Harold's Stores, Inc. and its wholly-owned subsidiaries (collectively "Harold's" or the "Company"), through a chain of women's and men's specialty apparel stores in 21 states, offers high-quality, classically inspired apparel to the upscale, quality-conscious consumer primarily in the 30 to 50 year old age group. The stores typically are strategically located in shopping centers and malls with other upscale specialty retailers and are enhanced by specially designed fixtures and visual props, to create an appealing stage for presentation of the Company's distinctive women's and men's apparel and accessories. More than 95% of sales consists of the Company's designs controlled by Harold's own designers and merchants and sourced by Harold's manufacturing staff from domestic, European and Asian manufacturers. The remainder consists of merchandise selected to complement Harold's merchandise presentation. See "Business - Product Development and Sourcing Progra ms."

As of February 1, 2003, the Company's 50 stores were comprised of 43 full-price retail stores and seven outlet stores to clear markdowns and slow-moving merchandise, in addition to limited merchandise produced specifically for the outlets. Store occupancy costs include base and percentage rent, common area maintenance expense, utilities and depreciation of leasehold improvements.

There was a decline in comparable store sales of 9.9% for 2002, compared to a decline of 16.3% for 2001. The Company believes that the declines experienced in comparable store sales during 2002 were primarily attributable to insufficient inventory levels in key styles, sizes and categories leading to disappointing sales during the fall and holiday seasons. The Company's average sales per square foot for retail stores excluding outlets open during the entire year were $324 and $346 for 2002 and 2001, respectively.

The Company believes that its future success will be achieved by increasing sales momentum at existing stores, focusing on the fashion needs of its target customer and expanding the number of its women's and men's apparel stores. During 2002, the Company did not open any new stores in order to focus on reinvigorating the Harold's brand. Once a profitable growth trend has been re-established, the Company plans to continue a store expansion program. The Company's expansion program will continue to focus primarily on markets currently served by the Company and in new markets that represent a geographical progression from existing markets. The Company currently does not plan to open any new stores during 2003. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity" for further information.

The Company operates on a 52-53 week year, which ends on the Saturday closest to January 31. References herein to 2003, 2002, 2001, and 2000 refer to the years ended January 31, 2004, February 1, 2003, February 2, 2002, and February 3, 2001, respectively. The year 2000 comprised a 53-week year while 2002 and 2001 each comprised 52-week years.

In August 2002, the Company closed on the sale of 200,000 shares of its Series 2002-A Preferred Stock receiving $4 million of proceeds which were used to reduce the Company's outstanding borrowings.

In January 2003, the Company eliminated several corporate office positions. Severance of approximately $330,000 associated with these terminations was recorded in the fourth quarter of 2002. The estimated annualized savings from this corporate restructuring should approximate $2.0 million inclusive of benefits.

In February 2003, the Company completed two important financing events. A new three-year credit facility was entered into with Wells Fargo Retail Finance, LLC and closing occurred on a $5 million private equity investment. At the same time, the Company entered into a lease amendment on the Dallas corporate office building, reducing rental amounts to be paid as well as square footage of the space. Additionally, the Company entered into an amendment to the employment contract for Clark Hinkley, Chief Executive Officer. Such amendment reduced Mr. Hinkley's annual base salary from $450,000 to $350,000 for the period from February 1, 2003 to January 31, 2004 and provided for further modifications to termination provisions if certain financial objectives are not achieved.

Subsequent to February 1, 2003, the Company decided to close seven unprofitable store locations: Tampa, Florida; Memphis-Wolfchase, Tennessee; Phoenix, Arizona; Hillsboro, Texas (outlet); San Marcos, Texas (outlet); and New River, Arizona (outlet). Such stores will be closed between March 2, 2003 and June 4, 2003

See Note 14 in the 2002 Annual Report for more details surrounding each of these subsequent events.

The Company's merchandise mix in women's apparel includes coordinated sportswear, dresses, outerwear, shoes and accessories, in updated classic styles. A fundamental feature of the Company's marketing strategy is the development of original exclusive apparel items. The Company estimates that more than 95% of its women's apparel sales are attributable to the Company's product development and proprietary label programs. In 2002 and 2001, women's apparel accounted for approximately 76% of sales.

The men's apparel product line includes tailored clothing, furnishings, sportswear, outerwear and shoes in updated classic styles. In 2002, the Company's proprietary label apparel accounted for more than 95% of total men's sales. The majority of the men's proprietary label sales are in the Company's Old School Company and Harold Powell Clothing lines. In 2002 and 2001, men's apparel accounted for approximately 24% of sales.

The following table sets forth the approximate percentage of sales attributable to the various merchandise categories offered by the Company in the past three years:

The Company's stores range in size from 3,000 to 13,402 square feet, with the typical store ranging from 4,000 to 6,000 square feet. The Company's stores generally are open seven days per week and evenings. The following table lists Harold's store locations as of February 1, 2003, with selected information for each location.

The employee population of a typical full-line Harold's store consists of a store manager, two assistant managers (women's and men's), one or two desk associates, and five to seven sales associates, most of whom work on a flex-time basis (20-25 hours per week). The majority of sales associates are generally paid a commission against a draw. Commissions range from 1% to 11% based on the type of product sold and the tenure and productivity of the associate. Store managers are paid a salary plus a performance bonus based on attainment of sales goals, expense control, inventory shrinkage and random store shop scores.

The Company's product development and sourcing programs enable it to offer exclusive items not available in competing stores or catalogs. More than 95% of sales is merchandise where the Company has created or controlled the design, demonstrating the Company's commitment to a unique product mix. The Company believes that this unique product mix enables it to compete with, and differentiates it from, larger apparel chains by offering customers an exclusive garment at a price below designers and similar open market merchandise. Direct creation and control of merchandise also enables the Company to offer superior quality and fit as well as improve its initial mark up. The Company's private label merchandise consists of items developed by the Company and manufactured exclusively for the Company.

An important component of the Company's product development programs is market research of styles and fabrics. The Company's design team shops European and domestic markets for emerging fashion trends and for fabric, artwork and samples for new garment designs. The product development staff adapts and develops fabric designs and garment models. These design models assist the Company in sourcing and in negotiations with mills and vendors. The Company's product development programs allow it to participate directly in the design and manufacturing of an exclusive product without investing in costly manufacturing equipment. The Company's development program is implemented by its offices in New York and Dallas, Texas and its association with independent agents in Hong Kong; Florence, Italy; Istanbul,Tukey; and Porto, Portugal. The Company imports a significant portion of its merchandise directly from the Far East and Italy.

The Company's merchandisers review the developed styles, analyze fashion trends and historical data and select the best pieces to convert into prints and patterns for the next season. Once the new styles are selected, the team then determines the specifications of various styles - detailing a garment's cut, fit, fabric, color and trim. After the specifications have been finalized, the fabric is ordered from domestic and international fabric mills. The finished fabric is then shipped to manufacturers who cut, sew and trim the completed design. Additionally, a growing percentage of merchandise is purchased as finished goods.

The Company's line of leather goods, which are sold in all store locations, is made and sourced through various third parties in Italy. Shoes, belts, handbags and small leather goods are co-designed by the Company's merchandisers and manufacturing partners.

The specialty retail apparel business fluctuates according to changes in customer preferences dictated by fashion and season. These fluctuations affect the inventory owned by apparel retailers, since merchandise usually must be ordered well in advance of the season and sometimes before fashion trends are evidenced by customer purchases. The Company's policy of carrying basic merchandise items in full assortments of sizes and colors requires it to carry a significant amount of inventory. The Company must enter into contracts for the purchase and manufacture of proprietary label apparel well in advance of its selling seasons.

The Company continually reviews its inventory levels in order to identify slow-moving merchandise and broken assortments (items no longer in stock in a sufficient range of styles, colors and sizes) and may use markdowns to clear this merchandise. Markdowns also may be used if inventory exceeds customer demand for reasons of style, seasonal adaptation, changes in customer preference, or if it is determined that the inventory in stock will not sell at its currently marked price. Such markdowns may have an adverse impact on earnings, depending on their extent and the amount of inventory affected. The Company utilizes its outlet stores to dispose of prior season or slow moving merchandise as well as merchandise developed specifically for the outlet division. In addition, in lieu of utilizing outside liquidation resources ("jobbers"), slow moving merchandise is generally cleared periodically through regional off-site discount sales which are promoted under the name "Haro ld's Warehouse Sale".

The Company operates an 85,000 square foot distribution facility in Norman, Oklahoma capable of processing merchandise for 74 stores. With a modest additional investment, the facility will have the capability of processing merchandise for 138 stores. All of the Company's merchandise is routed through the distribution center from various manufacturers. The majority of merchandise arrives at the distribution center with bar coded tickets placed on the garment by the vendor. Each item is examined, sorted and boxed for shipment by common carrier to the Company's stores. This process is done in a time sensitive manner in a substantially paperless environment, utilizing computers, bar codes and scanners.

The Company's business has historically followed a seasonal pattern, peaking three times per year during early spring (March through April), the early fall (September through October) and holiday (Thanksgiving through Christmas) periods. During 2002, approximately 51% of the Company's sales occurred and the majority of the Company's net loss was incurred during the third and fourth quarters.

The Company's business is highly competitive. The Company's stores compete with national and local department stores, specialty and discount store chains, catalogers and e-commerce, and independent retail stores which offer similar lines of specialty apparel. Many of these competitors have significantly larger sales volumes and assets than the Company.

Important factors in competing successfully in the retail industry include the following: depth of selection in sizes and colors and styles of merchandise, merchandise procurement and pricing, ability to anticipate fashion trends and customer preferences, inventory control, reputation, quality of private-label merchandise, store design and location, marketing and customer service. Given the large number of companies in the retail industry, the Company cannot estimate the number of its competitors or its relative competitive position.

In addition, the success of the Company's operations depends upon a number of factors relating to economic conditions and general consumer spending. If current economic conditions worsen and consumer spending is restricted, the Company's growth and profitability could be negatively impacted.

The Company's stores accept the proprietary "Harold's" credit card, and Visa, MasterCard, Discover and the American Express credit cards. Credit card sales were 73% in 2002, 79% in 2001 and 69% in 2000. In 2002, 30% of sales were made with the Harold's credit card and 43% were made with third-party credit cards. The Company maintains a credit department for customer service, credit authorizations, credit investigation, billing and collections. As of February 1, 2003, the provision for bad debts from Company credit card sales was approximately 0.8% of Harold's proprietary credit card sales for 2002.

Harold's has offered customers its proprietary credit card since 1974. The Company believes that providing its own credit card enhances customer loyalty while providing customers with additional credit at costs to the Company significantly lower than those charged by outside credit card companies (i.e. Visa, MasterCard, Discover and American Express). At February 1, 2003, the Company had approximately 30,732 active credit accounts and the average cardholder had a line of $1,400 and an outstanding balance of $321. Charges by holders of the Company's credit card during 2002 totaled approximately $26,789,000. Finance charge revenue is netted against selling, general and administrative expenses and was approximately $1,152,000, $1,074,000, and $1,111,000, in 2002, 2001, and 2000, respectively.

The Company maintains an in-house marketing department, which produces in-house print advertising for daily and weekly newspapers and other print media, and designs the Company's direct mail pieces. In 2002, the Company spent approximately $4,220,000 (4.7% of sales) on advertising and direct mail production costs as compared to approximately $3,889,000 (3.7% of sales) in 2001. This expenditure includes the production and mailing costs associated with the Company's in-home mailer. The marketing department is also involved in the production of annual reports to the Company's stockholders, sales training materials, internal marketing materials, and all corporate logos and labeling.

The Company places great emphasis on upgrading and integrating its management information systems ("MIS"). The Company believes these upgrades will enable it to maintain more efficient control of its operations and facilitate faster and more informed responses to potential opportunities and problems. The Company maintains an MIS team to oversee these management information systems, which include credit, sales reporting, accounts payable, and merchandise control, reporting and distribution.

The Company uses an integrated point-of-sale ("POS") inventory and management system to control merchandising and sales activities. This system automatically polls each location every 24 hours and provides a detailed report by merchandise category the next morning. Management evaluates this information daily and implements merchandising controls and strategies as needed. The POS system provides personnel scheduling and time keeping capabilities, as well as, a customer profile function to better identify and track consumer demographics.

The Company has also implemented Arthur, a computerized merchandise planning and allocation system, which interacts with the Company's AS400 and Island Pacific Systems software. Arthur facilitates seasonal planning and allocation by department and store, and provides certain data for financial planning.

"Harold's", "Harold Powell", "Old School Clothing Company", "OSCC Bespoke" and other trademarks either have been registered, or have trademark applications pending, with the United States Patent and Trademark Office and with the registries of various foreign countries. The Company files U.S. copyright registration on the original design and artwork purchased or developed by the Company.

The Company's three Houston stores and the Katy, Texas outlet bear the name "Harold Powell" rather than "Harold's" to avoid confusion with an existing local men's apparel store which operates in Houston under the name "Harold's" with prior usage in this market predating the Company's federal registration.

On March 15, 2003, the Company had approximately 390 full-time and 616 part-time employees. Additionally, the Company hires temporary employees during the peak late summer and holiday seasons. None of the Company's employees belong to any labor union and the Company believes it has good relations with its employees.

At February 1, 2003, the Company owned the Austin outlet store and leased 49 stores. The Company believes rent payable under its store leases is a key factor in determining the sales volume at which a store can be profitably operated. The leases typically provide for an initial term of 12 years. In most cases, the Company pays a base rent plus a contingent rent based on the store's net sales in excess of a certain threshold, typically four to five percent of net sales in excess of the applicable threshold. Among current store leases, one store lease has percentage rent only. All other store leases provide for a base rent with percentage rent payable above specified minimum net sales. Five of the leased stores open during all of 2002 operated at sales volumes above the breakpoint (the sales volume below which only base rent is payable). Based on the Company's current level of sales per square foot, the Company believes that some of the risk from any decline in future sales volume in these stores is reduced because a corresponding decline in occupancy expense would occur.

Substantially all of the leases require the Company to pay property taxes, insurance, utilities and common area maintenance charges. The current terms of the Company's leases, including automatic renewal options, expire as follows:

The Company generally has been successful in renewing its store leases as they expire.

During 2002, the Company did not enter into any new store leases. Management believes the terms of its leases are comparable with other similar national retailers in these locations. Base rent (minimum rent under terms of lease) in current leases ranges from $6 per square foot to $60 per square foot annually over the terms of the leases. Total base rent has continued to increase based on new store leases. Occupancy costs have increased slightly as the Company has entered new markets. The following table sets forth the fixed and variable components of the Company's rent expense for the years indicated:

The Company has decided to close seven stores in 2003. See "Developments in 2002 and Subsequent to Year End" for additional discussion. Base rent for these closing locations was approximately $942,000 during 2002.

The Company leases a 50,000 square foot building used primarily as its corporate headquarters and a men's and ladies' buying office in Dallas, Texas. The lessor of the Dallas location is a limited partnership whose partners include Rebecca Powell Casey, Michael T. Casey, H. Rainey Powell and Lisa Powell Hunt, all of whom are stockholders of the Company. Rebecca Powell Casey is also an executive officer and a director of the Company. This lease was amended in connection with the sale of the Series 2003-A Preferred Stock described above to reduce the Company's obligations. The office space lease expires September, 2010 with monthly rent payments of $39,865 plus insurance and property taxes until March, 2003 at which time the monthly rent will become $30,000, plus insurance, utilities and property taxes until March, 2004 at which time the monthly rent will be $19,933, plus insurance, utilities and property taxes until September, 2004 at which time monthly rent will be $20,982, plus insurance, utilities and property taxes until September, 2007 at which time monthly rent will be $22,031 plus insurance, utilities and property taxes until the expiration of the lease. This lease contains two renewal options of five years each.

During 2002, the Company owned a building in Norman, Oklahoma comprised of approximately 18,000 square feet. This space was being utilized by the Company for its administrative functions.

The Company leases an 85,000 square foot warehouse distribution center facility located in Norman, Oklahoma. The lessor of the distribution center is the same limited partnership which owns the Dallas locations mentioned above. The term of the distribution center lease expires in June 2012, with annual rent increases on a fixed scale up to a maximum of $419,951 during the final year of the lease.

The Company is involved in various claims, administrative agency proceedings and litigation arising out of the normal conduct of its business. Although the ultimate outcome of such litigation cannot be predicted, the management of the Company, after discussions with counsel, believes that resulting liability, if any, will not have a material effect upon the Company's financial position or results of operations.

No matters were submitted to a vote of security holders during the fourth quarter of the year covered by this report.

At March 15, 2003, there were 677 record holders of the Company's common stock, ("Common Stock"). The Company's Common Stock is listed on the American Stock Exchange under the symbol "HLD". The table below presents the range of the high and low sales prices, for the periods indicated.

The Company has never declared or paid cash dividends on its Common Stock and presently intends to retain all earnings for the operation and expansion of its business for the foreseeable future. Any future determination as to the payment of cash dividends will depend on the Company's earnings, capital requirements, financial condition and other factors as the Board of Directors may deem relevant.

The Company has three series of preferred stock outstanding, issued in 2001, 2002 and 2003 in the aggregate amount of $15 million. These shares are entitled to cumulative dividends of 10% on $6 million of preferred stock and 8% on the remaining $9 million, subject to reduction if certain profitability targets are met. See Note 7 for additional information on the preferred stock.

During 2002, approximately $780,000 of preferred stock dividends were paid. Approximately $367,000 of the total preferred stock dividends was paid in additional shares of preferred stock (as provided by the terms of the preferred stocks) and approximately $413,000 was paid in cash.

The Company's primary lending agreement does not currently allow for the payment of dividends on common stock. This agreement does, however, allow for the distribution of preferred stock dividends.

The following selected consolidated financial information is derived from the audited Consolidated Financial Statements of the Company and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and the notes thereto, appearing elsewhere herein.

The following table reflects items in the Company's statements of operations as a percentage of sales for the periods indicated:

The following table reflects the increases and decreases in Company sales for the periods indicated:

Total Company sales decreased 14.2% in 2002 as compared to a decrease of 17.9% in 2001 and a decrease of 6.4% in 2000. No new locations were opened during 2002 or 2001. Total Company comparable store sales declined 9.9% in 2002. The Company believes the sales decreases in 2002 were primarily attributable to sales declines experienced in the full-price retail stores during the fall and holiday periods, a result of inventory levels that were down considerably over the prior year and the difficult retail climate experienced by many retailers during the 2002 holiday period. The Company did not purchase deep enough quantities in certain key classifications of merchandise, and sales in the best-selling items were not maximized. Comparable store sales declined 13.8% during the fourth quarter in the 43 full-price retail stores as compared to a decline of 0.8% for the fourth quarter of prior year for the full-price retail stores. This was combined with significant sales declines in the ou tlet division. Comparable store sales in outlets declined 25.3% during 2002. The Company determined that it had too many outlet stores and is closing four of the seven outlet stores in the first half of 2003. Since the Company purchased very little merchandise in 2002 directly for the outlet division, the outlet store inventories throughout the year were down significantly over the prior year. Additionally, the outlets were used to liquidate older inventory, resulting in more units being sold but at lower prices. Another variable to the total Company sales declines was the reduction to warehouse sales conducted, as the Company's available inventory levels declined. Warehouse sale volume declined by $3.6 million, or 56%, in 2002 as compared to the prior year.

Total Company sales decreased 17.9% in 2001 as compared to a decrease of 6.4% in 2000 and an increase of 5.4% in 1999. No new locations were opened during 2001 compared to the opening of two new locations during 2000. The Company believes the sales decrease in 2001was primarily because the ladies' merchandise assortment for the first half of the year was not meeting the needs of the Company's target customer of age 40, but instead was targeting a younger audience in terms of styling and fit. During the fourth quarter of 2001, the Company reported a significant improvement in sales trends as customer response to the holiday and preview merchandise assortments continued to improve. Comparable store sales declined 0.8% during the fourth quarter in the 44 full-price retail stores as compared to a decline of 14.9% for the full year of 2001 and decreased 3.4% total company for the quarter. Like many other retailers, the Company's sales were significantly impacted by the tragic events of Septe mber 11, 2001. During 2001, comparable store sales declined 16.3% in total for the year. Excluding the week of September 11, 2001, the decline in comparable store sales was 15.3% for the year. In early 2001, the Company ceased conducting business through the catalog and internet, resulting in a decrease in sales of $2.3 million for the year as compared to 2000.

Comparable store sales declined 9.9% during 2002, compared to a decline of 16.3% in 2001. The Company believes that the declines experienced in comparable store sales during 2002 were primarily attributable to the reasons mentioned above for total sales. The declines experienced in comparable store sales during 2001 were primarily attributable to disappointing sales in ladies' merchandise assortments.

The Company's gross margin increased to 25.7% in 2002 from 21.6% in 2001, or 4.1% of sales. The increase in the Company's gross margin was primarily due to an increase in the gross margin in the full-price retail stores due to improved content and reduced purchase levels. The Company's gross margin decreased to 21.6% in 2001 from 26.4% in 2000, or 4.8% of sales. Higher occupancy costs that did not leverage due to lower sales represented 0.4% of the total 4.8% decrease. Additional declines are primarily attributed to additional markdowns on slow-selling merchandise inventory incurred due to sales shortfalls, aggressive efforts to liquidate prior season inventory and continued editing of assortments in an effort to improve inventory turnover.

Selling, general and administrative expenses increased by 3.2% of sales in 2002 compared to an increase of 2.3% of sales in 2001. The increase in selling, general and administrative expenses as a percentage of sales in 2002 was primarily due to the sales declines experienced for the year and the lack of leverage of fixed payroll costs. Selling, general and administrative expenses increased by 2.3% of sales in 2001 compared to a decrease of 1.2% of sales in 2000. The increase in selling, general and administrative expenses as a percentage of sales in 2001 was primarily due to the sales declines experienced for the year and the lack of leverage of fixed payroll costs.

The Company recorded approximately $1,060,000 in restructuring charges. The restructuring charges recorded in the fourth quarter consisted of severance costs of approximately $330,000 associated with elimination of positions in the corporate office, with the remainder of restructuring charges attributable to the acceleration of amortization of assets in conjunction with planned store closings in the first half of 2003.

During the third quarter of 2001, after a review of the goodwill balance originating from the purchase of CMT Enterprises, Inc. in February 2000, and the material changes that had occurred in the operation, it was determined that a write-off of the entire goodwill balance was deemed appropriate. The net amount of goodwill written off was approximately $3.0 million which represented 2.9% of sales for the year 2001.

During 2002, the total interest costs decreased $81,000 from 2001 due to lower outstanding debt balances. Lower average interest rates were also a contributing factor. The average balance on total outstanding debt was $19,729,000 in 2002, compared to $23,780,000 in 2001. The decrease in average debt balances resulted principally from the sale of preferred stock in the amount of $4,000,000 and the application of the proceeds of such sale to reduce debt. Increases to interest expense may occur if the Company's cash flow requires additional borrowed funds. During 2001, interest costs (including capitalized interest) decreased $599,000 as compared to 2000 resulting principally from the sale of preferred stock in the amount of $6,000,000 and the application of the proceeds of such sale to reduce debt.

The Company's effective income tax rate was 24.2% in 2002, (17.4)% in 2001 and (40.0)% in 2000. The Company did not elect to record the full tax benefit for all 2002 or 2001 losses in the financial statements. During 2002, the Company increased its valuation allowance to fully provide for all remaining deferred tax assets because the Company's recent history of operating losses makes the realization of these assets uncertain. It is expected that such amounts could be utilized for tax purposes against any future operating income.

Cash Flows From Operating Activities. For 2002, net cash used in operating activities was $401,000 as compared to $1,743,000 net cash provided by operating activities for 2001. The decrease in cash flows can be primarily attributed to the increase in the Company's net loss from prior year. For 2002, the Company's net loss was $16,479,000, compared to a net loss of $14,630,000 for 2001. This was offset by an increase in accounts payable of $3,125,000 in 2002, compared to a decrease in accounts payable of $172,000 in 2001.

Cash Flows From Investing Activities. For 2002, net cash used in investing activities was $1,736,000, as compared to $770,000 for 2001. Capital expenditures totaled $1,783,000, compared to $1,118,000 for 2001. Capital expenditures during 2002 and 2001 were invested principally in remodeling of existing stores and equipment expenditures in existing operations.

Cash Flows From Financing Activities. During 2002, the Company made periodic borrowings under its revolving credit facility to finance its inventory purchases, product development and private label programs, store remodeling and equipment purchases for the year (see "Liquidity").

On August 2, 2002, the Company executed a definitive agreement for the purchase by Inter-Him N.V., of which Ronald de Waal is a Managing Director, the Company's Chief Executive Officer and director, and three other directors, from the Company of 200,000 shares of a new Series 2002-A Preferred Stock for a total purchase price of $4 million. See Note 12 to the Consolidated Financial Statements for additional information.

The Company has available a line of credit with its bank. This line had average balances of $15,862,000 and $17,680,000 for 2002 and 2001, respectively. During 2002, this line of credit had a high balance of $19,214,000 and a balance of $16,092,000 as of February 1, 2003. The balance at March 15, 2003 was $17,438,000.

See Note 14 regarding changes to the Company's credit facility in February, 2003 and sale of additional preferred stock.

The Company has no off-balance sheet arrangements or transactions with unconsolidated, limited purpose entities, nor does it have any undisclosed material transactions or commitments involving related persons or entities.

The Company considers the following as measures of liquidity and capital resources as of the dates indicated (dollars in thousands).

The Company's primary needs for liquidity are to finance its inventories and revolving charge accounts and to invest in existing store remodeling, fixtures and equipment as well as new stores. Cash flow from operations and proceeds from credit facilities represent the Company's sources of liquidity. Management anticipates these sources of liquidity, combined with the receipt of $5 million of 2003-A Preferred Stock proceeds in February 2003 (see Note 14) to be sufficient in the foreseeable future. The Company's capital expenditures budget for 2003 is approximately $1,600,000 to be used for the purchase of fixtures and equipment as well as store remodeling expenses.

See Notes 5 and 14 to the Consolidated Financial Statements for information about restrictions and covenants under the Company's revolving line of credit.

The Company's business is subject to seasonal influences, with the major portion of sales realized during the fall season (third and fourth quarters) of each year, which includes the fall and holiday selling seasons. In light of this pattern, selling, general and administrative expenses are typically higher as a percentage of sales during the spring seasons (first and second quarters) of each year.

Inflation affects the costs incurred by the Company in its purchase of merchandise and in certain components of its selling, general and administrative expenses. The Company attempts to offset the effects of inflation through price increases and control of expenses, although the Company's ability to increase prices is limited by competitive factors in its markets. Inflation has had no meaningful effect on sales or net earnings of the Company.

The Consolidated Financial Statements and Notes to Consolidated Financial Statements contain information that is pertinent to Management's Discussion and Analysis. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Changes to these assumptions and estimates could have a material effect on the Company's consolidated financial statements. However, the Company believes it has taken conservative positions, where assumptions and estimates are used, in order to minimize the negative financial impact to the Company that could result if actual results vary from the assumptions and estimates. In management's opinion, the areas of the Company where the most significant judgment is exercised is in th e allowance for doubtful accounts related to the Company's proprietary credit card program, the valuation of inventory, impairment estimates and revenue recognition. The selection, application and disclosure of the following critical accounting estimates have been discussed with the Company's audit committee.

In 2002, approximately 31% of the Company's net retail sales were made under its proprietary credit card program, which resulted in customer accounts receivable balances of approximately $6,365,000 at February 1, 2003. The Company has significant experience in managing its credit card program. Each month, the Company reviews all of its credit card accounts and writes off those deemed uncollectible. The allowance for uncollectible accounts is maintained and periodically reviewed. The allowance is primarily based on account write-off trends and aging information. The Company does not expect actual results to vary significantly from our estimate.

The Company uses the retail inventory method. Under this method, the Company records markdowns to value merchandise inventories at net realizable value. The Company closely monitors actual and forecasted sales trends, current inventory levels, and aging information by merchandise categories. If forecasted sales are not achieved, additional markdowns may be needed in future periods to clear excess or slow-moving merchandise, which may result in lower gross margins.

When a store experiences unfavorable operating performance, the Company evaluates whether an impairment charge should be recorded. A store's assets are evaluated for impairment by comparing the store's estimated undiscounted cash flows to the assets' carrying value. If the cash flows are not sufficient to recover the carrying value, the assets are written down to fair value. Impairment losses associated with these reviews have not been significant. However, if comparative store sales decline and general negative economic trends continue, future impairment losses could be significant.

Sales from store locations represented 100% of the Company's total sales for 2002. These sales are recognized at the time of the customer's purchase. Sales are net of returns and exclude sales tax. Catalog and website sales no longer represent any of the Company's sales as these selling methods were eliminated in the first quarter of 2001. Catalog and website sales were 2% of sales during 2000. These sales were recognized at the time the order was shipped to the customer. Gift card sales are recognized as revenue when the gift card is redeemed, not when it is sold.

In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that an impairment loss be recognized only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and that the measurement of any impairment loss be the difference between the carrying amount and the fair value of the asset. Adoption of SFAS No. 144 is required for financial statements for periods beginning after December 15, 2001. The Company adopted this new standard effective February 3, 2002 and the adoption of this new standard did not have a material impact on its consolidated financial position or results of operation.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit and disposal activities and supersedes Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires recognition of a liability for a cost associated with an exit or disposal activity when the liability is incurred, as opposed to when the entity commits to an exit plan under EITF 94-3. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Adoption of SFAS No. 146 is required for exit and disposal activities initiated after December 31, 2002. The Company has adopted this new standard effective January 1, 2003 and the adoption of thi s new standard did not have a material impact on its consolidated financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation which includes the prospective method, modified prospective method and retroactive restatement method. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation" to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Adoption of the annual disclosure and voluntary transition requirements of SFAS No. 148 is required for annual financial statements issued for fiscal years ending after December 15, 2002. Adoption of the interim disclosure requirements of SFAS No. 148 is required for interim periods beginning after December 15, 2002. Pursuant to the provisions of SFAS No. 123, the Company has elected to continue using the intrinsic value method of accounting for its stock-based employee compensation plans in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company has, however, made more prominent disclosure of the effects of stock-based compensation on reported operating results. See Notes 1 and 7 for further discussion.

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be preceded or followed by or otherwise include the words "anticipates", "believes", "expects", "intends", "estimates", "will", "would", "could" or similar expressions. Such forward-looking statements, which reflect the Company's current views of future events and financial performance, involve known and unknown risks and uncertainties that may cause the Company's actual results to differ materially from planned or expected results. Those risks and uncertainties include, but are not limited to the impact of competition, pricing pressure, product demand and market acceptance risks, mergers and acquisitions, reliance on key strategic alliances, the ability to attract and retain key employees, the availability of cash for growth, fluctuations in operating res ults, ability to continue funding operating losses, and the ability of new management to improve the Company's financial condition and performance. For all of these reasons, actual results may vary materially from the forward-looking statements. The Company assumes no obligation to update any forward-looking statements.

The following table reflects certain of the Company's commitments as of February 1, 2003.

The foregoing table does not include contractual commitments pursuant to executory contracts for products and services such as telephone, data, computer maintenance and other regular payments pursuant to contracts that are expected to remain in existence for several years but as to which the Company's obligations are contingent upon the Company's continued receipt of the contracted products and services.

The primary objective of the following information is to provide forward-looking quantitative and qualitative information about the Company's potential exposure to market risks. The term "market risk" for the Company refers to the risk of loss arising from adverse changes in interest rates and various foreign currencies. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. This forward-looking information provides indicators of how the Company views and manages its ongoing market risk exposures.

At February 1, 2003, the Company had long-term debt outstanding of approximately $19.0 million. Of this amount, $1.1 million bears interest at a weighted average fixed rate of 8.26%. The remaining $17.9 million bears interest at variable rates, which averaged approximately 6.70% during 2002. A 10% increase in short-term interest rates on the variable rate debt outstanding at February 1, 2003 would approximate 67 basis points. Such an increase in interest rates would increase the Company's interest expense by approximately $114,000 assuming borrowed amounts remain outstanding.

The above sensitivity analysis for interest rate risk excludes accounts receivable, accounts payable and accrued liabilities because of the short-term maturity of such instruments. The analysis does not consider the effect this movement may have on other variables including changes in sales volumes that could be indirectly attributed to changes in interest rates. The actions that management would take in response to such a change is also not considered. If it were possible to quantify this impact, the results could well be different than the sensitivity effects shown above.

The table below provides information about the Company's debt obligations that are sensitive to changes in interest rates:

Substantially all of the Company's purchases are priced in U.S. dollars. However, some European purchases are denominated in local currency and, therefore, are subject to the fluctuation in currency exchange rates. From time to time the Company utilizes forward exchange contracts to secure firm pricing related to purchase commitments to be denominated in foreign currencies. The contracts are of varying short-term durations and amounts include a window delivery feature, which provides the Company with an option to enter into a swap agreement in the event that all of the currency is not utilized at the end of the contract's delivery term. The Company's objective in managing its exposure to foreign currency exchange rate fluctuations is to reduce the impact of adverse fluctuations in earnings and cash flows associated with foreign currency exchange rate changes. The principal currency hedged is the Italian lira. The Company regularly monitors its foreign exchange exposures to ensure the overall effectiveness of its foreign currency hedge positions. However, there can be no assurance the Company's foreign currency hedging activities will substantially offset the impact of fluctuations in currency exchange rates on its results of operations and financial position.

The Company had no foreign exchange instruments outstanding at February 1, 2003; therefore, a sensitivity analysis would result in no impact to earnings. Anticipated transactions, firm commitments, and accounts payable denominated in foreign currencies would be excluded from the sensitivity analysis. Additionally, as the Company utilizes foreign currency instruments for hedging anticipated and firmly committed transactions, a loss in fair value for those instruments is generally offset by increases in the value of the underlying exposure. Foreign currency fluctuations did not have a material impact on the Company during 2002, 2001 or 2000.

The consolidated financial statements of the Company and related information described below are set forth in the Company's Annual Report to Stockholders for the year ended February 1, 2003 (on pages 3-22) and are incorporated herein by reference.

1. Independent Auditors' Reports.

2. Consolidated Balance Sheets as of February 1, 2003 and February 2, 2002.

3. Consolidated Statements of Operations for the Years Ended February 1, 2003, February 2, 2002 and February 3, 2001.
4. Consolidated Statements of Stockholders' Equity for the Years Ended February 1, 2003, February 2, 2002 and February 3, 2001.
5. Consolidated Statements of Cash Flows for the Years Ended February 1, 2003, February 2, 2002 and February 3, 2001.
6. Notes to Consolidated Financial Statements.

Not applicable.

The information required under Item 10 will be contained in the definitive Proxy Statement of the Company for its 2003 Annual Meeting of Stockholders (the "Proxy Statement") and is incorporated herein by reference. The Proxy Statement will be filed pursuant to Regulation 14A with the Securities and Exchange Commission not later than 120 days after February 1, 2003.

The information required under Item 11 will be contained in the Proxy Statement and is incorporated herein by reference.

The information required under Item 12 will be contained in the Proxy Statement and is incorporated herein by reference.

The information required under Item 13 will be contained in the Proxy Statement and is incorporated herein by reference.

The Company's Chief Executive Officer and Chief Financial Officer (collectively, the "Certifying Officers") are responsible for establishing and maintaining disclosure controls and procedures. Based on their evaluation of these controls and procedures as of a date within 90 days of the filing of this report, such officers have concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in this report is accumulated and communicated to allow timely decisions regarding required disclosure.

The Certifying Officers also have indicated that there were no significant changes in the Company's internal controls or other factors that could significantly affect such controls subsequent to the date of their last evaluation.

1. The following documents are filed as part of this Report:

1. Consolidated Financial Statements: The response to this portion of Item 14 is set forth in Item 8 of Part II of this Report.
2. Financial Statement Schedules: Schedule II - Harold's Stores, Inc. and Subsidiaries Valuation Account (see page 21) of this report. All other schedules have been omitted because they are inapplicable, not required, or the information is included elsewhere in the financial statements or notes thereto.
3. Exhibits: See accompanying Index to Exhibits. The Company will furnish to any stockholder, upon written request, any exhibit listed in the accompanying Index to Exhibits upon payment by such stockholder of the Company's reasonable expenses in furnishing any such exhibit.

1. Reports on Form 8-K: There were no reports on Form 8-K for the quarter ended February 1, 2003.

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

Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed below by the following persons on behalf of the Registrant and in the capacities shown, and on the dates indicated.

I, Clark J. Hinkley, certify that:

1. I have reviewed this annual report on Form 10-K of Harold's Stores, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

1. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared.
2. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
3. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):

1. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
2. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were any significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: April 24, 2003

/s/ Clark J. Hinkley