Following is management's discussion and analysis of significant factors that have affected the Company's financial position and its results of operations for the periods presented in the accompanying consolidated financial statements.

Fiscal 2004, 2003 and 2002 results all include 52 weeks.

The Company is a regional department and specialty store chain completing its 100th year of operation. As of January 29, 2005, the Company operated 63 full-line "Gottschalks" department stores located in six Western states, with the majority of those stores located in California. The Company also operates 6 "Village East" and "Gottschalks" specialty stores which carry a limited selection of merchandise.

The Company's department stores typically offer a wide range of better to moderate brand-name and private-label merchandise, including mens, womens, juniors and childrens apparel; cosmetics, shoes, fine jewelry and accessories; and home furnishings including china, housewares, domestics, small electric appliances and, in selected locations, furniture and mattresses.

The Company's operations are significantly impacted by competitive pressures from department stores, specialty stores, mass merchandisers and other retail channels, as well as general consumer-spending levels, including the impact of employment levels and other economic conditions. Such pressures during fiscal 2004 were partially offset by promotional activities surrounding the celebration of the Company's 100^th anniversary resulting in a marginal increase in comparable store sales for fiscal 2004 of 0.2% as compared to fiscal 2003.

The Company's fiscal 2000 acquisition of 34 stores from the former Lamont's chain put significant pressure on the Company's operating performance and liquidity position. The Company subsequently closed 16 of the acquired stores and charged off the related assets and leasehold intangibles. In January 2003 the Company terminated its private label credit card receivables securitization program and sold the accounts and receivables to a third party, resulting in the payoff of $73.2 million in off balance sheet debt and reduction in outstanding borrowings on the Company's revolving line of credit of approximately $30.0 million. In March 2004 the Company amended and extended its revolving line of credit reducing the interest margin paid on outstanding borrowings and replacing certain higher variable interest debt with lower fixed interest debt. The Company was able to reduce its debt by an additional $22.4 million during fiscal 2004.

As a result of this strategic repositioning the Company has been able to refocus on its marketing and merchandising strategies. In addition, the Company has resumed its "raise the bar" programs in its existing stores and is beginning to enhance top line growth through new store openings. On April 15, 2005 the Company opened a new 43,000 square foot store in Albany, Oregon and plans to open a 100,000 square foot lifestyle store in August 2005 in Fresno, California.

Subsequent to the issuance of its financial statements for the year ended January 31, 2004, as a result of views expressed in a letter on February 7, 2005 by the Office of the Chief Accountant of the Securities and Exchange Commission ("SEC") to the American Institute of Certified Public Accountants regarding certain operating lease-related accounting issues and their applications under generally accepted accounting principles in the United States of America ("GAAP"), the Company determined that its then current manner in which it accounted for certain lease related issues was not in accordance with GAAP. Corrections to the Company's lease accounting policies include an adjustment to depreciation expense to correct the depreciable lives for certain leasehold improvements, and to correct the recording of certain tenant allowances and construction reimbursements, as reductions in rent expense, which are included in selling general and administration expenses, that had previously been recorded as reductions in the cost of the underlying constructed assets. In addition, the restatement includes adjusting lease terms of certain leases to include bargain renewal option periods where exercise of the options would be reasonably assured, and recognizing the straight-line effect over the lease term of such changes in rents during the option periods. As a result, the Company restated its consolidated financial statements for the fiscal years ended January 31, 2004 and February 1, 2003. Accordingly, the accompanying management's discussion and analysis of financial condition and results of operations gives effect to the restatement discussed in Note 16 of the accompanying consolidated financial statements.

In addition, the Company had previously classified newly generated receivables and payments on receivables under the securitization program as investing activities, and classified the gross proceeds from the sale of its proprietary credit card portfolio and the repayment of the 1999-1 and 2000-1 Series Certificates as financing activities in its consolidated statement of cash flows for the fiscal year ended February 1, 2003. To correct this error, the Company has restated its fiscal 2002 consolidated statement of cash flows to reflect the change in receivables and the net proceeds received by the Company from the sale of its proprietary credit card portfolio as operating activities, since the credit card receivables originated from the sale of the Company's merchandise. See Note 16 of the accompanying consolidated financial statements.

The Company's significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in Part IV, Item 15 of this Form 10-K. The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to its revenue recognition policy, the carrying value of its merchandise inventories, the adequacy of its store closure reserves, and the valuation of its long-lived assets and deferred tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. In the past, actual results have not been materially different from the Company's estimates.

Some of the Company's significant accounting policies involve a higher degree of judgment or complexity than its other accounting policies. The policies described below have been identified as critical to the Company's business operations and the understanding of its results of operations. The impact and associated risks related to these policies on the Company's business operations are discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations.

Net retail sales are recognized at the point-of-sale, net of estimated sales returns and allowances and exclusive of sales tax. Net retail sales also include all amounts billed to a customer in a sale transaction for shipping and handling, including customer delivery charges. Revenues on special order sales are recognized when the merchandise is delivered to the customer and the merchandise has been paid for in its entirety.

The Company records an allowance for estimated sales returns in the period in which the related sale occurs. These estimates are based primarily on historical sales returns. If the historical data used to calculate these estimates does not properly reflect future returns, adjustments to the allowance for estimated sales returns may be necessary.

Merchandise inventory, which consists of merchandise held for resale, is valued at the lower of LIFO (last-in, first-out) cost or market using the retail inventory method ("RIM") of accounting. Inherent in the RIM calculation are various judgments and estimates including, among others, merchandise markon, markups, markdowns and shrinkage, which significantly impact the ending inventory valuation at cost, as well as resulting gross margins. The Company applies various methodologies to ensure that the application of the RIM is consistent for all periods presented. Such methodologies include the development of consistent cost-to-retail ratios and the grouping of homogenous classes of merchandise. Estimated inventory shrinkage between physical inventory dates is based on historical experience. Should actual inventory shrinkage results differ from the Company's estimate, year-end revisions to inventory shrinkage expense recognized on an interim basis may be required.

Estimating the market value of the Company's merchandise inventory requires assumptions about future demand and market conditions. Such estimates are based on actual and forecasted sales trends, current inventory levels and aging information by merchandise categories. The Company records markdowns to value merchandise inventories at net realizable value. If forecasted sales are not achieved, or if other indicators of impairment are present, additional markdowns may be needed in future periods to clear excess or slow-moving merchandise, which may result in lower gross margins.

In the event a store is closed before its lease has expired, the remaining lease obligation after the closing date (less anticipated sublease rental income or proceeds from lease settlements, if any) is expensed at the date the store ceases operations. Asset impairment charges related to furniture, fixtures and equipment, leasehold improvements, goodwill and leasehold interests are expensed in the period in which management adopts a plan to close the store if impairment is considered likely as a result of such planned closure, or at such other time as impairment becomes likely. Severance and other incremental costs associated with a store closure are expensed as incurred.

As of January 29, 2005, the Company had no reserves for store closure costs. In the event the Company decides to close additional store locations in fiscal 2005 or beyond, additional reserves for store closure costs, which may be material, may be incurred.

The Company's long-lived assets consist primarily of property and equipment, goodwill, leasehold interests and other long-term assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. With respect to store locations, the Company performs an evaluation of whether an impairment charge should be recorded whenever a store experiences unfavorable operating performance. A store's assets are evaluated for impairment by comparing its estimated undiscounted cash flows over its estimated remaining lease term to its carrying value. If the cash flows are not sufficient to recover the carrying value, a loss equal to the difference between the carrying value and the estimated fair value of the asset is recognized. Estimates of future cash flows are based on a variety of factors, including historical experience in similar locations, changes in merchandising, promotional or operating strategy that may affect the profitability of a particular location, knowledge of the market area and in some cases, expected sale proceeds or sublease income, and independent appraisals. In addition, the analysis assumes that new store locations typically take three years to achieve their full profit potential. Various uncertainties, including but not limited to changes in consumer preferences, increased competition or a general deterioration in economic conditions could adversely impact the expected cash flows to be generated by an asset or group of assets. In fiscal 2002, the Company recorded asset impairment charges in connection with store closures, and such charges are included in loss on store closures in the accompanying consolidated statement of operations. In addition, asset impairment charges were recorded for certain underperforming store locations which continue to be operated. If actual performance or fair value estimates for other locations are less favorable than management's projections, future asset impairment charges may be necessary. Similar procedures are used when analyzing other corporate assets for impairment.

The carrying value of the Company's net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income to realize the value of these assets. In determining the appropriate valuation allowance, management considers all available evidence for certain tax credit, net operating loss and capital loss carryforwards that would likely expire prior to their utilization. Management believes it is more likely than not that the Company will generate sufficient future taxable income in the appropriate carryforward periods to realize the benefit of its remaining net deferred tax assets. However, if the available evidence were to change in the future, an adjustment to the valuation allowance may be required, resulting in additional income tax expense.

The accompanying management's discussion and analysis of financial condition and results of operations gives effect to the restatement discussed in Note 16 of the accompanying consolidated financial statements.

The following table sets forth for the periods indicated certain items from the Company's Consolidated Statements of Operations, expressed as a percent of net sales:

                                               Fiscal Years
                                     -------------------------------
                                       2004       2003       2002
                                     ---------  ---------  ---------
Net sales...........................    100.0 %    100.0 %    100.0 %
Net credit revenues.................      0.5        0.6        1.2
Net leased department revenues......      0.5        0.5        0.5
                                     ---------  ---------  ---------
     Total revenues.................    101.0      101.1      101.7

Costs and expenses:
   Cost of sales....................     65.3       65.9       66.3
   Selling, general and
     administrative expenses........     31.2       30.8       31.1
   Depreciation and amortization....      2.0        2.2        2.2
   Asset impairment charges.........       --         --        1.4
   Store closure costs..............       --         --         --
   Receivables sale costs...........       --         --        0.3
                                     ---------  ---------  ---------
     Total costs and expenses.......     98.5       98.9      101.3
                                     ---------  ---------  ---------
Operating income....................      2.5        2.2        0.4

Other (income) expense:
   Interest expense.................      1.4        2.0        2.3
   Losses on early extinguishment
     of debt........................       --         --        0.5
   Miscellaneous income.............     (0.2)      (0.3)      (0.3)
                                     ---------  ---------  ---------
                                          1.2        1.7        2.5
                                     ---------  ---------  ---------
Income (loss) before income taxes...      1.3        0.5       (2.1)

Income tax expense (benefit)........      0.5        0.2       (1.0)
                                     ---------  ---------  ---------
Income (loss) from
 continuing operations..............      0.8        0.3       (1.1)

Discontinued operations:
  Income (loss) from operation
   of closed stores.................       --       (0.1)      (0.3)
  Loss on store closures............       --       (0.1)      (0.7)
  Income tax benefit................       --       (0.1)      (0.3)
                                     ---------  ---------  ---------
Loss on discontinued operations.....       --       (0.1)      (0.7)
                                     ---------  ---------  ---------
Net income (loss)...................      0.8 %      0.2 %     (1.8)%
                                     =========  =========  =========

Net Sales

Net sales from continuing operations increased by approximately $1.4 million, or 0.2%, to $662.0 million in fiscal 2004 as compared to $660.6 million in fiscal 2003. The fiscal 2004 sales increase is primarily attributable to promotional activity related to the celebration of the Company's 100^th anniversary, but was tempered by a continuing soft general economic environment in much of the Company's market areas and additional competitive pressures in the Central California markets. Comparable store sales for fiscal 2004, which includes sales for stores open for the full period in both years, increased by 0.2% as compared to the same 52-week period of the prior year.

The Company operated 63 department stores and 6 specialty stores as of the end of fiscal 2004 as compared to 63 department stores and 11 specialty stores as of the end of fiscal 2003. During 2004 the Company closed 5 specialty apparel stores and integrated their merchandise into the nearby Gottschalks store in the malls where they reside. As described more fully in Note 8 to the accompanying financial statements, during fiscal 2003 the Company closed six department stores. Two such stores were closed in February 2003, and one store was closed in each of March 2003, April 2003, July 2003 and January 2004.

As described more fully in Note 2 to the accompanying financial statements, in January 2003, pursuant to the terms of a Purchase and Sale Agreement between the Company and Household Bank SB (N.A.), which has subsequently been acquired by HSBC Group ("HSBC"), the Company sold its private label credit card accounts and accounts receivable to HSBC. In connection with the sale, the Company entered into two additional agreements with HSBC: an Interim Servicing Agreement (the "ISA") and a Credit Card Program Agreement (the "CCA"). Under the terms of the ISA, the Company continued to service the credit card receivables until HSBC assumed their servicing on May 14, 2003, as planned. HSBC compensated the Company for providing the services during the interim servicing period. The CCA provides that the Company will be paid a percentage of Net Cardholder Charges and a percentage of Other Revenue (each as defined in the CCA). All amounts received under the CCA, including amortization of prepaid program revenue, are reflected in the table below as service charge revenues. In connection with the sale, the Company also terminated its receivables securitization program.

Net credit revenues related to the Company's credit card receivables portfolio decreased by approximately $0.6 million or 16.7%, to $3.1 million in fiscal 2004 as compared to $3.7 million in fiscal 2003. As a percent of net sales, net credit revenues were 0.5% of net sales in fiscal 2004 as compared to 0.6% in fiscal 2003. Net credit revenues consist of the following:

(In thousands)                                              2004       2003
- --------------------------------------------------------  ---------  ---------
Service charge revenues................................. $   2,955  $   2,649
Interim servicing compensation - net....................                1,088
Amortization of interest-only strip.....................                 (313)
Recoveries of previously charged off receivables........       151        305
                                                          ---------  ---------
                                                         $   3,106  $   3,729
                                                          =========  =========

The interim servicing compensation amount represents servicing fees under the ISA attributable to general corporate activities that were not offset by direct costs of servicing the portfolio during the interim period. These revenues ceased at the end of the interim servicing period on May 14, 2003.

In connection with the sale of the receivables, on January 31, 2003, the Company recorded a $313,000 interest-only strip that was amortized over the estimated life of the underlying assets sold (approximately five months). The interest-only strip represented the portion of the initial revenues under the CCA that is considered a residual interest in the assets sold. The interest-only strip was fully amortized at the end of 2003.

Net rental income generated by the Company's various leased departments was $3.5 million in fiscal 2004, essentially equal to fiscal 2003. Leased department sales are presented net of the related costs for financial reporting purposes. Sales generated in the Company's leased departments, consisting primarily of fine jewelry departments and beauty salons, totaled $24.3 million in fiscal 2004 as compared to $24.5 million in fiscal 2003.

Cost of sales from continuing operations, which includes costs associated with the buying, handling and distribution of merchandise, decreased by approximately $3.3 million to $432.1 million in fiscal 2004 as compared to $435.4 million in fiscal 2003, a decrease of 0.7%. The decrease is primarily due to the decrease in sales volume. The Company's gross margin percentage increased to 34.7% in fiscal 2004 as compared to 34.1% in fiscal 2003. The increase in the gross margin percentage was primarily due to reductions in comparable store average inventory which enabled the Company to increase turnover and better manage its markdown strategies .

Selling, general and administrative expenses from continuing operations increased approximately $3.5 million, or 1.7%, to $207.0 million in fiscal 2004 as compared to $203.5 million in fiscal 2003. As a percentage of net sales, selling, general and administrative expenses increased 0.4% to 31.2% in fiscal 2004 as compared to 30.8% in fiscal 2003. The increase is primarily attributable to recent increases in unemployment insurance contribution rates and worker's compensation loss development rates in California. The Company is continuing to experience benefits from its cost control initiatives, but expects to see offsetting pressures from such rate increases in the foreseeable future.

Depreciation and amortization expense, which includes the (amortization) accretion of intangible assets other than goodwill, decreased by approximately $1.2 million or 8.1%, to $13.3 million in fiscal 2004 as compared to $14.5 million in fiscal 2003. As a percent of net sales, depreciation and amortization expense was 2.0% in fiscal 2004 and 2.2% in fiscal 2003. The dollar decrease is primarily the result of impairment charges taken during fiscal 2002 related to certain underperforming stores, partially offset by additional depreciation related to information systems placed in service during 2002 and capital expenditures for the renovation and expansion of certain existing stores.

Interest expense, which includes the amortization of deferred financing costs, decreased by approximately $3.8 million to $9.5 million in fiscal 2004 as compared to $13.3 million in fiscal 2003, a decrease of 28.5%. As a percent of net sales, interest expense decreased to 1.4% in fiscal 2004 as compared to 2.0% in fiscal 2003. These decreases are primarily due to lower outstanding borrowings on the Company's revolving credit facility and the elimination of certain higher interest debt facilities resulting from the amendment and extension of the Company's revolving credit facility. Total debt was $22.4 million lower at the end of fiscal 2004 as compared to the end of fiscal 2003. The weighted-average interest rate applicable to the facility was 4.6% in fiscal 2004 as compared to 5.2% in fiscal 2003.

Miscellaneous income, which includes the amortization of deferred income and other miscellaneous income and expense amounts, decreased by approximately $0.7 million to $1.6 million in fiscal 2004 as compared to $2.3 million in fiscal 2003. As a percent of net sales, miscellaneous income was 0.2% in fiscal 2004 and 0.3% in fiscal 2003. Fiscal 2003 included recovery of reserves related to the final settlement of certain net operating loss carry-back claims.

The Company's effective tax rate for continuing operations is 36.3% in fiscal 2004 as compared to 35.7% in fiscal 2003. Including the tax benefit reported in discontinued operations, the Company's effective tax rate is 36.3% in fiscal 2004 as compared to 36.8% in fiscal 2003.

As a result of the foregoing, the Company reported income from continuing operations of $5.3 million, or $0.40 per diluted share, in fiscal 2004 as compared $2.2 million, or $0.17 per diluted share, in fiscal 2003.

As described more fully in Note 8 to the accompanying financial statements, during fiscal 2003 the Company closed six store locations. These stores were determined to be either underperforming or inconsistent with the Company's long-term operating strategy. The net loss from operating these stores was $0.5 million in fiscal 2003. The loss from operation of discontinued stores consists of the following:

(In thousands)                                               2004        2003
- --------------------------------------------------------  ----------  ----------
Net sales from closed stores............................ $           $    6,973

Cost of sales...........................................                  4,437
Selling, general and administrative expenses............                  3,013
Depreciation and amortization...........................                     70
                                                          ----------  ----------
  Total costs and expenses..............................         --       7,520
                                                          ----------  ----------
Loss from operations of closed stores................... $       --  $     (547)
                                                          ==========  ==========

Net costs associated with the closure of stores were minor in fiscal 2004 primarily consisting of incremental costs associated with the closure of one store at January 31, 2004. Net costs associated with the closure of stores totaled $0.8 million in fiscal 2003 consisting of lease termination costs, severance and other incremental costs associated with the store closings.

Certain of the Company's stores may perform below expectations from time to time. In the event the Company is unable to improve the operating performance of such underperforming stores, the Company may consider the sale, sublease or closure of those stores in the future.

As a result of the foregoing, the Company reported net income of $5.3 million in fiscal 2004 as compared $1.4 million in fiscal 2003. On a per diluted share basis the 2004 net income was $0.40 per share as compared to net loss of $0.10 per share in fiscal 2003.

Net Sales

Net sales from continuing operations decreased by approximately $5.3 million, or 0.8%, to $660.6 million in fiscal 2003 as compared to $665.9 million in fiscal 2002. The fiscal 2003 sales decrease is primarily attributable to continued downturn in the general economic environment in much of the Company's market areas resulting in lower consumer spending during the first half of the fiscal period. Comparable store sales for fiscal 2003, which includes sales for stores open for the full period in both years, decreased by 0.7% as compared to the same 52-week period of the prior year.

The Company operated 63 department stores and 11 specialty stores as of the end of fiscal 2003 as compared to 69 department stores and 12 specialty stores as of the end of fiscal 2002. As described more fully in Note 8 to the accompanying financial statements, during fiscal 2003 the Company closed six department stores. Two such stores were closed in February 2003, and one store was closed in each of March 2003, April 2003, July 2003 and January 2004. During fiscal 2002 the Company closed two stores in each of June 2002 and January 2003.

As described more fully above and in Note 2 to the accompanying financial statements, in January 2003 the Company sold its private label credit card accounts and accounts receivable to HSBC In connection with the sale, the Company also terminated its receivables securitization program. As a result, net credit revenues related to the Company's credit card receivables portfolio decreased by approximately $4.5 million or 54.7%, to $3.7 million in fiscal 2003 as compared to $8.2 million in fiscal 2002. As a percent of net sales, net credit revenues were 0.6% of net sales in fiscal 2003 as compared to 1.2% in fiscal 2002. Net credit revenues consist of the following:

(In thousands)                                              2003       2002
- --------------------------------------------------------  ---------  ---------
Service charge revenues................................. $   2,649  $  17,813
Interim servicing compensation - net....................     1,088
Amortization of interest-only strip.....................      (313)
Interest expense on securitized receivables.............               (4,863)
Charge-offs on receivables sold and provision for
  credit losses on receivables ineligible for sale......       305     (4,821)
Gain on sale of receivables.............................                   96
                                                          ---------  ---------
                                                         $   3,729  $   8,225
                                                          =========  =========

The interim servicing compensation amount represents servicing fees under the ISA attributable to general corporate activities that were not offset by direct costs of servicing the portfolio during the interim period. These revenues ceased at the end of the interim servicing period on May 14, 2003.

In connection with the sale of the receivables, on January 31, 2003, the Company recorded a $313,000 interest-only strip that was amortized over the estimated life of the underlying assets sold (approximately five months). The interest-only strip represented the portion of the initial revenues under the CCA that is considered a residual interest in the assets sold. The interest-only strip has been fully amortized.

As expected, the Company experienced a substantial decrease in net credit revenues in fiscal 2003 as a result of the receivables sale to HSBC, as well as a reduction in selling, general and administrative expenses as a result of outsourcing the credit card servicing to HSBC and a reduction in interest expense arising from reduced line of credit borrowings resulting from the application of the proceeds from the HSBC transaction. The net credit revenues the Company received under the CCA approximately equaled the net revenues from its former in-house credit card operations, net of operating expenses and interest expense.

Net rental income generated by the Company's various leased departments decreased by approximately $0.03 million, or 0.9%, to $3.53 million in fiscal 2003 as compared to $3.56 million in fiscal 2002. This decrease is primarily due to a continued downturn in the general economic environment in much of the Company's market areas resulting in lower consumer spending during the first three quarters of the fiscal year.

Leased department sales are presented net of the related costs for financial reporting purposes. Sales generated in the Company's leased departments, consisting primarily of fine jewelry departments and beauty salons, totaled $24.5 million in fiscal 2003 as compared to $24.9 million in fiscal 2002.

Cost of sales from continuing operations, which includes costs associated with the buying, handling and distribution of merchandise, decreased by approximately $6.0 million to $435.4 million in fiscal 2003 as compared to $441.4 million in fiscal 2002, a decrease of 1.4%. The dollar decrease is primarily due to the decrease in sales volume. The Company's gross margin percentage increased to 34.1% in fiscal 2003 as compared to 33.7% in fiscal 2002. The increase in the gross margin percentage was primarily due to a change in accounting for certain allowances received from vendors as a result of the Company's adoption of Emerging Issues Task Force ("EITF") Issue No. 02-16 Accounting by a Customer (including a Reseller) for Cash Consideration Received from a Vendor that previously would have been reported as reductions in advertising expense, in addition to lower markdowns as a percentage of sales as compared to the prior year.

Selling, general and administrative expenses from continuing operations decreased by approximately $3.9 million, or 1.9%, to $203.5 million in fiscal 2003 as compared to $207.4 million in fiscal 2002. As a percentage of net sales, selling, general and administrative expenses decreased 0.3% to 30.8% in fiscal 2003 as compared to 31.1% in fiscal 2002. The dollar decrease is primarily attributable to the elimination of the in-house credit card operations in connection with the sale of receivables to HSBC and cost reduction efforts initiated throughout all areas of the Company, particularly in the areas of payroll and related fringe benefits, reduced advertising expenditures resulting from an increased reliance on more effective targeted marketing efforts (partially offset by the change in accounting for certain allowances previously mentioned), and reduced communications costs. Such cost savings were partially offset by increased professional fees and insurance costs. The Company is continuing to implement programs aimed at reducing operating costs throughout all areas of the Company. Although the Company anticipates it will be successful in achieving its cost reduction initiatives, there can be no assurance that the Company will be able to fully offset the impact of increases in certain of these costs in the future.

Depreciation and amortization expense, which includes the (amortization) accretion of intangible assets other than goodwill, decreased by approximately $0.1 million or 1.0%, to $14.5 million in fiscal 2003 as compared to $14.6 million in fiscal 2002. As a percent of net sales, depreciation and amortization expense was 2.2% in fiscal 2003 and fiscal 2002. The dollar decrease is primarily the result of impairment charges taken during fiscal 2002 related to certain underperforming stores, partially offset by additional depreciation related to information systems placed in service during 2002 and capital expenditures for the renovation and expansion of certain existing stores.

No asset impairment charges related to continuing operations were recorded during fiscal 2003. During fiscal 2002, the Company recorded non-cash asset impairment charges of $9.5 million to write down long-lived assets related to certain underperforming stores that the Company continues to operate, primarily former Lamonts locations. These charges consisted of $3.6 million of property and equipment, $5.8 million of leasehold interests and $0.1 million of goodwill. The charges were determined by comparing projected net operating cash flows, including estimated proceeds from the sale of certain assets, to the carrying value of the stores' long-lived assets.

Receivables Sale Costs

In connection with the sale of accounts receivable to HSBC in fiscal 2002, the Company recorded receivable sale transaction costs of $2.0 million including consulting, legal, and other fees, and the net non-cash write-off of the remaining accounts of GCRC. These charges are partially offset by a $0.3 million retained interest only strip that was amortized over the estimated life of the underlying assets sold (estimated to be approximately five months). The interest only strip represents the portion of the initial program fees to be paid that is considered a residual interest in the assets sold.

Interest expense, which includes the amortization of deferred financing costs, decreased by approximately $2.6 million to $13.3 million in fiscal 2003 as compared to $15.9 million in fiscal 2002, a decrease of 16.3%. As a percent of net sales, interest expense decreased to 2.0% in fiscal 2003 as compared to 2.3% in fiscal 2002. These decreases are primarily due to lower outstanding borrowings on the Company's revolving credit facility as a result of the repayment of some borrowings with part of the net proceeds from the sale of the receivables to HSBC. The weighted-average interest rate applicable to the facility was 5.2% in fiscal 2003 as compared to 5.5% in fiscal 2002.

Interest expense related to securitized receivables is reflected as a reduction of net credit revenues and is not included in interest expense for financial reporting purposes.

In fiscal 2002, in connection with the termination of its receivables securitization program, the Company recorded a loss on extinguishment of debt of $3.7 million representing prepayment penalties and the write-off of unamortized deferred loan fees related to the program.

Miscellaneous income, which includes the amortization of deferred income and other miscellaneous income and expense amounts, increased by approximately $0.5 million to $2.3 million in fiscal 2003 as compared to $1.8 million in fiscal 2002. As a percent of net sales, miscellaneous income was 0.3% in fiscal 2003 and fiscal 2002. This increase was primarily due to an increase in the net income of the partnership which owns the Company's corporate headquarters building. The Company has a 36% interest in the partnership and accounts for its investment using the equity method of accounting. Fiscal 2002 includes recoveries of prior interest charges arising from the partial settlement of certain net operating loss carryback claims, partially offset by charges to the Company's partnership investment in its corporate offices related to the partnership's implementation of SFAS No. 133.

The Company's effective tax rate for continuing operations is an expense of 35.7% in fiscal 2003 as compared to a benefit of 46.3% in fiscal 2002. Including the tax benefit reported in discontinued operations, the Company's effective tax rate is an expense of 36.8% in fiscal 2003 as compared to a benefit of 42.5% in fiscal 2002. The fiscal 2002 tax benefit includes $0.8 million arising from the realization of net operating loss carryback claims.

As a result of the foregoing, the Company reported income from continuing operations of $2.2 million, or $0.17 per diluted share, in fiscal 2003 as compared to a net loss of $7.9 million, or $0.62 per diluted share, in fiscal 2002.

As described more fully in Note 8 to the accompanying financial statements, during fiscal 2003 the Company closed six store locations. During fiscal 2002 the Company closed four store locations. These stores were determined to be either underperforming or inconsistent with the Company's long-term operating strategy. The net loss from operating these stores was $0.5 million in fiscal 2003 and $1.9 million in fiscal 2002. The loss from operation of discontinued stores consists of the following:

(In thousands)                                               2003        2002
- --------------------------------------------------------  ----------  ----------
Net sales from closed stores............................ $    6,973  $   25,512

Cost of sales...........................................      4,437      15,669
Selling, general and administrative expenses............      3,013      10,906
Depreciation and amortization...........................         70         885
                                                          ----------  ----------
  Total costs and expenses..............................      7,520      27,460
                                                          ----------  ----------
Loss from operations of closed stores................... $     (547) $   (1,948)
                                                          ==========  ==========

Net costs associated with the closure of stores totaled $0.8 million in fiscal 2003 primarily consisting of lease termination costs, severance, and other incremental costs associated with the store closings. Net costs associated with the closure of stores totaled $4.8 million in fiscal 2002 consisting of lease termination costs, severance and other incremental costs associated with the store closings of approximately $0.6 million and non-cash asset impairment charges related to stores closed in fiscal 2003 and fiscal 2002 of $4.5 million, partially offset by a gain of $0.3 million from the sale of lease rights and fixtures and equipment related to two of the closed locations.

As a result of the foregoing, the Company reported net income of $1.4 million in fiscal 2003 as compared to a net loss of $12.4 million in fiscal 2002. On a per diluted share basis the 2003 net income was $0.10 per share as compared to net loss of $0.97 per share in fiscal 2002.

Liquidity and Capital Resources

The Company's working capital requirements are currently met through a combination of cash provided by operations, borrowings under its senior revolving credit facility, short-term trade and factor credit and by proceeds from external financings and sale transactions. As described more fully below and in Note 2 to the accompanying financial statements, on January 31, 2003 the Company sold its credit card accounts and accounts receivable to HSBC. Proceeds from the sale were used to reduce the Company's debt, including off-balance sheet securitization obligations, by over $100 million. At the closing date, the Company's availability under its revolving credit facility increased by approximately $30 million and the Company experienced increases in availability from $7 million to $33 million during fiscal 2003 as compared to fiscal 2002. As of March 1, 2004, the Company re-negotiated its senior revolving credit facility (the "GE facility"). The GE facility provides for borrowings of up to $165.0 million and has been extended through February 28, 2009. The GE facility provides for lower rates of interest than the previous credit facility and refinanced an existing real estate loan, which also has resulted in lower interest costs to the Company. In addition, the GE facility reduced the number of financial covenants to one fixed charge covenant. As a result, the Company experienced an additional improvement of approximately $21.0 million in average daily availability during fiscal 2004 as compared to fiscal 2003 and believes its liquidity position after the sale of the receivables and the re-negotiation of the revolving credit facility is substantially improved in comparison to prior years. Availability was $56.7 million as of January 29, 2005.

In fiscal 2004, the Company generated a total of $38.5 million from operations as compared to $23.1 million positive cash flow from operations in fiscal 2003 and $20.9 million in fiscal 2002. The $15.4 million increase in cash provided by operating activities in fiscal 2004 relative to fiscal 2003 was primarily due to increased net income, the return of certain deposits and the timing of certain payables, partially offset by lower levels of inventory reductions.

Net cash used in investing activities amounted to $13.7 million, $4.0 million, and $12.2 million in fiscal 2004, 2003, and 2002, respectively. The net cash outflow in fiscal 2004 increased from fiscal 2003 in the amount of $9.7 million, primarily related to increased capital expenditures for store remodeling and new store construction (see "Uses of Liquidity").

Net cash used in financing activities was $24.6 million, $20.1 million, and $5.2 million in fiscal 2004, 2003 and 2002, respectively. The net cash outflow in fiscal 2004 was principally attributable to the payoff of certain high interest debt and continued reductions of outstanding borrowing on the Company's revolving credit facility, partially offset by additional funds provided by a lower fixed interest term loan connected to the amended revolving credit agreement.

On January 31, 2003, pursuant to the terms of a Purchase and Sale Agreement between the Company and HSBC, the Company sold substantially all of its private label credit card accounts and the related accounts receivable to HSBC. The $102.8 million purchase price was paid in cash at closing, $100.3 million of which was allocated to the purchase of such credit card accounts and receivables and $2.5 million of which comprised prepaid program revenue. Proceeds from the sale were used to pay in full $73.2 million principal and accrued interest due to the Series 1999-1 and Series 2000-1 certificateholders under the Company's accounts receivable securitization program plus $3.4 million in prepayment penalties. The remaining proceeds of $26.2 million and $3.8 million of cash remaining on deposit in certain bank accounts relating to the securitization was released to the Company at closing. All of the $30 million released to the Company was applied as a reduction of outstanding borrowings under the Company's revolving credit facility.

In connection with the sale, on January 31, 2003 the Company entered into two additional agreements with HSBC: an Interim Servicing Agreement (the "ISA") and a Credit Card Program Agreement (the "CCA"). Under the terms of the ISA, the Company continued to service the credit card receivables until HSBC assumed the servicing on May 14, 2003. HSBC compensated the Company for providing the services during the interim servicing period.

The CCA sets forth the terms and conditions under which HSBC will issue credit cards to the Company's customers and pay the Company for sales made on the cards. Under the terms of the CCA, the Company is required to perform certain duties, including the duties to receive in-store customer payments on behalf of HSBC and remit such payments to HSBC. The CCA has a term of five (5) years and is cancelable earlier by either party under certain circumstances, as described in the CCA. The CCA further provides that the Company will be paid a percentage of Net Cardholder Charges and a percentage of Other Revenue (each as defined in the CCA). As expected, the Company experienced a substantial decrease in net credit revenues in fiscal 2003 as a result of the receivables sale to HSBC, as well as a reduction in selling, general and administrative expenses as a result of outsourcing the credit card servicing to HSBC and a reduction in interest expense arising from reduced line of credit borrowings resulting from the application of the proceeds from the HSBC transaction. The net credit revenues the Company received under the CCA has, to date, approximately equaled the net credit revenues from its former in-house credit card operations, net of operating expenses and interest expense, although no assurances can be given that the amounts received under the CCA will continue at these levels or at all.

On February 1, 2002, the Company entered into a three-year senior revolving credit facility with General Electric Capital Corporation ("GE Capital") as agent, and The CIT Group/Business Credit as syndication agent (the "Original GE facility"). On March 1, 2004 the Company finalized an amendment and restatement of the Original GE facility (the "GE facility"). The GE facility provides up to $165.0 million of working capital financing through February 28, 2009. The GE facility consists of a revolving credit facility of up to $156.0 million (including a $20.0 million letter of credit sub-facility) and a fully funded term loan of $9.0 million. Borrowings under the revolving credit facility are limited to the sum of (a) a specified percentage of eligible credit card receivables, and (b) the lesser of specified percentages of (i) the cost of eligible inventory and (ii) the net recovery value of the inventory, as determined by periodic valuation performed by an independent appraiser. Such borrowings are further limited by a requirement to maintain a minimum of $5.0 million of excess availability at all times, and other reserves that are in effect. As of January 29, 2005, outstanding borrowings under the GE facility totaled $45.8 million, and excess borrowing availability under the facility, after the deduction of the minimum availability requirement and other reserves, totaled $56.7 million.

In connection with the extension of the GE facility, the subordinated note in the principal amount of $21.2 million at January 29, 2005 with an affiliate was extended through May 30, 2009 and provides for payment of up to $8.0 million of principle balance through that date, subject to certain minimum excess availability requirements under the GE facility.

In January 2005 the Company amended the GE facility to provide for a springing lock-box arrangement. Pursuant to guidance in the Financial Accounting Standards Board's Emerging Issues Task Force Issue No. 95-22, "Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement," the Company has classified all of its revolving credit facility as long-term as of fiscal year ended January 29, 2005. Although the Company has held the intent and ability to maintain this debt outstanding for more than one year, prior to such amendment the Company has classified its borrowings under the facility as a current liability pursuant to such guidance. Accordingly, borrowings under the revolving credit facility as of January 31, 2004 are classified as current liabilities.

As of January 29, 2005, interest charged on amounts borrowed under the revolving portion of the GE facility are at the prime rate (5.25% at January 29, 2005), or at the Company's option, at the applicable LIBOR rate plus 1.50% per annum (4.19% at January 29, 2005), and interest charged on the term loan is a fixed rate of 6.6% per annum. In addition, the Company pays an unused commitment fee equal to 0.375% per annum on the average unused daily balance of the revolving portion of the GE facility. The interest rate applicable to the revolving portion of the GE facility is adjusted upwards or downwards on a quarterly basis based on a pricing matrix which is tied to the Company's daily average excess availability for the preceding fiscal quarter (as defined in the agreement). Under the pricing matrix, the applicable interest rate could range from a rate as low as prime, or LIBOR plus 1.50%, to as high as prime plus 0.75%, or LIBOR plus 2.75%.

On March 22, 2002, the Company had entered into a $15.0 million financing with Kimco Capital Corp. (the "Kimco facility") at a fixed interest rate of 12.0% per annum. The Kimco facility was secured by first priority liens on three of the Company's owned stores and with subordinate liens on substantially all other assets of the Company securing the Original GE facility. The Kimco facility was co-terminus with the Original GE facility, with monthly principal payments of $80,000 plus interest at a fixed rate of 12% per annum, and a balloon payment upon maturity on January 31, 2005 of $12.4 million. In March 2004, the Company prepaid the remaining $13.2 million balance of the Kimco facility (including a prepayment penalty, and other transaction fees and costs) with borrowings under the GE facility. The term loan under the GE facility is collateralized by two of the three owned stores previously securing the Kimco facility.

The GE facility contains restrictive financial and operating covenants, including the requirement to maintain a fixed charge coverage ratio of 1:1 (as defined in the agreement). As of January 29, 2005, management believes the Company was in compliance with all restrictive financial covenants applicable to the GE facility.

The success of the Company's business is highly dependent upon the adequacy of trade credit offered by key factors and vendors, the vendors' ability and willingness to sell it products at favorable prices and terms, and the willingness of vendors to ship merchandise on a timely basis. The Company has been able to purchase adequate levels of merchandise to support its operations and expects the level of trade credit to be sufficient to support its operations in the foreseeable future. Restrictions to the amount of trade credit granted by key factors and vendors can adversely impact the volume of merchandise the Company is able to purchase. Any significant reduction in the volume of merchandise the Company is able to purchase, or a prolonged disruption in the timing of when merchandise is received, would have a material adverse affect on the Company's business, liquidity position, and results of operations.

Due to low liquidity levels during fiscal 2002 and 2003 unsecured credit granted by key factors, which can represent over 50% of total trade credit granted to the Company, was restricted. Management negotiated the restoration of partially secured credit lines with certain key factors by issuing standby letters of credit. The issuance of those letters of credit reduced the Company's borrowing availability under its revolving line of credit. In order to offset the majority of this availability reduction, the Harris Company, a subsidiary of El Corte Ingles and an affiliate of the Company, agreed to provide a short-term credit enhancement to the revolving line of credit under the terms of a Credit Facilitation Agreement (the "CFA") entered into with the Company on February 22, 2002. The CFA was terminated as a result of the closing of the sale of receivables to HSBC. As a result of continued improvements in the Company's operations and liquidity position, including sale of receivables to HSBC and the March 1, 2004 renegotiation of the GE facility, all of the letters of credit issued for the benefit of certain key factors have been allowed to expire and unsecured credit lines with all of the Company's key factors and many of the Company's unfactored suppliers are sufficient to provide an adequate level of merchandise to support the Company's operations.

On February 14, 2005, the Company amended and extended the financing of its ownership interest in the partnership that owns the Company's corporate headquarters building. The related note payable of $3.7 million, which originally provided for interest only payments at a variable rate of interest of prime plus 1.5% per annum, and was due in full upon maturity on May 24, 2005, has been modified to a fully amortizing note bearing interest at a fixed rate of 7.50% per annum and maturing on February 24, 2010. There is no prepayment penalty associated with the note.

The Company may consider various other sources of liquidity in the future, including but not limited to the issuance of additional securities that might have a dilutive effect on existing shareholders or incurring additional indebtedness which would increase the Company's leverage.

The Company's primary uses of liquidity are for working capital, debt service requirements and capital expenditures. Capital expenditures in fiscal 2004, totaling $13.7 million, were primarily related to the renovation, refixturing, and expansion of certain existing locations, and to certain information system enhancements. In July of fiscal 2004 the Company entered into an agreement to open one new concept store in the River Park area of Fresno, California. The anticipated completion date of the project is August 2005 with an estimated net cost to the Company of approximately $4.5 million. On April 15, 2005 the Company also opened a new store in Albany, Oregon at a total cost to the Company of approximately $1.2 million.

As of January 29, 2005, the Company had issued a total of $3.3 million of standby letters of credit and documentary letters of credit totaling $2.1 million. The standby letters of credit were issued to provide collateral for workers compensation insurance policies. Management believes that the likelihood of any draws under the remaining workers compensation standby letters of credit is remote. Documentary letters of credit are issued in the ordinary course of business to facilitate the purchase of merchandise from overseas suppliers. The supplier draws against the documentary letter of credit upon delivery of the merchandise.

The following tables set forth certain information concerning the Company's debt obligations and commitments to make future payments under contracts, such as debt and lease agreements, and under contingent commitments.

Contractual Obligations:

                                                           Payments due by period (1)
                                                                  (In thousands)
                                       ----------------------------------------------------------------
                                        Fiscal     Fiscal     Fiscal     Fiscal     Fiscal     There-
                                         2005       2006       2007       2008       2009       after
                                       ---------  ---------  ---------  ---------  ---------  ---------
Long-term debt ...................... $   1,525  $   1,597  $   1,702  $   1,786  $   1,710  $  14,865
Capitalized lease obligations........     2,205      1,466        947        476        476      2,204
Subordinated note
  payable to affiliate (2)...........     1,000      1,000      1,000      2,000     16,180         --
Non-cancelable operating leases......    23,169     22,772     19,475     17,570     15,013     75,700
Purchase obligations (3).............     6,416        439        183        141        115        358
                                       ---------  ---------  ---------  ---------  ---------  ---------
Total contractual cash obligations... $  34,315  $  27,274  $  23,307  $  21,973  $  33,494  $  93,127
                                       =========  =========  =========  =========  =========  =========


                                                  Amount of commitment expiration by period
                                                                (In thousands)
                                       ----------------------------------------------------------------
                                        Fiscal     Fiscal     Fiscal     Fiscal     Fiscal     There-
                                         2005       2006       2007       2008       2009       after
                                       ---------  ---------  ---------  ---------  ---------  ---------
Senior revolving credit facility (4). $      --  $      --  $          $      --  $  45,753  $      --
Standby letters of credit............     3,250         --         --         --         --         --
Documentary letters of credit........     2,107         --         --         --         --         --
                                       ---------  ---------  ---------  ---------  ---------  ---------
                                      $   5,357  $      --  $      --  $      --  $  45,753  $      --
                                       =========  =========  =========  =========  =========  =========

In the ordinary course of business, the Company enters into arrangements with vendors to purchase merchandise up to twelve months in advance of expected delivery. These purchase orders do not contain any significant termination payments or other penalties if cancelled.

Cash generated by operations, together with liquidity provided by the GE facility, the CCA and other financial resources are expected to adequately finance the Company's planned cash requirements for fiscal 2005.

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4." This statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) and is effective for fiscal years beginning after June 15, 2005. The Company does not anticipate that the adopting of this statement will have a material impact on the Company's consolidated financial position, results of operations or cash flows.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"). This statement is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Under the provisions of this statement, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. The transition alternatives include retrospective and prospective adoption methods. Under the retrospective method, prior periods may be restated based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either for all periods presented or as of the beginning of the year of adoption. The prospective method requires that compensation expense be recognized beginning with the effective date, based on the requirements of this statement, for all share-based payments granted after the effective date, and based on the requirements of SFAS 123, for all awards granted to employees prior to the effective date of this statement that remain unvested on the effective date. The provisions of this statement are effective as of the beginning of the first annual reporting period that begins after June 15, 2005. The Company is currently evaluating the requirements of this revision and has not determined its method of adoption.

 In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions." This statement eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, and replaces it with an exception for exchanges that do not have commercial substance. The provisions of the statement are effective for fiscal periods beginning after June 15, 2005. The Company does not anticipate that the adopting of this statement will have a material impact on the Company's consolidated financial position, results of operations or cash flows.

Although inflation has not been a material factor in the Company's operations during the past several years, the Company has experienced increases in the costs of certain merchandise, salaries, employee benefits and other general and administrative costs, including utilities, health care and workers' compensation and property and casualty insurance costs. The Company is generally able to offset these increases by adjusting its selling prices or by modifying its operations. The Company's ability to adjust selling prices is limited by competitive pressures in its market areas.

The Company values its merchandise inventories at the lower of LIFO cost or market using the retail inventory method of accounting. Under the LIFO method, which is determined by using the department store price indices published by the Bureau of Labor Statistics, the cost of products sold reported in the financial statements approximates current costs and thus reduces the impact of inflation due to increasing costs on reported income. The valuation of the Company's merchandise inventories under the LIFO method is currently equal to that as determined by the first-in, first-out (FIFO) method of accounting.

The Company's business, like that of most retailers, is subject to seasonal influences, with the major portion of net sales, gross profit and operating income realized during the Christmas selling months of November and December of each year, and, to a lesser extent, during the Easter and Back-to-School selling seasons. The Company's results may also vary from quarter to quarter as a result of, among other things, the timing and level of the Company's sales promotions, weather, fashion trends and the overall health of the economy, both nationally and in the Company's market areas. Working capital requirements also fluctuate during the year, increasing substantially prior to the Christmas selling season when the Company must carry significantly higher inventory levels.

The following table sets forth unaudited quarterly results of operations for fiscal 2004 and 2003 (in thousands, except per share data). Summarized quarterly financial information in fiscal 2003 and the first three quarters of fiscal 2004 have been restated to reflect the correction of an error related to lease accounting as discussed in Note 16 to the accompanying financial statements.

                                                              2004
                                             ----------------------------------------------
Quarter Ended                                  May 1      July 31    October 30  January 29
- -------------------------------------------  ----------  ----------  ----------  ----------
Net sales from continuing operations....... $  144,533  $  147,776  $  147,893     221,790
Gross profit...............................     49,714      52,292      52,472      75,386
Income (loss) from continuing operations
  as previously reported...................     (2,088)        350      (1,391)      8,822
Income (loss) from continuing
  operations (as restated).................     (2,216)        224      (1,529)      8,822
Discontinued operations, net of tax........        (20)         --          --          --
Net income (loss) as previously reported...     (2,108)        350      (1,391)      8,822
Net income (loss) (as restated)............     (2,236)        224      (1,529)      8,822

Net income (loss) per common share
Basic
Income (loss) from continuing operations
  as previously reported................... $    (0.16) $     0.03  $    (0.11) $     0.68
Income (loss) from continuing
  operations (as restated)................. $    (0.17) $     0.02  $    (0.12) $     0.68
Discontinued operations.................... $       --  $       --  $       --  $       --
Net income (loss) as previously reported... $    (0.16) $     0.03  $    (0.11) $     0.68
Net income (loss)(as restated)............. $    (0.17) $     0.02  $    (0.12) $     0.68

Diluted
Income (loss) from continuing operations
  as previously reported................... $    (0.16) $     0.03  $    (0.11) $     0.65
Income (loss) from continuing
  operations (as restated)................. $    (0.17) $     0.02  $    (0.12) $     0.65
Discontinued operations.................... $       --  $       --  $       --  $       --
Net income (loss) as previously reported... $    (0.16) $     0.03  $    (0.11) $     0.65
Net income (loss)(as restasted)............ $    (0.17) $     0.02  $    (0.12) $     0.65

Weighted-average number of common
  shares outstanding:
    Basic..................................     12,883      12,904      12,927      12,976
    Diluted................................     12,883      13,266      12,927      13,552

                                                               2003
                                             ----------------------------------------------
Quarter Ended                                  May 3      August 2   November 1  January 31
- -------------------------------------------  ----------  ----------  ----------  ----------
Net sales from continuing operations....... $  137,915  $  149,757  $  145,288  $  227,614
Gross profit...............................     46,575      53,455      50,916      74,258
Income (loss) from continuing operations
  as previously reported...................     (3,563)        334      (2,590)      8,571
Income (loss) from continuing
  operations (as restated).................     (3,683)        206      (2,720)      8,433
Discontinued operations, net of tax........       (424)       (307)        (23)       (128)
Net income (loss) as previously reported...     (3,987)         27      (2,613)      8,443
Net income (loss) (as restated)............     (4,107)       (101)     (2,743)      8,305

Net income (loss) per common share
Basic
Income (loss) from continuing operations
  as previously reported................... $    (0.28) $     0.03  $    (0.20) $     0.67
Income (loss) from continuing
  operations (as restated)................. $    (0.29) $     0.02  $    (0.21) $     0.66
Discontinued operations.................... $    (0.03) $    (0.03) $           $    (0.01)
Net income (loss) as previously reported... $    (0.31) $       --  $    (0.20) $     0.66
Net income (loss)(as restated)............. $    (0.32) $    (0.01) $    (0.21) $     0.65

Diluted
Income (loss) from continuing operations
  as previously reported................... $    (0.28) $     0.03  $    (0.20) $     0.66
Income (loss) from continuing
  operations (as restated)................. $    (0.29) $     0.02  $    (0.21) $     0.65
Discontinued operations.................... $    (0.03) $    (0.03) $       --  $    (0.01)
Net income (loss) as previously reported... $    (0.32) $       --  $    (0.20) $     0.65
Net income (loss)(as restated)............. $    (0.32) $    (0.01) $    (0.21) $     0.64

Weighted-average number of common
  shares outstanding:
    Basic..................................     12,801      12,818      12,844      12,857
    Diluted................................     12,801      12,818      12,844      13,102

The Company is exposed to market risks in the normal course of business due to changes in interest rates on short-term borrowings under its senior revolving credit facility. As of January 29, 2005, the Company also had one term loan bearing variable interest rates. The Company does not engage in financial transactions for speculative or trading purposes, nor does the Company purchase or hold any derivative financial instruments.

As of January 29, 2005, borrowings subject to a variable interest rate, represented 52.3% of the Company's total outstanding borrowings. The interest payable on the Company's senior revolving credit facility is based on variable interest rates and is therefore affected by changes in market interest rates. An increase of 52 basis points on existing floating rate borrowings (a 10% change from the Company's weighted-average interest rate as of January 29, 2005) would reduce the Company's pre-tax net income and cash flow by approximately $0.4 million. This 52 basis point increase in interest rates would not materially affect the fair value of the Company's fixed rate financial instruments. (See Note 1 to the accompanying financial statements.)

The response to this item is set forth under Part IV, Item 15, included elsewhere herein.

None.

The Company maintains "disclosure controls and procedures," as such term is defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are designed to ensure that information required to be disclosed in the Company's reports, pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding the required disclosures. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.

The Company's Chief Executive Officer and Chief Financial Officer (its principal executive officer and principal financial officer, respectively), with the participation of the Company's management, have carried out an evaluation of the effectiveness of the Company's "disclosure controls and procedures," as of January 29, 2005.

As discussed in Note 16 to the accompanying consolidated Financial Statements, as a result of the February 7, 2005 letter issued by the Chief Accountant of the Securities and Exchange Commission, we reviewed our policy related to the accounting for operating leases and the depreciable lives of related leasehold improvements. We determined that our policy should be corrected to adjust depreciation expense to correct the depreciable lives for certain leasehold improvements, and to correct the recording of certain tenant allowances and construction reimbursements, as reductions in rent expense that had previously been recorded as reductions in the cost of the underlying constructed assets. In addition, the corrections include adjusting lease terms of certain leases to include bargain renewal option periods where exercise of the options would be reasonably assured, and recognizing the straight-line effect over the lease term of such changes in rents during the option periods. As a result, the Company restated its consolidated financial statements for the fiscal years ended January 31, 2004 and February 1, 2003, and its summary financial information in each of fiscal 2000 through 2003, included in this Annual Report on Form 10K.

After considering the underlying conditions that gave rise to the restatement discussed above, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K, were not effective in ensuring that material information relating to the Company, required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

During the fourth quarter of fiscal 2004, there were no significant changes in the Company's internal controls over financial reporting or in other factors that could significantly affect internal controls over financial reporting.

During the first quarter of 2005, the Company remediated the material weakness in internal control over financial reporting and the ineffectiveness of its disclosure controls and procedures by conducting a review of its accounting related to leases, and correcting its method of accounting for tenant improvement allowances, lease terms and depreciable lives used for leasehold costs and improvements.

The evaluation referred to above did not identify any other significant change in our internal control over financial reporting that occurred during the period covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

The information required by Item 10 of Form 10-K, other than the following information required by Paragraph (b) of Item 401 of Regulation S-K, is incorporated by reference from those portions of the Company's definitive proxy statement with respect to the Annual Stockholders' Meeting scheduled to be held on June 23, 2005, to be filed pursuant to Regulation 14A (the "2004 Proxy") under the headings "Nominees for Election as Director" and "Section 16(a) Beneficial Ownership Reporting Compliance."

As of March 31, 2005, the name, age and title of the senior executive officers of the Company are as follows:

James R. Famalette became President and Chief Executive Officer of the Company on June 25, 1999 after serving as President and Chief Operating Officer of the Company since April 14, 1997. Prior to joining the Company, Mr. Famalette was President and Chief Executive Officer of Liberty House, a department and specialty store chain based in Honolulu, Hawaii, from 1993 through 1997, and served in a variety of other positions with Liberty House from 1987 through 1993, including Vice President, Stores and Vice President, General Merchandise Manager. From 1975 to 1987 he served in a variety of senior level management positions with Village Fashions/Cameo Stores and Colonies, a specialty store chain.

Gary L. Gladding has been Executive Vice President of the Company since 1987, and joined the Company as Vice President/General Merchandise Manager in 1983 (1). Prior to 1983, he served in a variety of management positions with Lazarus Department Stores, a division of Federated Department Stores, Inc., and the May Department Stores Co.

J. Gregory Ambro became Senior Vice President/Chief Administrative and Financial Officer of the Company on November 20, 2003. Prior to joining Gottschalks, Mr. Ambro served for three years as Senior Vice President and Chief Financial Officer of Bradlees, a regional discount department store in the Northeast. From 1995 to 2000 he served as Chief Financial Officer of Marshalls, an off-price retailer, Streamline, a grocery and consumer products retailer and Harris Teeter, an upscale supermarket chain in the Southeast. From 1978 to 1994 Mr. Ambro served in a variety of financial positions for Marshalls and the May Department Stores Co.

Michael J. Schmidt became Senior Vice President/Director of Stores of the Company in 1985(1). From 1983 through 1985, he was Manager of the Company's Fresno, California Fashion Fair store. Prior to joining the Company, he held management positions with Liberty House, Allied Corporation and R.H. Macy & Co., Inc.

_______________________

The information required by this item is incorporated by reference from those portions of the Company's 2005 Proxy under the headings "Executive Compensation" and "Director Compensation for Fiscal Year 2004."

The information required by this item is incorporated by reference from the portion of the Company's 2005 Proxy under the heading "Security Ownership of Certain Beneficial Owners and Management" and Item 5. Market for Registrant's Common Equity, Related Stockholder matters and Issuer Purchases of Equity Securities in this report on Form 10-K.

The information required by this item is incorporated by reference from the portion of the Company's 2005 Proxy under the heading "Certain Relationships and Related Transactions."

The information required by this item is incorporated by reference from the portion of the Company's 2005 Proxy under the heading "Information on Independent Public Accountants".

To the Board of Directors and Stockholders of
Gottschalks Inc.
Fresno, California

We have audited the accompanying consolidated balance sheets of Gottschalks Inc. and Subsidiary (the "Company") as of January 29, 2005 and January 31, 2004, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three fiscal years in the period ended January 29, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15 (a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Gottschalks Inc. and Subsidiary at January 29, 2005 and January 31, 2004, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 29, 2005 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement 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.

As discussed in Note 16, the Company's fiscal 2003 and 2002 consolidated financial statements have been restated.

/s/ Deloitte & Touche LLP

Fresno, California
April 29, 2005

GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands)

                                                        January 29,  January 31,
                                                           2005         2004
                                                        -----------  -----------
                                                                    (As Restated)
                                                                    (See Note 16)
ASSETS
CURRENT ASSETS:
  Cash................................................ $     5,470  $     5,172
  Receivables - net...................................       6,920        9,145
  Merchandise inventories.............................     152,753      156,552
  Other...............................................       9,669       10,849
                                                        -----------  -----------
    Total current assets..............................     174,812      181,718

PROPERTY AND EQUIPMENT - net..........................     126,509      127,561

OTHER ASSETS:
  Goodwill - net......................................       7,501        7,501
  Other intangibles - net.............................         652          689
  Other...............................................       6,101        4,730
                                                        -----------  -----------
                                                            14,254       12,920
                                                        -----------  -----------
                                                       $   315,575  $   322,199
                                                        ===========  ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Trade accounts payable and accrued expenses......... $    75,414  $    67,467
  Revolving line of credit............................                   51,009
  Current portion of long-term debt...................       1,525        1,789
  Current portion of capitalized lease obligations....       1,717        1,936
  Deferred income taxes...............................       1,717        1,073
                                                        -----------  -----------
    Total current liabilities.........................      80,373      123,274

LONG-TERM OBLIGATIONS, less current portion...........      71,403       41,302

OTHER LIABILITIES.....................................      18,298       18,228

DEFERRED INCOME TAXES.................................      11,965       10,847

SUBORDINATED NOTE PAYABLE TO AFFILIATE - net..........      21,180       22,180

COMMITMENTS AND CONTINGENCIES (Notes 7 and 15)

STOCKHOLDERS' EQUITY:
  Common stock, par value of $.01 per share;
    30,000,000 shares authorized; 12,955,935
    and 12,878,802 issued.............................         130          129
  Additional paid-in capital..........................      72,146       71,440
  Retained earnings...................................      40,080       34,799
                                                        -----------  -----------
                                                           112,356      106,368
                                                        -----------  -----------
                                                       $   315,575  $   322,199
                                                        ===========  ===========

See notes to consolidated financial statements.

GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)

                                                                   Fiscal Years Ended
                                                        ----------------------------------------
                                                        January 29,   January 31,   February 1,
                                                            2005          2004          2003
                                                        ------------  ------------  ------------
                                                                      (As Restated) (As Restated)
                                                                      (See Note 16) (See Note 16)

Net sales............................................. $    661,992  $    660,574  $    665,916
Net credit revenues...................................        3,106         3,729         8,225
Net leased department revenues........................        3,515         3,525         3,557
                                                        ------------  ------------  ------------
    Total revenues....................................      668,613       667,828       677,698
                                                        ------------  ------------  ------------
Costs and expenses:
  Cost of sales.......................................      432,128       435,370       441,426
  Selling, general and
    administrative expenses...........................      206,897       203,448       207,367
  Depreciation and amortization.......................       13,325        14,497        14,633
  Asset impairment charges............................           --            --         9,502
  Receivables sale costs..............................           --            --         1,749
                                                        ------------  ------------  ------------
     Total costs and expenses.........................      652,350       653,315       674,677
                                                        ------------  ------------  ------------
Operating income .....................................       16,263        14,513         3,021
                                                        ------------  ------------  ------------
Other (income) expense:
  Interest expense....................................        9,509        13,296        15,883
  Losses on early extinguishment of debt..............           --            --         3,695
  Miscellaneous income................................       (1,565)       (2,262)       (1,802)
                                                        ------------  ------------  ------------
                                                              7,944        11,034        17,776
                                                        ------------  ------------  ------------
Income (loss) from continuing operations
  before income tax (benefit).........................        8,319         3,479       (14,755)

Income tax expense (benefit)..........................        3,018         1,243        (6,838)
                                                        ------------  ------------  ------------

Income (loss) from continuing operations..............        5,301         2,236        (7,917)

Discontinued operations:
  Loss from operations of closed stores...............           --          (547)       (1,948)
  Loss on store closures..............................          (31)         (789)       (4,801)
  Income tax benefit..................................          (11)         (454)       (2,295)
                                                        ------------  ------------  ------------
  Loss on discontinued operations.....................          (20)         (882)       (4,454)
                                                        ------------  ------------  ------------
  Net income (loss)................................... $      5,281  $      1,354  $    (12,371)
                                                        ============  ============  ============

Net income (loss) per common share:
Basic
  Income (loss) from continuing operations............ $       0.41  $       0.17  $      (0.62)
  Loss on discontinued operations .................... $      (0.00) $      (0.07) $      (0.35)
  Net income (loss) per common share.................. $       0.41  $       0.10  $      (0.97)
Diluted
  Income (loss) from continuing operations............ $       0.40  $       0.17  $      (0.62)
  Loss on discontinued operations .................... $      (0.00) $      (0.07) $      (0.35)
  Net income (loss) per common share.................. $       0.40  $       0.10  $      (0.97)
Weighted average number of common shares outstanding
  Basic...............................................       12,922        12,830        12,747
  Diluted.............................................       13,352        12,919        12,747

See notes to consolidated financial statements.

GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except per share data)

                                               Common Stock   Additional
                                         -------------------   Paid-in    Retained
                                           Shares     Amount   Capital    Earnings     Total
                                         -----------  ------  ----------  ---------  ---------
BALANCE, FEBRUARY 2, 2002
  (As previously reported, see Note 16). 12,726,364  $  127  $   71,189  $  46,856  $ 118,172
  Prior period adjustment...............                                    (1,040)    (1,040)
                                         -----------  ------  ----------  ---------  ---------

BALANCE, FEBRUARY 2, 2002
  (As restated, see Note 16)............ 12,726,364     127      71,189     45,816    117,132
  Net loss (as restated, See Note 16)...                                   (12,371)   (12,371)
  Shares issued under
   stock purchase plan and
   related tax benefit..................     75,305       1         124                   125
                                         -----------  ------  ----------  ---------  ---------

BALANCE, FEBRUARY 1, 2003
  (As restated, see Note 16)............ 12,801,669     128      71,313     33,445    104,886
  Net income (as restated, see Note 16).                                     1,354      1,354
  Issuance of common stock
   pursuant to nonqualified
   stock purchase plan and
   related tax benefit..................      9,000                  27                    27
  Shares issued under
   stock purchase plan and
   related tax benefit..................     68,133       1         100                   101
                                         -----------  ------  ----------  ---------  ---------

BALANCE, JANUARY 31, 2004
  (As restated, see Note 16)............ 12,878,802     129      71,440     34,799    106,368
  Net income............................                                     5,281      5,281
  Issuance of common stock
   pursuant to nonqualified
   stock purchase plan and
   related tax benefit..................    132,250       1         634                   635
  Shares issued under
   stock purchase plan and
   related tax benefit..................     19,217                  72                    72
                                         -----------  ------  ----------  ---------  ---------
BALANCE, JANUARY 29, 2005............... 13,030,269  $  130  $   72,146  $  40,080  $ 112,356
                                         ===========  ======  ==========  =========  =========

See notes to consolidated financial statements.

GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)

                                                                                  Fiscal Years Ended
                                                                        ----------------------------------------
                                                                        January 29,   January 31,   February 1,
                                                                            2005          2004          2003
                                                                        ------------  ------------  ------------
                                                                                      (As restated) (As restated)
                                                                                      (See Note 16) (See Note 16)
OPERATING ACTIVITIES:
Net income (loss)..................................................... $      5,281  $      1,354  $    (12,371)
Adjustments:
  Depreciation and amortization.......................................       13,326        14,569        15,518
  Deferred income taxes...............................................        1,761            24        (2,955)
  Amortization of deferred income and
    other deferred items..............................................           69        (2,446)          436
  Net proceeds from sale of credit card accounts receivable...........           --            --        26,233
  Provision for credit losses.........................................                        200           825
  Asset impairment charges............................................                         --        10,867
  Store closure costs.................................................           31           789         3,762
  Net loss on sales of stores.........................................                                     (326)
  Net loss from sale of assets........................................           16            59           131
  Other non-cash items, net...........................................          (31)         (968)         (139)
Changes in assets and liabilities:
     Receivables......................................................        2,225         1,295        (7,051)
     Merchandise inventories..........................................        5,287         9,332        (2,370)
     Other current and long-term assets...............................          779         3,515         9,184
     Trade accounts payable and accrued expenses......................        8,005        (5,842)        5,950
     Other current and long-term liabilities..........................        1,787         1,181        (4,669)
                                                                        ------------  ------------  ------------
         Net cash provided by operating activities....................       38,536        23,062        43,025

INVESTING ACTIVITIES:
Purchases of property and equipment...................................      (13,745)       (4,363)       (8,279)
Proceeds from sale of lease rights, fixtures and equipment............            3            27         1,010
Proceeds from investment in limited partnership.......................           91           352           216
                                                                        ------------  ------------  ------------
        Net cash used in investing activities.........................      (13,651)       (3,984)       (7,053)

FINANCING ACTIVITIES:
Net proceeds (repayments) from new revolving credit facility..........      (14,256)       (7,836)      (37,062)
Proceeds from sale and leaseback transactions.........................           --            --         1,334
Proceeds from long-term obligations...................................        9,000            --        20,010
Principal payments on long-term obligations...........................      (17,135)       (4,568)      (14,737)
Changes in cash management liability..................................       (1,843)       (7,845)       (1,195)
Debt issuance costs...................................................       (1,060)           --          (973)
Proceeds from exercise of options.....................................          635            27            --
Proceeds from sale of stock under employee
  stock purchase plans................................................           72           101           125
                                                                        ------------  ------------  ------------
Net cash (used in) financing activities...............................      (24,587)      (20,121)      (32,498)
                                                                        ------------  ------------  ------------
INCREASE (DECREASE) IN CASH...........................................          298        (1,043)        3,474
CASH AT BEGINNING OF YEAR.............................................        5,172         6,215         2,741
                                                                        ------------  ------------  ------------
CASH AT END OF YEAR................................................... $      5,470  $      5,172  $      6,215
                                                                        ============  ============  ============

See notes to consolidated financial statements.

GOTTSCHALKS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)               2004       2003       2002
- -----------------------------------------------   --------   --------   --------
Net income (loss) as reported.................. $   5,281  $   1,354  $ (12,371)
Deduct: Total stock-based compensation expense
  determined under fair value based method
  for all awards, net of related tax effects...      (308)       (99)      (347)
                                                  --------   --------   --------
Pro forma net income (loss).................... $   4,973  $   1,255  $ (12,718)
                                                  ========   ========   ========

Earnings (loss) per share:
  As reported:
   Basic....................................... $    0.41  $    0.10  $   (0.97)
   Diluted..................................... $    0.40  $    0.10  $   (0.97)

  Pro-forma:
   Basic....................................... $    0.38  $    0.10  $   (1.00)
   Diluted..................................... $    0.37  $    0.10  $   (1.00)

(In thousands)                                   2004        2003        2002
- --------------------------------------------  ----------  ----------  ----------
Service charge revenues..................... $    2,955  $    2,649  $   17,813
Interim servicing compensation - net........                  1,088
Amortization of interest-only strip.........                   (313)
Interest expense on securitized receivables.                             (4,863)
Charge-offs on receivables sold and
  provision for credit losses on
  receivables ineligible for sale...........        151         305      (4,821)
Gain on sale of receivables.................         --          --          96
                                              ----------  ----------  ----------
                                             $    3,106  $    3,729  $    8,225
                                              ==========  ==========  ==========

                                              January 29,   January 31,
(In thousands)                                    2005          2004
- --------------------------------------------  ------------  ------------
Furniture, fixtures and equipment........... $    100,871  $     95,839
Buildings and leasehold improvements........       92,974        90,306
Land........................................       15,185        15,185
Buildings and equipment under
  capital leases............................       18,720        18,720
Construction in progress....................        7,095         1,141
                                              ------------  ------------
                                                  234,845       221,191
Less accumulated depreciation
  and amortization..........................     (108,336)      (93,630)
                                              ------------  ------------
                                             $    126,509  $    127,561
                                              ============  ============

                                              January 29,   January 31,
(In thousands)                                    2005          2004
- --------------------------------------------  ------------  ------------
Trade accounts payable...................... $     24,548  $     20,035
Cash management liability...................        5,483         7,326
Accrued expenses............................       23,385        19,673
Accrued payroll and related liabilities.....        8,139         7,718
Taxes, other than income taxes..............       12,059        12,059
Federal and state income taxes payable......        1,801           656
                                              ------------  ------------
                                             $     75,415  $     67,467
                                              ============  ============

                                              January 29,   January 31,
(In thousands)                                    2005          2004
- --------------------------------------------  ------------  ------------
Revolving line of credit.................... $     45,753  $         --
9.39% mortgage loans payable, due 2010......       17,059        17,513
12.0% note payable..........................                     13,240
Capital lease obligations...................        5,707         7,643
Variable rate note payable, due 2005........        3,700         3,700
Other mortgage loans and notes payable......        2,426         2,931
                                              ------------  ------------
                                             $     74,645  $     45,027
  Less current portion......................        3,242         3,725
                                              ------------  ------------
                                             $     71,403  $     41,302
                                              ============  ============

                                                Capital      Operating
(In thousands)                                   Leases        Leases
- --------------------------------------------  ------------  ------------
2005........................................ $      2,205  $     23,169
2006........................................        1,466        22,772
2007........................................          947        19,475
2008........................................          476        17,570
2009........................................          476        15,013
Thereafter..................................        2,204        75,700
                                              ------------  ------------
Total minimum lease payments................        7,774  $    173,699
  Amount representing interest..............       (2,067)  ============
                                              ------------
Present value of minimum lease payments.....        5,707
  Less current portion......................       (1,717)
                                              ------------
                                             $      3,990
                                              ============

(In thousands)                                    2004          2003         2002
- --------------------------------------------  ------------  ------------  ----------
Operating leases:
  Buildings:
    Minimum rentals......................... $     23,360  $     23,125  $   23,409
    Contingent rentals......................        2,839         2,895       3,016
  Fixtures and equipment....................        1,910         1,994       1,618
                                              ------------  ------------  ----------
                                             $     28,109  $     28,014  $   28,043
                                              ============  ============  ==========

(In thousands)                                               2004        2003         2002
- --------------------------------------------------------  ----------  ----------  ------------
Net sales from closed stores............................ $           $    6,973  $     25,512
Net lease department revenues...........................         --          --            --
                                                          ----------  ----------  ------------
  Total Revenues........................................         --       6,973        25,512

Cost of sales...........................................                  4,437        15,669
Selling, general and administrative expenses............                  3,013        10,906
Depreciation and amortization...........................                     70           885
                                                          ----------  ----------  ------------
  Total costs and expenses..............................         --       7,520        27,460
                                                          ----------  ----------  ------------

Loss from operations of closed stores................... $       --  $     (547) $     (1,948)
                                                          ==========  ==========  ============

(In thousands)                                    2004          2003         2002
- --------------------------------------------  ------------  ------------  ----------
Current:
  Federal................................... $      1,066  $      1,848  $   (4,179)
  State.....................................          180           221        (783)
                                              ------------  ------------  ----------
                                                    1,246         2,069      (4,962)
                                              ------------  ------------  ----------
Deferred:
  Federal...................................        1,412          (896)     (2,316)
  State.....................................          360            70         440
                                              ------------  ------------  ----------
                                                    1,772          (826)     (1,876)
                                              ------------  ------------  ----------
                                             $      3,018  $      1,243  $   (6,838)
                                              ============  ============  ==========

                                      January 29,             January 31,
                                         2005                    2004
                                ----------------------  ----------------------
                                Deferred    Deferred    Deferred    Deferred
                                   Tax         Tax         Tax         Tax
                                 Assets    Liabilities   Assets    Liabilities
                                ---------  -----------  ---------  -----------
Current:
  Accrued employee benefits... $   1,094  $            $   1,036  $
  Credit losses...............
  State income taxes..........       110                      74
  LIFO inventory reserve......                 (3,897)                 (3,093)
  Supplies inventory..........                   (647)                   (558)
  Workers' compensation.......     2,718                   1,825
  Valuation Allowance.........      (750)                   (494)
  Other items, net............     1,210       (1,555)     1,448       (1,311)
                                ---------  -----------  ---------  -----------
                                   4,382       (6,099)     3,889       (4,962)
                                ---------  -----------  ---------  -----------
Long-Term:
  Net operating loss and tax
    credit carryforwards......     4,514                   5,561
  State income taxes..........       690                     567
  Property and equipment......                (13,326)                (14,437)
  Accounting for leases.......        --       (3,180)        --       (3,737)
  Leasehold interests.........       878                   1,911
  Impaired assets.............     1,239                   1,450
  Deferred income.............     1,063       (3,812)     1,326       (3,558)
  Deferred rent...............     1,206                   1,232
  Valuation allowance.........    (1,504)                 (1,323)
  Other items, net............     1,228         (960)       940         (779)
                                ---------  -----------  ---------  -----------
                                   9,314      (21,278)    11,664      (22,511)
                                ---------  -----------  ---------  -----------
                               $  13,696  $   (27,377) $  15,553  $   (27,473)
                                =========  ===========  =========  ===========

                                                    2004       2003       2002
- -----------------------------------------------   --------   --------   --------
Statutory rate.................................      35.0 %     35.0 %    (35.0)%
State income taxes, net of
 federal income tax benefit....................       4.3        8.0       (0.9)
General business credits.......................      (2.3)      (6.7)      (1.3)
Amortization of goodwill.......................
Tax refund claims..............................                            (4.0)
Other items, net...............................      (0.7)      (0.6)      (5.1)
                                                  --------   --------   --------
Effective rate.................................      36.3 %     35.7 %    (46.3)%
                                                  ========   ========   ========

(Shares in thousands)                               2004       2003       2002
- -----------------------------------------------   --------   --------   --------
Weighted average number of
  shares - basic...............................    12,922     12,830     12,747
Effect of assumed option exercises.............       430         89
                                                  --------   --------   --------
Weighted average number of
  shares - diluted.............................    13,352     12,919     12,747
                                                  ========   ========   ========

                          2004                 2003                 2002
                     -------------------- -------------------- --------------------
                                 Weighted-            Weighted-            Weighted-
                       Number    Average    Number    Average    Number    Average
                         of      Exercise     of      Exercise     of      Exercise
                       Shares     Price     Shares     Price     Shares     Price
                     ----------  -------- ----------  -------- ----------  --------
Options outstanding
  at beginning of
  year.............. 1,688,500  $   5.36  1,713,000  $   5.99  1,535,500  $   6.68
Granted.............   261,500      6.10    279,500      1.64    295,500      2.61
Exercised...........  (132,250)     3.71     (9,000)     3.03
Cancelled...........  (270,000)     9.34   (295,000)     5.57   (118,000)     6.42
                     ----------  -------- ----------  -------- ----------  --------
Options outstanding
 at end of year..... 1,547,750  $   4.96  1,688,500  $   5.36  1,713,000  $   5.99
                     ==========  ======== ==========  ======== ==========  ========
Options exercisable
 at end of year.....   941,375  $   5.69  1,067,625  $   6.95  1,009,250  $   7.47
                     ==========  ======== ==========  ======== ==========  ========

                                Weighted-
                                 Average    Weighted-
                                Remaining    Average
    Range of         Number    Contractual  Exercise
 Exercise Prices  Outstanding  Life (yrs.)    Price
- ----------------- ------------ -----------  ---------
$1.13 to $3.28        534,250        7.46  $    2.61
$3.52 to $6.03        622,000        6.94  $    5.04
$6.19 to $9.21        391,500         4.1  $    8.03
- ----------------- ------------ -----------  ---------
$1.13 to $9.21      1,547,750        6.40  $    5.69
================= ============ ===========  =========

                                           2004       2003       2002
                                         ---------  ---------  ---------
Risk-free interest rate................       3.4 %      1.3 %      2.3 %
Expected dividend yield................        --         --         --
Expected volatility....................      55.0 %     57.0 %     57.0 %
Expected option life (years)...........         5          5          5
Fair value of options granted..........     $3.41      $0.68      $1.09

Statement of Operations
                                                January 31,   January 31,     February 1,    February 1,
For the year ended:                                2004           2004           2003           2003
                                               -------------  -------------  -------------  -------------
                                               (As previously (As restated)  (As previously (As restated)
                                                 reported)                     reported)

Selling, general and administrative expenses. $     203,966  $     203,448  $     207,885  $     207,367
Depreciation and amortization................        13,177         14,497         13,374         14,633
Operating income.............................        15,315         14,513          3,762          3,021
Income (loss) from continuing operations
  before income tax (benefit)................         4,281          3,479        (14,014)       (14,755)
Income tax expense (benefit).................         1,529          1,243         (6,495)        (6,838)
Income (loss) from continuing operations.....         2,752          2,236         (7,519)        (7,917)
Net income (loss)............................ $       1,870  $       1,354  $     (11,973) $     (12,371)
Net income (loss) per common share:
Basic
  Income (loss) from continuing operations... $        0.22  $        0.17  $       (0.59) $       (0.62)
  Loss from discontinued operations.......... $        0.07  $       (0.07) $       (0.35) $       (0.35)
  Net income (loss) per common share......... $        0.15  $        0.10  $       (0.94) $       (0.97)
Diluted
  Income (loss) from continuing operations... $        0.21  $        0.17  $       (0.59) $       (0.62)
  Loss from discontinued operations.......... $       (0.07) $       (0.07) $       (0.35) $       (0.35)
  Net income (loss) per common share......... $        0.14  $        0.10  $       (0.94) $       (0.97)

Balance Sheet
                                               January 31,     January 31,
As of:                                            2004             2004
                                             ---------------  ---------------
                                             (As previously    (As restated)
                                                reported)

Property and equipment, net................ $       129,832  $       127,561
Other intangibles - net....................             854              689
Total other assets.........................          12,535           12,370
Total assets...............................         323,991          321,555
Deferred income taxes, current.............             569            1,073
Other liabilities..........................          16,874           17,678
Deferred income taxes (less current portion)         12,637           11,352
Retained earnings..........................          36,753           34,799
Total stockholders' equity.................         108,322          106,368
Total liabilities and stockholders' equity. $       323,991  $       321,555


Statement of Cash Flows
                                               February 1,      February 1,
For the year ended:                               2003             2003
                                             ---------------  ---------------
                                             (As previously    (As restated)
                                                reported)

Net cash provided by operating activities.. $        20,871  $        43,025

Net cash used in investing activities...... $       (12,218) $        (7,053)

Net cash used in financing activities...... $        (5,179) $       (32,498)

                                                    ADDITIONS
                                          ------------------------
          COL. A               COL. B       COL. C        COL. D         COL. E          COL. F
- ---------------------------  -----------  ----------     ---------     -----------     -----------
                                                          Charged
                             Balance at   Charged to     to Other                      Balance at
                              Beginning   Costs and      Accounts      Deductions        End of
Description                   of Period    Expenses      Describe       Describe         Period
- ---------------------------  -----------  ----------     ---------     -----------     -----------
Year ended January 29, 2005:
  Store closure reserve.... $   337,000  $              $             $  (337,000)(4) $        --
  Deferred tax asset
    valuation allowance.... $ 1,818,000  $  436,000 (5) $             $               $ 2,254,000
  Allowance for vendor
    claims receivable...... $   281,000  $              $             $  (191,000)(6) $    90,000


Year ended January 31, 2004:
  Store closure reserve.... $   618,000  $  542,000 (3) $             $  (823,000)(4) $   337,000
  Deferred tax asset
    valuation allowance.... $ 1,438,000  $  380,000 (5) $             $               $ 1,818,000
  Allowance for vendor
    claims receivable...... $    81,000  $  200,000 (6) $             $               $   281,000


Year ended February 1, 2003:
  Allowance for doubtful
    accounts............... $   354,544  $  825,061 (1) $             $(1,179,605)(2) $
  Store closure reserve.... $   529,000  $  581,000 (3) $             $  (492,000)(4) $   618,000
  Deferred tax asset
    valuation allowance.... $   645,000  $  793,000 (5) $             $               $ 1,438,000
  Allowance for vendor
    claims receivable...... $    91,000  $              $             $   (10,000)(6) $    81,000