subject to limitations imposed 
by the Internal Revenue Service.

The Company's annual contributions for the profit-sharing plan are determined 
by applying a formula to earnings before income taxes.  Expense under this 
plan was $8,649, $8,395, and $8,314 in 1997, 1996 and 1995, respectively.

The Company has thrift plans for its eligible salaried employees in which it
matches an employee's contribution dollar for dollar up to the first 3%, and 50
cents for each dollar contributed up to the next 3%. The Company also has
separate thrift plans for certain eligible hourly employees.  The Company
contributes 25 cents for each dollar of employee contributions. Expense under
these plans was $6,091, $5,388 and $5,842 in 1997, 1996 and 1995, respectively.

STOCK OPTION PLAN 
The Spiegel, Inc. Salaried Employees Incentive Stock Option Plan provides for
the issuance of options to purchase up to 1,900,000 shares of Class A non-voting
common stock to certain salaried employees. Under the plan, participants are
granted options to purchase shares of the specified stock at the fair market
value at the date of grant. The options are exercisable at the rate of 20% per
year.  In addition, the Company has a non-qualified stock option plan in place
for certain former employees.  Options are transferred from the qualified plan
to the non-qualified plan 90 days after the date of separation.  Options
outstanding under the non-qualified plan were 510,000 at January 3, 1998 and are
included in the following presentations of total options outstanding.

The Company follows the disclosure provisions of SFAS No. 123.  Accordingly, no
compensation expense has been recognized for the stock option activity.  Had
compensation expense for the Company's stock option activity been calculated
under the provisions of SFAS No. 123 and recognized in the Company's net
earnings (loss) and earnings (loss) per share for the years ended January 3,
1998 and December 28, 1996, the effect would have been immaterial. During the
phase-in period of SFAS No. 123, the estimation of compensation costs reflects
only a partial vesting of options.  In future years, the estimated pro-forma
compensation costs may be higher depending upon, among other factors, the number
of options granted.

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model.  A risk-free discount rate of 5.75%, an
expected life of 5 years for the grants and a volatility of 53% and 58% were
assumed for grants in 1997 and 1996, respectively.  Dividend yields of 1.8% and
1.6% were assumed for the 1997 and 1996 valuations, respectively.  The
weighted-average fair value of stock options granted during 

                                          26
<PAGE>

the years ended January 3, 1998 and December 28, 1996, respectively, were $2.18
and $3.63 calculated using the Black-Scholes option-pricing model.

A summary of the changes in the options outstanding is as follows:
<TABLE>
<CAPTION>

 


                                             Shares       Amount    Average Price 
                                           -----------  ----------  --------------
<S>                                        <C>          <C>         <C>
Outstanding at December 31, 1994            1,252,820   $  12,493   $       9.97
  Granted                                     274,500       2,222           8.09
  Exercised                                   (39,600)       (243)          6.13 
  Canceled                                   (124,460)     (2,532)         20.34 
                                           -----------  ----------  --------------
Outstanding at December 30, 1995            1,363,260      11,940           8.76
  Granted                                     195,500       1,526           7.80
  Exercised                                   (13,560)        (80)          5.92
  Canceled                                    (28,880)       (314)         10.85  
                                           -----------  ----------  --------------
Outstanding at December 28, 1996            1,516,320      13,072           8.62
  Granted                                     134,500         659           4.90          
  Exercised                                   (42,060)       (228)          5.41  
  Canceled                                   (225,060)     (2,076)          9.22  
                                           -----------  ----------  --------------
OUTSTANDING AT JANUARY 3, 1998              1,383,700   $  11,427   $       8.26   
                                           ===========  ==========  ==============

</TABLE>
 

Total stock options authorized but unissued at January 3, 1998 were 617,200.

The following table summarizes information about options outstanding at January
3, 1998:

<TABLE>
<CAPTION>
 

                              OPTIONS OUTSTANDING                        OPTIONS EXERCISABLE    
                   -----------------------------------------------  ---------------------------------
Range of                Number  Weighted-Average            Number
Exercise           Outstanding         Remaining  Weighted-Average  Exercisable    Weighted-Average
  Prices            at 1/03/98  Contractual Life    Exercise Price   at 1/03/98      Exercise Price  
---------          -----------  ----------------   ---------------  -----------    -----------------
<S>                <C>          <C>                <C>              <C>            <C>
$  4.00 to $  7.99    824,220     5.9 years            $  6.18          539,820          $  6.20       
$  8.00 to $ 11.99    485,880     3.6 years            $  9.66          427,600          $  9.60
$ 12.00 to $ 23.00     73,600     3.8 years            $ 22.25           68,880          $ 22.25
                    ---------                                         ---------
                    1,383,700     5.0 years            $  8.26        1,036,300          $  8.67
                    =========                                         =========


</TABLE>
 

                                          27
<PAGE>

PENSION PLANS
The Company also has defined benefit pension plans covering substantially all
employees other than those eligible to participate in the savings and
profit-sharing plans and those hourly employees eligible to participate in the
thrift plans. The unit credit actuarial cost method is used in developing the
costs of the pension plans and the pension benefit obligation.  The plan assets
consist primarily of high quality common stock and bond funds.  In 1996, due to
consolidation of certain distribution operations, the Company recognized a
curtailment an hourly pension plan.  This resulted in $1,625 of periodic pension
cost which is included in net amortization and deferral in 1996.

The net periodic pension cost for the years ended January 3, 1998, December 28,
1996 and December 30, 1995 is computed as follows:
<TABLE>
<CAPTION>
 

                                                   1997         1996         1995
                                               --------     --------     --------
<S>                                            <C>          <C>          <C>
Service cost                                   $    397     $    647     $    397
Interest cost                                     4,580        4,298        4,413
Return on plan assets                           (12,595)      (5,208)      (7,049)
Net amortization and deferral                    10,115        4,654        3,509
                                               --------     --------     -------- 
Net periodic pension cost                      $  2,497     $  4,391     $  1,270   
                                               ========     ========     ========

</TABLE>
 

Weighted average assumptions used in accounting for obligations and assets were
as follows:
<TABLE>
<CAPTION>

                                                         1997         1996
                                                       --------     --------
<S>                                                    <C>          <C>
Discount rate                                            7.25%        8.0%
Expected long-term rate of return on assets               9.0%        9.0%

</TABLE>
The following table sets forth the plans' funded status at January 3, 1998 and
December 28, 1996:
<TABLE>
<CAPTION>

                                              1997                  1996
                                        Union    Non-Union    Union    Non-Union
                                        Plan     Plan         Plan     Plan 
                                       --------  --------    --------  --------
<S>                                    <C>       <C>         <C>       <C>
Accumulated and projected 
  benefit obligation:
    Vested                             $ 45,808  $ 10,907    $ 46,987  $ 11,983
    Non-Vested                              801       146         899       162
                                       --------  --------    --------  --------
Total                                    46,609    11,053      47,886    12,145
Market value of plan assets              48,009    13,658      35,666    11,539
                                       --------  --------    --------  --------
Over (under) funded projected 
  benefit obligation                      1,400     2,605     (12,220)     (606)
Unrecognized net transition liability         -       848         315     1,060
Unrecognized net (gain) loss from 
  past experience different from 
  that assumed and effects 
  of changes in assumptions               6,677      (222)     12,764     2,846
Additional liability required to
  recognize minimum liability                 -         -     (13,079)   (3,906)
                                       --------  --------    --------  --------
Prepaid (accrued) pension cost
     in the balance sheet              $  8,077  $  3,231    $(12,220) $   (606)
                                       ========  ========    ========  ========
</TABLE>

                                          28
<PAGE>

POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In addition to the benefits described above, the Company provides certain
medical benefits for eligible retired employees until age 65.  The following
table presents the accumulated postretirement benefit obligation at January 3,
1998 and December 28, 1996:

<TABLE>
<CAPTION>
 

                                                                 1997        1996
                                                               -------     -------
<S>                                                            <C>         <C>
Retirees                                                       $ 5,393     $ 6,049
Fully eligible active plan participants                          1,097       1,153
Other active plan participants                                   2,982       3,753
                                                               -------     -------
Total                                                            9,472      10,955
Unrecognized prior service cost                                    331      (2,500)
Unrecognized loss                                               (1,981)     (1,246)
                                                               -------     -------
Accrued postretirement benefit cost in the balance sheet       $ 7,822     $ 7,209
                                                               =======     =======


</TABLE>
 

The net periodic postretirement benefit cost for the years ended January 3,
1998,  December 28, 1996 and December 30, 1995 is computed as follows:

<TABLE>
<CAPTION>
 

                                                      1997         1996        1995
                                                    -------      -------     -------
<S>                                                 <C>          <C>         <C>
Service cost                                        $   393      $   727     $   629
Interest cost                                           727          827         804
Net amortization and deferral                           117          236         141
                                                    -------      -------     -------
Net periodic postretirement benefit cost            $ 1,237      $ 1,790     $ 1,574
                                                    =======      =======     =======

</TABLE>
 

For measurement purposes, a 9% and 10% annual rate of increase in the per capita
cost of covered benefits (i.e., health care cost trend rate) was assumed for
1997 and 1996, respectively. This rate was assumed to decrease 1% per year to 6%
in 2000 and remain at that level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. For example,
increasing the assumed health care cost trend rate by 1 percentage point in each
year would increase the accumulated postretirement benefit obligation as of
January 3, 1998 by $648 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for the year ended
January 3, 1998 by $117.

The weighted average discount rates used in determining the accumulated
postretirement benefit obligation were 7.25% and 8.0% at January 3, 1998 and
December 28, 1996, respectively.

                                          29
<PAGE>

6. COMMITMENTS AND CONTINGENCIES

LEASE COMMITMENTS 
The Company leases office facilities, distribution centers, retail store space
and data processing equipment. Lease terms are generally 10 years and many
contain renewal options. Many of the retail store leases provide for minimum
annual rentals plus additional rentals based upon percentage of sales, which
range from 3% to 5%. Rental expense for all operating leases was $137,604 in
1997, $128,173 in 1996 and $124,183 in 1995. 

The following is a schedule by year of future minimum rental payments required
under operating leases that have initial or remaining noncancelable lease terms
in excess of one year as of January 3, 1998:
<TABLE>
<CAPTION>
 

                                                                         Amount
                                                                        ---------
                                      <S>                               <C>
                                      1998                              $126,578   
                                      1999                              $115,040
                                      2000                              $107,189
                                      2001                              $ 90,751
                                      2002                              $ 81,523
                                      and thereafter                    $360,596

</TABLE>
 


LITIGATION
The Company is routinely involved in a number of legal proceedings and claims
that cover a wide range of matters. In the opinion of management, the outcome of
these matters is not expected to have any material adverse effect on the
consolidated financial position or results of operations of the Company.

                                          30
<PAGE>

7. INCOME TAXES

Earnings (loss) before income taxes is composed of the following:
<TABLE>
<CAPTION>

                      1997            1996           1995
                   ---------       ---------       --------- 
<S>                <C>             <C>             <C>
Domestic           $ (57,510)      $ (25,307)      $ (16,740) 
Foreign                8,104           4,031             933
                   ---------       ---------       ---------
Total              $ (49,406)      $ (21,276)      $ (15,807)
                   =========       =========       =========

</TABLE>
 

The components of income tax expense (benefit) for the years ended January 3,
1998, December 28, 1996 and December 30, 1995 are as follows:

<TABLE>
<CAPTION>
 

                                                1997          1996         1995
                                             ---------     ---------    ---------
<S>                                          <C>           <C>          <C>
Current
  Federal                                    $ (5,975)     $(12,311)    $(12,577)
  State                                          (896)          700       (2,950)   
  Foreign                                       3,894         2,277          946
                                             ---------     ---------    ---------  
Total Current                                  (2,977)       (9,334)     (14,581)
                                             ---------     ---------    --------- 
Deferred
  Federal                                     (10,548)        2,811        9,489
  State                                        (2,633)         (931)        (787) 
  Foreign                                        (227)         (433)        (447) 
                                             ---------     ---------    ---------  
Total Deferred                                (13,408)        1,447        8,255
                                             ---------     ---------    --------- 
                                             $(16,385)     $ (7,887)    $ (6,326)
                                             =========     =========    =========

</TABLE>
 

The differences between the provision (benefit) for income taxes at the 
statutory rate and the amounts shown in the consolidated statements of 
earnings for the years ended January 3, 1998, December 28, 1996 and 
December 30, 1995 are as follows:

<TABLE>
<CAPTION>
 

                                     1997                1996                1995 
                                Amount  Percent     Amount   Percent    Amount   Percent
                              --------- --------  --------- --------  --------- --------
<S>                           <C>       <C>       <C>       <C>       <C>       <C>
Statutory rate                $(17,292)  (35.0)%  $ (7,447)  (35.0)%  $ (5,532)  (35.0)%
State income tax (net of 
  federal income tax benefit)     (241)   (0.5)     (1,391)   (6.5)     (1,027)   (6.5)
Amortization of non-
  deductible goodwill
   and other items               1,548     3.1       1,601     7.5       1,885    11.9
Changes in estimates of
   previously provided taxes         -       -           -       -      (1,652)  (10.4)
Tax Credits                       (400)   (0.8)       (650)   (3.1)          -       -
                              --------- --------  --------- --------  --------- --------
Effective tax rate            $(16,385)  (33.2)%  $ (7,887)  (37.1)%  $ (6,326)  (40.0)%
                              ========= ========  ========= ========  ========= ========


</TABLE>

                                      31
<PAGE>

Significant components of the Company's deferred tax assets and liabilities at 
January 3, 1998 and December 28, 1996 are as follows:

<TABLE>
<CAPTION>

                                            1997         1996
                                         --------     --------
<S>                                      <C>          <C>
Deferred tax assets:
  Allowance for doubtful accounts        $  6,369     $  6,240
  Allowance for the gross profit               
    on estimated future returns            10,810       14,633
  Reserve for distribution facility
    and store closings                      4,979        5,220
  Compensated absences accruals             4,395        4,429
  Reserve for self insurance                1,340        1,338
  Pension liability                             -        6,243
  Reserve for inventory losses              9,915        5,232
  Postretirement benefit obligation         3,232        3,052
  Capitalized overhead in inventory         3,957        4,157
  Net operating loss carryforward          49,167            - 
  Other                                     2,462        1,675
                                         --------     --------
                                           96,626       52,219
                                         --------     --------
Deferred tax liabilities:
  Property and equipment                   46,337       45,309
  Prepaid and deferred expenses             8,386        7,934
  Gain on sale of accounts receivable      34,412        7,192
  Earned but unbilled finance charges       5,843        5,997
  Deferred rent obligation                  3,331        1,135
  Other                                     1,391        1,134
                                         --------     --------
                                           99,700       68,701
                                         --------     --------
Net deferred tax liabilities             $ (3,074)    $(16,482)
                                         ========     ========

</TABLE>
 

The Company has a net operating loss carryforward of $124,540, due to expire in
the year 2012. Although realization is not assured for the deferred tax assets
relating to the NOL, management believes it is more likely than not that they
will be realized through future taxable earnings or alternative tax strategies.

8. STOCKHOLDERS' EQUITY

In December 1995, the Company discontinued payment of all cash dividends. 
Certain restrictions on dividend payments exist under the Company's debt
covenants based on financial results.  The Company will evaluate its dividend
policy on an ongoing basis.

During the first six months of 1995, the Company purchased and retired 500,000
shares of Class A non-voting common stock at market value for a total cost of
$4,742.  Accordingly, common stock was decreased by $500 representing the par
value of the shares and additional paid-in capital was decreased by
approximately $4,242 for the difference between the purchase price and the par
value.

                                          32
<PAGE>

In March 1997, the Company issued 10,341,644 shares of Class B voting common
stock to its majority shareholder, Spiegel Holdings, Inc.  The net proceeds of
$69,972 are being used primarily to fund working capital and investing needs,
including the continued expansion of Eddie Bauer.

9. EARNINGS PER COMMON SHARE  

Earnings per share are calculated and presented in accordance with SFAS No. 128,
"Earnings per Share."  Basic and diluted earnings per share are computed based
on the weighted average number of both classes of common shares outstanding
during the year.

<TABLE>
<CAPTION>
 

                             Income          Shares         Per-Share
                          (Numerator)     (Denominator)       Amount  
<S>                       <C>             <C>               <C>
1995
Basic EPS                  $ (9,481)         107,838         $ (.09)
Effect of dilutive 
    securities                                     -
Diluted EPS                $ (9,481)         107,838         $ (.09)
1996
Basic EPS                  $(13,389)         107,751         $ (.12)
Effect of dilutive 
    securities                                     -
Diluted EPS                $(13,389)         107,751         $ (.12)
1997
Basic EPS                  $(33,021)         116,194         $ (.28)
Effect of dilutive 
    securities                                     -
Diluted EPS                $(33,021)         116,194         $ (.28)

</TABLE>
 

When income from continuing operations is a loss, potential common shares
included in the computation of diluted EPS will always result in an antidiluted
per share amount.  Therefore, for the years shown, no potential shares were
added to the equation for diluted EPS.

Potential common shares consist only of employee stock options.  Options to
purchase 1,383,700 shares of Class A non-voting common stock, with exercise
prices ranging between $4.47 and $22.25, were outstanding at January 3, 1998. 
Assuming income from continuing operations, 166,690, 846,895, and 1,067,590
shares would have had dilutive potential in 1997, 1996 and 1995, respectively. 
After applying the treasury stock method to the dilutive options, which assumes
the proceeds from the exercise is used to repurchase 124,049 shares of stock, a
net 42,641 additional shares would have been added to the denominator of the
equation for diluted EPS in 1997.  The remainder of the shares would not be
included because the options' exercise price exceeded the average market value
of the common stock at January 3, 1998.

10. SUBSEQUENT EVENT (UNAUDITED)

In March 1998, the Board of Directors of the Company authorized an additional
17.5 million shares of Class B voting common stock.  In conjunction with the
increase in authorized shares, the Company issued 13.5 million shares of Class B
voting common stock for $70,000 to its majority shareholder, Spiegel Holdings,
Inc.  The proceeds from this issuance will be used primarily to fund working
capital and investing needs, including the continued expansion of Eddie Bauer.

                                          33
<PAGE>

STATEMENT OF MANAGEMENT RESPONSIBILITY

We have prepared the accompanying consolidated financial statements and related
information for the years 1997, 1996 and 1995. The opinion of the Company's
independent auditors, KPMG Peat Marwick LLP, on those financial statements
follows. The primary responsibility for the integrity and objectivity of the
financial information included in this annual report rests with management. Such
information was prepared in accordance with generally accepted accounting
principles appropriate in the circumstances, based on our best estimates and
judgments and giving due consideration to materiality.

The Company maintains an internal control structure that is adequate to provide
reasonable assurance that assets are safeguarded from loss or unauthorized use,
and that produces records adequate for preparation of financial information.
There are limits inherent in all systems of internal control structures based on
the recognition that the cost of such a structure should not exceed the benefits
to be derived. In addition, the Company maintains an internal audit department
to review the adequacy, application and compliance of the internal control
structure.

KPMG Peat Marwick LLP, independent auditors, has been engaged to audit the
financial statements and to render an opinion as to their conformity with
generally accepted accounting principles. They conducted their audit in
accordance with generally accepted auditing standards. Those standards require
that they plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. KPMG Peat
Marwick LLP is a member of the SEC Practice Section of the American Institute of
Certified Public Accountants.

The Board of Directors pursues its responsibility for these financial statements
through its audit committee, composed of directors who are not employees of
Spiegel or its subsidiaries, which meets periodically with both management and
the independent auditors to ensure that each is carrying out its
responsibilities. KPMG Peat Marwick LLP and the internal audit department have
free access to the audit committee, with and without the presence of management.


                                          34
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Stockholders and Board of Directors of Spiegel, Inc.:

We have audited the accompanying consolidated balance sheets of Spiegel, Inc.
and subsidiaries as of January 3, 1998 and December 28, 1996, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the years in the three-year period ended January 3, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Spiegel, Inc. and
subsidiaries as of January 3, 1998 and December 28, 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended January 3, 1998 in conformity with generally accepted accounting
principles. 




/s/ KPMG PEAT MARWICK LLP

Chicago, Illinois 
February 11, 1998

                                          35
<PAGE>

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
($000s omitted, except per share amounts)
<TABLE>
<CAPTION>
 

 
                      
1997                        First            Second          Third            Fourth      Total Year
------------------     ------------     ------------    ------------     ------------    -----------
<S>                    <C>              <C>             <C>              <C>             <C>
Net sales and
 other revenues        $  601,812       $   696,243     $  646,963       $ 1,111,816     $ 3,056,834
Operating income (loss)   (39,863)           (3,365)       (10,394)           72,314          18,692
Net earnings (loss)    $  (31,209)      $   (13,483)    $  (20,195)      $    31,866     $   (33,021)
Net earnings (loss)       
 per common share
   Basic and diluted   $     (.28)      $      (.11)    $     (.17)      $       .27     $      (.28)
Weighted average 
 common shares
 outstanding          110,261,774       118,106,457    118,112,697       118,143,431     116,193,587

MARKET PRICE DATA
 High                  $    7 7/8       $     7 5/8     $    7 1/2       $     7 1/4     $     7 7/8
 Low                   $    6 1/2       $     5 3/4     $        6       $     4 3/4     $     4 3/4

<CAPTION>

1996                        First           Second           Third            Fourth     Total Year
------------------     ------------     ------------    ------------     ------------    -----------
<S>                    <C>              <C>             <C>              <C>             <C>
Net sales and           
 other revenues        $  634,681       $   668,601     $  620,916       $ 1,090,422     $ 3,014,620
Operating income (loss)    (3,842)           13,911         (7,800)           59,132          61,401
Net earnings (loss)    $  (14,321)      $    (3,297)    $  (15,558)      $    19,787     $   (13,389) 
Net earnings (loss) 
 per common share     
   Basic and diluted   $     (.13)      $      (.03)    $     (.14)      $       .18     $      (.12)
Weighted average 
  common shares
  outstanding         107,746,498       107,746,760    107,752,989       107,757,531     107,750,945

MARKET PRICE DATA
  High                 $   11 1/8       $    12 1/4     $   13 1/4       $     9 1/8     $    13 1/4 
  Low                  $    6 7/8       $     8 5/8     $    6 1/2       $     6 1/2     $     6 1/2


</TABLE>
 

                                          36
<PAGE>

                                       PART III

ITEM 10  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS
<TABLE>
<CAPTION>
 

The following persons are the directors of the Company.
                                                                                                Year
                                                                                          Elected as
Name                              Age   Offices with Registrant or Other (4)                Director
----------------------            ---   ------------------------------------------------------------
<S>                               <C>   <C>                                                 <C>
Dr. Michael Otto (1)              54    Chairman of the Board of Directors                  1982
                                        and Chairman of the Board of Directors
                                        of Otto Versand (GmbH & Co)

Harold S. Dahlstrand (1)(4)       53    Vice Chairman of the Board of Directors,            1994
                                        Chief Human Resources Officer and 
                                        Chairperson of the Office of the President

Thomas Bohlmann                   52    Board of Directors and Director - Planning          1989
                                        and Control of Otto Versand (GmbH & Co)(1989)
          
Dr. Michael E. Cruesemann (2)(3)  52    Board of Directors and Director - Finance           1994
                                        of Otto Versand (GmbH & Co) and Chief
                                        Financial Officer of Otto Versand Group
                                        (1994); Deputy Director of Finance of
                                        Otto Versand (GmbH & Co)(1985)

Richard T. Fersch (4)             48    President and Chief Executive Officer of            1996
                                        Eddie Bauer

Hans Jorg Hammer                  58    Board of Directors and Director -                   1991
                                        Personnel of Otto Versand (GmbH & Co)(1991)

Horst R. Hansen (2)               63    Retired.  Prior to March 1994 was a member          1982
                                        of the Board of Directors and Director -
                                        Finance and Chief Financial Officer
                                        of Otto Versand Group

John W. Irvin (4)                 50    President and Chief Executive Officer of            1996
                                        Spiegel Catalog

Siegfried Kockmann                58    Board of Directors and Director -                   1997 
                                        Organizational and Systems Planning of
                                        Otto Versand (GmbH & Co)(1982)

Michael R. Moran (3)(4)           51    General Counsel, Chief Legal Officer and            1997
                                        Member of the Office of the President
 
Dr. Peter Mueller (2)             56    Retired.  Prior to December 1997 was a              1985
                                        member of the Board of Directors and 
                                        Director - Advertising and Marketing of Otto 
                                        Versand (GmbH & Co)

                                        37
<PAGE>

Gert Rietz                        51    Board of Directors and Director -                   1997
                                        Merchandise of Otto Versand (GmbH & Co)(1989)

James W. Sievers (3)(4)           55    Chief Financial Officer and Member of               1997
                                        the Office of the President 

Dr. Peer Witten                   52    Board of Directors and Director -                   1991
                                        Operations of Otto Versand (GmbH & Co) for
                                        at least the last five years

Martin Zaepfel (1)                54    Vice Chairman of the Board of Directors and 
                                        Director - Advertising and Marketing of Otto 
                                        Versand (GmbH & Co)(1998); Board of Directors 
                                        and Director - Merchandise of Otto Versand
                                       (GmbH & Co)(1988)


</TABLE>
 

(1) Member of Board Committee (Executive Committee)
(2) Member of Audit Committee
(3) Member of Finance Committee
(4) The business experience during the last five years of directors who are     
executive officers of the Company is detailed along with the listing of     
executive officers that follows.

The terms of all the above-named directors expire on the date of the next annual
meeting of the stockholders which is to be held in April, 1998.

Dr. Michael Otto was a member of the Board of Directors and Director -
Merchandise of Otto Versand for ten years prior to March 1, 1981.

There is no family relationship between any of the directors.

                                          38
<PAGE>

EXECUTIVE OFFICERS

The following persons are the executive officers and certain significant
employees of the Company:

<TABLE>
<CAPTION>
 

                                                       Positions and Offices Held
                                             (all positions and offices are of the Company
Name                             Age                   unless otherwise indicated)            
----------------------           ---        ---------------------------------------------------
<S>                              <C>        <C>
EXECUTIVE OFFICERS OF SPIEGEL, INC.:

Harold S. Dahlstrand             53          Vice Chairman, Chief Human Resources Officer
                                             and Chairperson of the Office of the President
                                            (1997); Senior Vice President - Human Resources
                                            (1993); and Director (1994)

Michael R. Moran                 51         General Counsel, Chief Legal Officer and Member
                                            of the Office of the President (1997); Senior Vice
                                            President, Secretary & General Counsel (1996);
                                            Vice President, Secretary & General Counsel (1988);
                                            and Director (1997)

James W. Sievers                 55         Chief Financial Officer (1994) and Member of
                                            the Office of the President (1997); Senior Vice
                                            President - Finance (1995); Vice President -
                                            Finance (1990); and Director (1997)

Richard T. Fersch                48         President (1992) and Chief Executive Officer (1997) 
                                            of Eddie Bauer; and Director (1994)

John W. Irvin                    50         President (1996) and Chief Executive Officer (1997) 
                                            of Spiegel Catalog; Senior Vice President, General 
                                            Merchandise Manager of Mervyn's (a division of Dayton 
                                            Hudson Corporation) (1992); and Director (1996)

George D. Ittner                 54         President (1992) and Chief Executive Officer (1997) 
                                            of Newport News

Jon K. Nordeen                   42         Vice President and Chief Information Officer
                                            (1996); Director of Application Development of
                                            Dayton Hudson Corporation (1995); Director of
                                            Application Development - Department Store Division
                                            of Dayton Hudson Corporation (1987)

John R. Steele                   45         Vice President (1995) and Treasurer (1993)

                                                                     39
<PAGE>

CERTAIN SIGNIFICANT EMPLOYEES:

Gregory R. Aube                  45         President of FCNB (1995); General Counsel and
                                            Corporate Secretary of FCNB (1989)

James R. Cannataro               45         Executive Vice President - Finance and
                                            Administration of Eddie Bauer (1996); Senior Vice
                                            President - Finance of Eddie Bauer (1993)

Julie A. Rodway                  38         Executive Vice President - Merchandising of Eddie 
                                            Bauer (1997); Senior Vice President - Merchandising 
                                            of Eddie Bauer (1996); Vice President - Catalog 
                                            Merchandising of Eddie Bauer (1995); President -
                                            Logan's Drive (a small specialty retailer focusing 
                                            on casual menswear) (1993)

Dr. Jack Sansolo                 54         Executive Vice President - Global Brand Direction 
                                            of Eddie Bauer (1997); Senior Vice President -  
                                            Global Brand Direction of Eddie Bauer (1996); 
                                            President/Owner of Point A Consulting (a marketing, 
                                            communications and advertising consultancy in 
                                            California) (1993)

Georgia Shonk-Simmons            46         Executive Vice President - Merchandising and
                                            Marketing of Newport News (1994); Vice President -
                                            Merchandise of Spiegel (1993)

Karl A. Steigerwald              51         Executive Vice President - Administration of
                                            Spiegel Catalog (1996); Vice President -
                                            Marketing of Spiegel (1992)

Michael L. Wilson                43         President of DFS (1996); Director - Logistics of
                                            Eddie Bauer (1995); Vice President - Retail
                                            Distribution of DFS (1993)


</TABLE>
 

The terms of all the above-named officers expire on the date of the next annual
meeting of the Board of Directors which is to be held in April, 1998.

There is no family relationship between any of the officers.

                                          40
<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth all compensation paid or accrued by the Company
for the years ended January 3, 1998, December 28, 1996 and December 30, 1995 to
or on behalf of each of the seven most highly compensated key policy-making
executive officers of the Company.

<TABLE>
<CAPTION>
 

                                                                       Stock
     Name and                                    Annual Compensation   Options      All Other
     Principal                                   Salary        Bonus   Granted    Compensation (4)
     Position                       Year         ($)           ($)        (#)         ($)
     ----------------------         ----        --------   ---------   --------   ------------
     <S>                            <C>         <C>        <C>         <C>        <C>
     Harold S. Dahlstrand           1997        $290,000   $150,000    10,000     $   99,357
       Vice Chairman,               1996         230,000    123,464     7,500         80,056
       Chief Human Resources        1995         210,000          -     5,000         59,642
       Officer and Chairperson  
       of the Office of the President 
       
     Michael R. Moran               1997        $260,000   $150,000    10,000     $   94,456
       General Counsel, Chief       1996         210,000     23,464     5,000         90,635
       Legal Officer, Member        1995         180,000          -     7,500         51,700
       of the Office of the 
       President and Director
     
     James W. Sievers               1997        $310,000   $150,000    10,000     $  103,765
       Chief Financial Officer,     1996         270,000     23,464     5,000         95,151
       Member of the Office of      1995         225,000          -    10,000         57,883
       the President and Director
        
     John J. Shea (2)               1997        $375,000   $      -         -     $1,685,980
       Retired.  Former Vice        1996         700,000     23,464         -        198,200
       Chairman, President,         1995         600,000          -   100,000(1)     157,732
       Chief Executive Officer
       and Director
     
     Richard T. Fersch              1997        $650,000   $243,700    10,000     $  157,789
       President and Chief          1996         600,000    702,000    10,000        150,387
       Executive Officer of         1995         415,000    466,875    50,000         68,789
       Eddie Bauer and Director
     
     John W. Irvin (3)              1997        $475,000   $213,750    10,000     $  126,945
       President and Chief          1996         300,000    100,000    60,000         88,649
       Executive Officer of         1995               -          -         -              - 
       Spiegel Catalog and
       Director
     
     George D. Ittner               1997        $374,736   $175,000    25,000     $   57,906
       President of                 1996         366,045     50,000     5,000         49,601
       Newport News                 1995         330,000          -     5,000         24,612
     

</TABLE>
 
                                          41
<PAGE>

     
     (1)  The options granted to John J. Shea in 1995 represent a repricing of
          100,000 of the options granted to him in 1993. 

     (2)  John J. Shea retired from the Company and the Board of Directors in
          July 1997.  As part of his retirement agreement, Mr. Shea received
          $1,525,000 in 1997 and will receive an additional $750,000 in 1998.
     
     (3)  John W. Irvin joined Spiegel Catalog in April 1996.
     
     (4)  The following tables summarize all other compensation for the years
          ended January 3, 1998, December 28, 1996 and December 30, 1995:
<TABLE>
<CAPTION>
 

     
     
                                Retirement   Car Allowance/  Life Insurance
              Name               Benefits        Other       Premiums Paid      Total
          --------------------  -----------  -------------  ----------------  ----------
     <S>                        <C>          <C>            <C>               <C>
     1997 Harold S. Dahlstrand  $   25,300   $   64,055        $  10,002      $   99,357
          Michael R. Moran          22,600       64,095            7,761          94,456
          James W. Sievers          27,100       62,779           13,886         103,765
          John J. Shea           1,591,700       52,981           41,299       1,685,980
          Richard T. Fersch         57,700       45,251           54,838         157,789
          John W. Irvin             41,950       50,712           34,283         126,945
          George D. Ittner           5,476       52,430                -          57,906

     1996 Harold S. Dahlstrand  $   20,030    $  46,184        $  13,842      $   80,056
          Michael R. Moran          18,210       61,593           10,832          90,635
          James W. Sievers          23,670       53,102           18,379          95,151
          John J. Shea              86,663       56,918           54,619         198,200
          Richard T. Fersch         53,700       41,710           54,977         150,387
          John W. Irvin                  -       49,476           39,173          88,649
          George D. Ittner           3,791       43,835            1,975          49,601 

     1995 Harold S. Dahlstrand  $   22,537    $  27,397        $   9,708      $   59,642
          Michael R. Moran          17,643       26,588            7,468          51,700
          James W. Sievers          20,906       23,578           13,399          57,883
          John J. Shea              86,151       38,168           33,413         157,732
          Richard T. Fersch         35,275       33,514                -          68,789
          John W. Irvin                  -            -                -               - 
          George D. Ittner           4,620       17,998            1,994          24,612


</TABLE>
 

                                          42
<PAGE>

OPTION GRANTS TABLE

The following table sets forth grants of stock options to the named executive
officers during the year ended January 3, 1998 and the potential realizable
value of the grants assuming that the market price of the underlying stock
appreciates in value from the date of grant to the end of the option term at the
stipulated annual rates of 5% and 10%:

<TABLE>
<CAPTION>

 

                            
                     Number                                  
                       of                                             Potential Realizable
                   Securities   Percent of                            Value at Assumed 
                     Under-   Total Options                         Annual Rates of Stock
                     lying     Granted to                            Price Appreciation 
                     Options    Employees   Exercise   Expiration       for Option      
Name                 Granted    in 1997       Price      Date        5% ($)     10% ($)  
-------------------- --------  -----------  --------  -----------   --------   ---------
<S>                  <C>       <C>          <C>       <C>           <C>        <C>
Harold S. Dahlstrand  10,000     7.4%         4.90     12/31/07     30,816       78,093

Michael R. Moran      10,000     7.4%         4.90     12/31/07     30,816       78,093

James W. Sievers      10,000     7.4%         4.90     12/31/07     30,816       78,093

John J. Shea             -        -             -          -           -            -

Richard T. Fersch     10,000     7.4%         4.90     12/31/07     30,816       78,093

John W. Irvin         10,000     7.4%         4.90     12/31/07     30,816       78,093

George D. Ittner      25,000    18.6%         4.90     12/31/07     77,040      195,233


</TABLE>
 


The stock options granted become exercisable at the rate of 20% per year from
the date of the grant.

                                          43
<PAGE>

AGGREGATED OPTION EXERCISES IN 1997 AND JANUARY 3, 1998 OPTION VALUES

The following table sets forth shares acquired on exercise and stock option
values at January 3, 1998:

<TABLE>
<CAPTION>

 

                                           Number of Securities    Value of Unexercised
                                         Underlying Unexercised    In-the-Money Options
                        Shares                  Options at                  at
                       Acquired               January 3, 1998         January 3, 1998       
                         On       Value   Exercise-   Unexercise- Exercise-   Unexercise-
   Name                Exercise  Realized   able        able       able           able
---------------------  --------  --------  -------     --------   -------     -----------
<S>                    <C>       <C>      <C>         <C>         <C>         <C>

Harold S. Dahlstrand        -        -     39,700       22,000     $  516        $    -

Michael R. Moran            -        -     43,400       21,100      2,580             -

James W. Sievers            -        -     38,400       22,600         -              -

John J. Shea                -        -    358,000          -           -              -   

Richard T. Fersch           -        -     52,400       53,000         -              -

John W. Irvin               -        -     12,000       58,000         -              -   

George D. Ittner            -        -      6,000       34,000         -              -


</TABLE>
 

COMPENSATION OF DIRECTORS
 
The Company pays an annual fee of $10,000 to its independent directors and
reimburses any reasonable out-of-pocket expenses incurred by all directors in
attending meetings.

REPORT OF REPRICING OF OPTIONS

The following table sets forth a 1995 transaction which, in effect, repriced
certain options granted.  This transaction was approved by the Board of
Directors and the Stock Option Committee.
<TABLE>
<CAPTION>

 

                                                                                    Length of
                            Number of      Market Price   Exercise                  Original
                            Securities     of Stock at    Price at                  Option Term
                            Underlying     Time of        Time of                   Remaining at
                            Options        Repricing or   Repricing or  New         Date of 
                            Repriced or    Amendment      Amendment     Exercise    Repricing or
Name              Date      Amended (#)        $             $          Price ($)   Amendment    
-----            ------    ------------    ------------  ------------  -----------  ------------
<S>             <C>        <C>             <C>           <C>           <C>          <C>
John J. Shea    5/10/95      100,000          $10.00       $22.75       $10.00      8 years


</TABLE>
 

                                          44
<PAGE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Board Committee, which determines executive officer compensation, consists
of Dr. Michael Otto, Martin Zaepfel, and Harold S. Dahlstrand.  Mr. Dahlstrand
also serves as the Chairperson of the Office of the President of the Company.

EMPLOYEE BENEFITS

     STOCK OPTION PLAN  
     
     The Spiegel, Inc. Salaried Employees Incentive Stock Option Plan is
     administered by a Stock Option Committee consisting of three members of the
     Company's Board of Directors who are not salaried employees of the Company
     or its participating subsidiaries and who are appointed to the Committee
     periodically.  Certain salaried employees of Spiegel and its subsidiaries
     are eligible to participate in the plan.  Options are granted to those
     eligible employees as determined by the Stock Option Committee.  The Stock
     Option Committee also has authority to determine the number of shares and
     terms consistent with the plan with respect to each option. Options granted
     under the plan relate to the Class A Non-Voting Common Stock of the
     Company.  The maximum number of shares which may be issued under options
     granted is 1,900,000 shares.  The participants' options become exercisable
     at the rate of 20% per year.  The options expire ten years after the date
     of grant of options.  The option price upon exercise of the option is the
     fair market value of the shares on the date of grant of the option. 
     Options granted under the plan are not transferable or assignable other
     than by will or by the laws of descent and distribution.
     
     The average per share price of stock options granted during the year was
     $4.90. Net cash realized with respect to the exercise of options during the
     year was approximately $228,000.
     
     SPIEGEL GROUP VALUE IN PARTNERSHIP PROFIT SHARING AND 401(k) SAVINGS PLAN
     
     The Company maintains two consolidated Profit Sharing and 401(k) Savings
     Plans for employees of Spiegel, Eddie Bauer, FCNB and Distribution
     Fulfillment Services ("DFS").  Participation commences on the beginning of
     a quarter following one year of continuous service.  The Company and
     participating subsidiaries contribute annually to the plan 7% of the first
     $100 million of Spiegel consolidated earnings before income taxes, plus 6%
     of the second $100 million of Spiegel consolidated earnings before income
     taxes, plus 4% of Spiegel consolidated earnings before income taxes in
     excess of $200 million plus any other amounts determined by the Company's
     Board of Directors.  A minimum contribution of 4% of eligible considered
     compensation will be made, but in no event will the total contribution
     exceed the maximum amount deductible for Federal income tax purposes. 
     Company contributions and forfeitures are allocated among eligible
     participants in proportion to considered compensation. A participant can
     make nondeductible after-tax contributions to the plan of up to 5% of their
     considered compensation, subject to special limitations imposed by the
     Internal Revenue Code thereon.
     
     Employees may also contribute up to 10% of their base compensation to the
     401(k) Plan through payroll deductions.  Employee contributions are made on
     a pretax basis under Section 401(k) of the Internal Revenue Code.  The
     Company matches salaried employee contributions dollar for dollar up to the
     first 3% of base compensation and 50 cents for each dollar contributed up
     to the next 3%.  The 

                                          45
<PAGE>

     Company matches hourly employee contributions 25 cents for each dollar
     contributed up to 6% of base compensation.  The Company's matching
     contributions, however, may not exceed the amount deductible under the
     Internal Revenue Code.
     
     All contributions and investments are held in a trust for the benefit of
     plan participants.  All employees who participate in the plan after one
     year of service are 100% vested in their contributions and earnings thereon
     but become vested in the Company's matching contribution and earnings
     thereon at a rate based on years of service, with full vesting after a
     maximum of seven years.  Participants are permitted to borrow from their
     account, but may have only one outstanding loan at a time.  Repayment is
     made through payroll deductions.  Participants who suffer a financial
     hardship as defined by the Internal Revenue Code and who are not eligible
     for a loan may withdraw amounts from the plan while still employed. In
     addition, participants may annually receive a distribution of their
     after-tax contributions.  All participants receive the full value of their
     accounts under the plan upon retirement after age 62 or permanent
     disability and the vested portion of their accounts on other termination of
     employment.  The full value of a deceased participant's account is
     distributable to his beneficiaries.  Distributions are made in a lump sum.
     
     SPIEGEL, INC., SUPPLEMENTAL RETIREMENT BENEFIT PLAN
     
     The Company maintains an unfunded supplemental retirement plan for the
     benefit of its employees and those of its participating subsidiaries
     covered by the Spiegel Group Value in Partnership Profit Sharing and 401(k)
     Savings Plan described above (the "profit sharing and thrift plans") whose
     benefits under the profit sharing and thrift plans are reduced by
     application of Sections 415, 401(a)(17) and 402(g)of the Internal Revenue
     Code.  If a participant's annual additions under the profit sharing and
     thrift plans are reduced by reason of special limitations of the Internal
     Revenue Code, the Company will make an annual contribution to the trust in
     the amount of the reduction.  Supplemental benefits under the supplemental
     retirement plan are payable in cash at the same time and in the same manner
     as the participant's employer account under the profit sharing and thrift
     plans except no payments are made prior to death, disability or reaching
     retirement age.

                                          46
<PAGE>

     SPLIT DOLLAR LIFE INSURANCE PROGRAM  
     
     The Company maintains a split dollar life insurance program covering
     certain executives of the Company.  A covered employee may apply for an
     individual life insurance policy on his life in a face amount up to three
     times his base salary. The employee pays a portion of the annual premium
     equal to the after tax cost of an equivalent amount of term life insurance.
     The balance of the premium due (if any) is paid by the Company.  The
     Company owns a part of the cash value equal to its payments and is
     beneficiary for that amount.  The employee names his own beneficiary and
     collaterally assigns the policy to the Company to the extent of the
     Company's payments.  Cash value and dividends accumulate tax-free and all
     amounts in excess of the Company's payments belong to the employee.  On the
     death of the employee, any amounts due to the Company are paid with the
     balance of the proceeds distributed as directed by the employee.
     
     EXECUTIVE BONUS AND INCENTIVE PLANS
     
     The Company maintains various bonus plans for certain of its executives,
     designed to reward performance.  The Company's annual payment of bonuses is
     based upon the attainment of pre-determined operating, financial and
     individual performance objectives. For 1997, approximately $9,900,000 was
     earned under these bonus plans.
     
     NEWPORT NEWS, INC. RETIREMENT SAVINGS PLAN
     
     Newport News has a retirement savings plan covering its associates. 
     Associates become eligible as of the beginning of the calendar quarter
     following completion of one year of service.  Associates may elect to
     contribute up to 10% of their compensation to the plan on a pre-tax basis
     under Section 401(k) of the Internal Revenue Code.  The associate may also
     elect to make nondeductible after-tax contributions to the plan of up to 5%
     of their compensation.  The company matches contributions at a rate of 50%
     of the first 4% of compensation contributed.  The company matching
     contributions, however, may not exceed the amount deductible under the
     Internal Revenue Code.
     
     Contributions are held in trust for the benefit of the plan participants. 
     A participant receives the full amount in this account under the plan
     (including investment earnings) on termination of employment by reason of
     retirement (as defined in the plan document), or disability.  Upon death,
     the full value of the participant's account is distributable to their
     beneficiary.  On any other termination of employment, a participant is 100%
     vested at all times in the portion of his account attributable to pre-tax
     contributions, and is vested in the company's matching contributions and
     earnings thereon, at a rate based on years of service, with full vesting
     after a maximum of five years.  Distributions are made on a lump sum basis.
     Participants are permitted to borrow from their account, but may only have
     one loan outstanding at a time.  Participants suffering certain financial
     hardships may request an inservice withdrawal of prior contributions.

                                          47
<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

A.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

Spiegel Holdings, Inc. (SHI) holds 99.9% of the Company's Class B Voting Common
Stock.  The following table sets forth certain information with respect to the
number of shares of Class B Voting Common Stock owned by SHI, which is the only
stockholder beneficially owning more than 5% of the Class B Voting Common Stock.
SHI is a holding company whose principal asset is stock of the Company.  The
total number of holders of the Company's Class B voting Common Stock as of March
26, 1998, was two.

<TABLE>
<CAPTION>
 

                                                                          Percentage of
                                                                          Outstanding
                                    Number of            Title of         Class B Voting
Name and Address                    Shares(1)            Class            Common Stock 
-------------------------          -----------           ---------        ---------------
<S>                                <C>                  <C>               <C>
Spiegel Holdings, Inc.(2)           116,957,089         Class B           99.9%
The Corporation                                         Voting
  Trust Center                                          Common
1209 Orange Street                                      Stock
Wilmington, DE 19801


</TABLE>
 

(1)       The shares are owned of record and beneficially, with sole investment
          and voting power.  However, see note (2) below.

(2)       In excess of 50% of the common stock of SHI is beneficially owned by
          Dr. Michael Otto who controls the manner in which SHI votes its Class
          B Voting Common Stock of the Company in all matters, including the
          election of directors.  Under rules and regulations promulgated by the
          Securities and Exchange Commission, Dr. Otto may be deemed to
          beneficially own all the shares of the Company owned by SHI.  Dr. Otto
          is a director of the Company.  No officers or other directors of the
          Company are stockholders of record or beneficial stockholders thereof.

B.  SECURITY OWNERSHIP OF MANAGEMENT

As of March 26, 1998, certain members of the Company's Board of Directors, and
the directors and officers of the Company as a group, owned shares of the
Company's Class A Non-Voting Common Stock as indicated in the following table:

As shown in Column II, in the case of Company officers, portions of the shares
indicated as beneficially owned are actually shares attributable to unexercised
and unexpired options for Class A Non-Voting Common Stock granted by the Company
to such officers, which are exercisable as of, or first become exercisable
within 60 days after, March 26, 1998.

                                          48
<PAGE>

<TABLE>
<CAPTION>
 

                                     Amount and
                Name of              Nature of                           
 Title        Beneficial             Beneficial       Acquirable        Percent
of Class        Owner                Ownership (1)  Within 60 Days      of Class
--------   --------------------      -------------  --------------   ------------
                                         (I)              (II)           (III)
<S>        <C>                       <C>            <C>              <C>
Class A   Gregory A. Aube               1,200           1,200             *

Class A   James R. Cannataro           18,000          17,000             *  

Class A   Harold S. Dahlstrand         56,850          39,700             *   

Class A   Richard T. Fersch            56,000          52,400             *   

Class A   John W. Irvin                32,000          22,000             *
      
Class A   George D. Ittner              8,400           6,000             *

Class A   Michael R. Moran             55,400          43,400             *     

Class A   Dr. Peter Mueller            10,000          10,000             *

Class A   Julie Rodway                  1,400           1,400             *

Class A   Jack Sansolo                  1,000           1,000             *

Class A   Georgia Shonk-Simmons        30,900          30,900             *

Class A   James W. Sievers             44,400          38,400             *

Class A   John R. Steele                1,150             900             *

Class A   Karl A. Steigerwald          44,200          31,000             *

Class A   Michael L. Wilson             1,038           1,038             *

Class A   All directors and           361,900         286,300           2.5%
          officers as a group
          (25 persons)              


</TABLE>
 

(1)  Includes shares which may be acquired within 60 days under the Company's 
     Stock Option Plan.
 
*    Less than 1%.

                                          49
<PAGE>

ITEM 13.  CERTAIN TRANSACTIONS

Since its acquisition of the Company in 1982, and following the transfer of its
interest therein to its partners and designees in April 1984, Otto Versand and
the Company have entered into certain agreements seeking to benefit both parties
by providing for the sharing of expertise.  The following is a summary of such
agreements and certain other transactions.

The Company utilizes the services of Otto Versand International (GmbH) as a
buying agent for the Company in Hong Kong, Taiwan, Korea, India, Italy,
Indonesia, Singapore, Thailand and Turkey.  Otto Versand International (GmbH) is
a wholly-owned subsidiary of Otto Versand.  Buying agents locate suppliers,
inspect goods to maintain quality control, arrange for appropriate documentation
and, in general, expedite the process of procuring merchandise in these areas. 
Under the terms of its arrangements, the Company paid $4,050,000 in 1997,
$3,917,000 in 1996, and $3,720,000 in 1995.  The arrangements are indefinite in
term but may generally be canceled by either party upon one year's written
notice.

The Company has an agreement with Together, Ltd., a United Kingdom company,
which gives the Company the exclusive right to market "Together!" merchandise by
catalog and in retail stores.  Otto Versand owns Together, Ltd.  Commission
expenses incurred on this account were $3,171,000, $3,870,000 and $5,755,000 in
1997, 1996 and 1995, respectively.  These expenses include certain production
services, the cost of which would normally be borne by the Company, including
design of the product, color separation, catalog copy and layout, identification
of suggested manufacturing sources and test marketing information.

In 1993, the Company formed a joint venture with Otto-Sumisho, Inc. (a joint
venture company of Otto Versand and Sumitomo Corporation) and entered into
license agreements to sell Eddie Bauer products through retail stores and
catalogs in Japan.  The Company believes that the terms of the arrangement are
no less favorable to Eddie Bauer than would be the case in an arrangement with
an unrelated third party.  There were 28 stores open in Japan as of January 3,
1998.  To date, Eddie Bauer has contributed $9,294,000 to the project and in
1994, received a $2,500,000 licensing fee for the use of its name.  Eddie Bauer
received $4,272,000, $3,981,000 and $3,243,000 in royalty income on retail and
catalog sales during 1997, 1996 and 1995, respectively.  Eddie Bauer recorded
approximately a loss of $31,000 in 1997, income of $406,000 in 1996, and a loss
of $673,000 in 1995 for its equity share of the joint venture.

During 1995, Eddie Bauer formed a joint venture with Handelsgesellschaft
Heinrich Heine GmbH and Sport-Scheck GmbH (both subsidiaries of Otto Versand)
and entered into license agreements to sell Eddie Bauer products through retail
stores and catalogs in Germany.  The Company believes that the terms of the
arrangement are no less favorable to Eddie Bauer than would be the case in an
arrangement with an unrelated third party.  There were seven stores open in
Germany as of January 3, 1998.  Eddie Bauer has contributed $3,482,000 to the
project and has received $1,000,000 in licensing fees for the use of its name. 
Eddie Bauer received $756,000, $773,000 and $295,000 in royalty income on retail
and catalog sales during 1997, 1996 and 1995, respectively.  Eddie Bauer
recorded approximately $1,642,000, $707,000 and $98,000 of losses for its equity
share of the joint venture during 1997, 1996 and 1995.  

During 1996, Eddie Bauer formed a joint venture with Gratten plc (a subsidiary
of Otto Versand)and entered into license agreements to sell Eddie Bauer products
through retail stores and catalogs in the United Kingdom.  The Company believes
that the terms of the arrangement are no less favorable to Eddie Bauer than
would be the case in an arrangement with an unrelated third party.  There were
two stores open in the United Kingdom as of 

                                          50
<PAGE>

January 3, 1998.  A licensing fee will not be recognized until 1998.  Eddie
Bauer received $41,000 in royalty income on retail and catalog sales during
1997.  Eddie Bauer recorded approximately $957,000 of losses for its equity
share of the joint venture during 1997.

In 1993, Eddie Bauer entered into an agreement with Eddie Bauer International,
Ltd. (a subsidiary of Otto Versand) whereby the latter acts as buying agent in
Asia and contacts suppliers, inspects goods and handles shipping documentation
for Eddie Bauer.  The Company believes that the terms of the arrangement are no
less favorable to Eddie Bauer than would be the case in an arrangement with an
unrelated third party.  The Company paid $22,900,000, $14,476,000 and
$13,907,000 for these services in 1997, 1996 and 1995, respectively.  In 1997,
an Eddie Bauer International, Ltd. buying office was established in the United
States to provide similar sourcing services in the Americas beginning in 1998.  

In March 1994, Newport News issued 113 shares of non-voting preferred stock to
ten directors and ten other executive officers of the Company and nine executive
officers and directors of Newport News and Otto Versand for $40,000 per share. 
Each participant was eligible to purchase up to four shares.  Of the initial
issuance, 85 shares remain outstanding held by the following individuals with
the number of shares each owns indicated by parentheses following each name: 
Dr. Michael Otto (4); Thomas Bohlmann (3); Hans-Christoph Fischer (4); Hans Jorg
Hammer (4); Dr. Peter Mueller (4); Peer Witten(4); John J. Shea (4); Harold S.
Dahlstrand (4); James J. Broderick (4); Robert E. Conradi (4); Michael R. Moran
(4); Georgia L. Shonk-Simmons (4); James W. Sievers (4); Karl A. Steigerwald
(4); George D. Ittner (4); James W. Brewster (4); Geralyn M. Madonna (2);
Gerhard Hocht (4); Siegfried Kockmann (4); Gert Rietz (4); Martin Zaepfel (4)
and Dr. Michael Cruesemann (4). In December, 1995, an additional seven shares
were offered to four executive officers from Newport News and Eddie Bauer at
$43,000 per share.  These individuals and the number of shares each owns,
indicated in parenthesis following each name, include:  Martin Smith (1); David
Knoll (1); Charles Krieg (1); and Richard Fersch (4).  The redemption price of
the preferred stock prior to December 31, 1997 ranged from $40,000 to $43,000
per share.  Subsequent to December 31, 1997, the redemption price is fair market
value.  All shares of Newport News non-voting preferred stock must be redeemed
by December 31, 1999.

In March 1997, the Company issued 10.3 million shares of Class B voting common
stock for $70,000 to its majority shareholder, Spiegel Holdings, Inc.  The
Company issued an additional 13.5 million shares of Class B voting common stock
for $70,000 to Spiegel Holdings, Inc. in March 1998.  The proceeds from these
issuances, net of related costs, are being used to fund working capital and
investing needs, including the continued expansion of Eddie Bauer.

The Company is included in the consolidated federal income tax return of SHI. 
Pursuant to a tax reimbursement agreement with SHI, the Company records
provisions for income tax expense as if it were a separate taxpayer.

                                          51
<PAGE>

                                       PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
                                                               
                                                                    PAGE
A.   1.   FINANCIAL STATEMENTS
          
          Consolidated Balance Sheets                                 16
          Consolidated Statements of Earnings                         17
          Consolidated Statements of Stockholders' Equity             18
          Consolidated Statements of Cash Flows                       19
          Notes to Consolidated Financial Statements                  20-33
          Report of Independent Auditors                              35
          Selected Quarterly Financial Data                           36


     2.   FINANCIAL STATEMENT SCHEDULE
          
          Independent Auditors' Report on Schedule                    54
          Schedule II--Valuation and Qualifying Accounts              55
          

          Schedules not listed above are omitted because of absence of
          conditions under which they are required or because the required
          information is included in the financial statements submitted.

                                          52
<PAGE>

     
          3.   EXHIBITS
     
          Exhibit
          Number    Description of Exhibit
     
     
          3(a)      Restated Certificate of Incorporation of the Registrant (i)
     
          3(b)      By-Laws of the Registrant (i)
     
          4         Revised Specimen Stock Certificate (ii)
     
          10(a)     Spiegel, Inc., Semi-Monthly Salaried Employees Incentive
                    Stock Option Plan (File No. 33-15936) and post-effective
                    Amendment No. 1 thereto, and the Company's registration
                    statements on Form S-8 and post-effective amendments thereto
                    (File No. 33-19663, 33-32385, 33-38478, 33-44780, 33-56200,
                    33-51755 and 33-65469) (iii)
     
          10(b)     Spiegel, Inc., Supplemental Retirement Benefit Plan (iv)
     
          21        List of subsidiaries of the Registrant

          23        Consent of KPMG Peat Marwick LLP
     
          24        Powers of Attorney (iv)
     
          27        Financial Data Schedule

     (i)   Filed as an Exhibit to or part of the Company's Registration
           Statement on  Form S-3 (File No. 33-50739) and hereby incorporated
           by reference herein.
     
     (ii)  Filed as an Exhibit to the 1988 10-K.
     
     (iii) Filed as an Exhibit to or part of the Company's Registration
           Statement on Form S-8 (File No. 33-19663, 33-32385, 33-38478,
           33-44780, 33-56200 and 33-51755) and hereby incorporated by
           reference herein.
     
     (iv)  Filed as an Exhibit to or part of the Company's Registration
           Statements on Form S-1 (File No. 33-15936) and hereby incorporated
           by reference herein.
     
     B.    REPORTS ON FORM 8-K
     
           None.

                                          53
<PAGE>


     INDEPENDENT AUDITORS' REPORT ON SCHEDULE
     
     The Board of Directors and Stockholders
     Spiegel, Inc.:
     
     Under date of February 11, 1998, we reported on the consolidated balance
     sheets of Spiegel, Inc., and subsidiaries as of January 3, 1998 and
     December 28, 1996, and the related consolidated statements of earnings,
     stockholders' equity, and cash flows for each of the years in the
     three-year period ended January 3, 1998, which are included elsewhere
     herein. In connection with our audits of the aforementioned consolidated
     financial statements, we also audited the related consolidated financial
     statement schedule.  This financial statement schedule is the
     responsibility of the Company's management.  Our responsibility is to
     express an opinion on this financial statement schedule based on our
     audits.
     
     In our opinion, such schedule, when considered in relation to the basic
     consolidated financial statements taken as a whole, presents fairly, in all
     material respects, the information set forth therein.
     
     
     
     
     
     
     
                                               /S/ KPMG PEAT MARWICK LLP
     
     
     Chicago, Illinois
     February 11, 1998

                                          54
<PAGE>

                                                                 SCHEDULE II
     
     
                            SPIEGEL, INC. AND SUBSIDIARIES
     
                          VALUATION AND QUALIFYING ACCOUNTS
                                 FOR THE YEARS ENDED
                                   ($000s omitted)
     
<TABLE>
<CAPTION>
 
     
                                              January 3,   December 28,  December 30,
                                                1998          1996          1995
                                             -----------   ------------  ------------
     <S>                                     <C>          <C>          <C>
     Allowance for doubtful accounts

     Balance at beginning of year            $  14,830    $  40,832    $  49,954
       Charged to earnings                      13,521       22,593       91,612
       Reduction for receivables sold             (235)     (23,861)     (33,600)
       Accounts written off, net of             
         recoveries                            (13,194)     (24,734)     (67,134)
                                             ----------   ----------   ----------
       Balance at end of year                $  14,922    $  14,830    $  40,832
                                             ==========   ==========   ==========

</TABLE>
 

                                          55
<PAGE>

                                      SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Spiegel, Inc., has duly caused this Annual Report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized, on April 3, 1998.

     SPIEGEL, INC.

                              By:   /s/ Harold S. Dahlstrand
                                    Harold S. Dahlstrand, Chief Human
                                    Resources and Chairperson of the Office
                                    of the President 
                                    (Principal Operating Executive Officer)

                                    /s/ James W. Sievers               
                                    James W. Sievers, Chief Financial
                                    Officer and Member of the Office of the
                                    President (Principal Operating
                                    Executive Officer and Principal
                                    Financial and Accounting Officer)

                                    /s/ Michael R. Moran
                                    Michael R. Moran, General Counsel,
                                    Chief Legal Officer and Member of the
                                    Office of the President
                                    (Principal Operating Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Spiegel,
Inc., and in the capacities indicated on April 3, 1998.

<TABLE>
<CAPTION>

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

<S>                                 <C>
/s/ Harold S. Dahlstrand            Vice Chairman of the Board of Directors, 
Harold S. Dahlstrand                Chief Human Resources Officer and Chairperson
                                    of the Office of the President (Principal
                                    Operating Executive Officer)


/s/ James W. Sievers                Chief Financial Officer and Member of the
James W. Sievers                    Office of the President (Principal Operating
                                    Executive Officer and Principal Financial and
                                    Accounting Officer) and Director

/s/ Michael R. Moran                General Counsel, Chief Legal Officer and Member
Michael R. Moran                    of the Officer of the President (Principal 
                                    Operating Executive Officer) and Director


/s/ D. L. Skip Behm                 Vice President - Controller (Principal 
D. L. Skip Behm                     Accounting Officer)
                                         
     
                                                                     56
<PAGE>

Pursuant to the requirements of the Securities Exchange Act of 1934, this 
report has been signed below by the following persons on behalf of Spiegel, 
Inc., and in the capacities indicated on April 3, 1998.


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


/s/ Thomas Bohlmann                   Director
Thomas Bohlmann



/s/ Dr. Michael E. Cruesemann         Director
Dr. Michael E. Cruesemann



/s/ Richard T. Fersh                  Director
Richard T. Fersch



/s/ John W. Irvin                     Director
John W. Irvin



/s/ Martin Zaepfel                    Director
Martin Zaepfel


</TABLE>

                                          57