GADZOOKS INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED FEBRUARY 1, 2003

OR

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

For the transition period from to

COMMISSION FILE NUMBER 0-26732
GADZOOKS, INC.
(Exact name of registrant as specified in its charter)

TEXAS 74-2261048
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

4121 INTERNATIONAL PARKWAY
CARROLLTON, TEXAS 75007
(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(972) 307-5555

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

TITLE OF EACH CLASS
COMMON STOCK, $0.01 PAR VALUE

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

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]

The aggregate market value of the voting and non-voting Common Stock held
by non-affiliates of the registrant as of August 2, 2002 (the last business day
of the registrant's most recently completed second fiscal quarter) was
approximately $74,497,735. All outstanding shares of voting stock, except for
shares held by executive officers and members of the Board of Directors and
their affiliates, are deemed to be held by non-affiliates.

On April 25, 2003, the registrant had 9,159,671 shares of Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates information by reference from the registrant's
definitive proxy statement for the 2003 Annual Meeting of Shareholders, to be
filed with the Commission no later than 120 days after the end of the
registrant's fiscal year covered by this Form 10-K.
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GADZOOKS, INC.

INDEX TO FORM 10-K

1

PART I

ITEM 1. BUSINESS.

Gadzooks, Inc., the "Company" or "Gadzooks," is a mall-based specialty
retailer of casual apparel and related accessories for young men and women,
principally between the ages of 14 and 18. At the end of fiscal 2002, the
Company operated 435 Gadzooks stores in both metropolitan and middle markets in
41 states. During fiscal 2002, the Company opened 11 new Gadzooks stores and
closed three Gadzooks stores. The Company plans to open one new Gadzooks store
in fiscal 2003.

On January 9, 2003, the Company announced plans to focus exclusively on
apparel and accessories for females. The conversion of the Gadzooks stores to an
all-female merchandise assortment is scheduled to take place early in the second
half of fiscal 2003. Prior to the conversion, all men's merchandise will be
liquidated. Marketing and advertising campaigns will be utilized to support the
transition with an emphasis on the grand reopening of Gadzooks as a female-only
apparel and accessories store. The Gadzooks store environment will also be
updated to have more of a feminine appeal both in its signage and fixture
presentations.

In the second half of fiscal 2001, the Company began testing a new retail
concept with the opening of four Orchid stores in two states. The Orchid concept
caters to the unique innerwear and sleepwear needs of females between the ages
of 14 and 22. The Company is still evaluating the concept.

The Company's website, gadzooks.com, is utilized to provide an additional
marketing opportunity for the Gadzooks stores. The site features current fashion
trends, a monthly calendar of events, in-store promotions, on-line contests and
music videos.

The Company was incorporated in Texas in 1982. Its executive offices are
located at 4121 International Parkway, Carrollton, Texas 75007, and its
telephone number is (972) 307-5555. A copy of the Form 10-K, excluding exhibits,
as filed with the Securities and Exchange Commission, may be obtained without
charge upon written request to Investor Relations at the Company's headquarters.

BUSINESS STRATEGY

The Company is a leading retailer of brand name casual apparel and related
accessories for teenagers. The principal elements of the Company's business
strategy in its Gadzooks stores are:

- Customer Focus. Historically, the Gadzooks concept has focused on
providing fashionable casual apparel and accessories to both male and
female teenage customers. However, beginning in the second half of fiscal
2003, Gadzooks plans to convert its stores to an all-female merchandise
assortment. Gadzooks believes that this conversion will allow it to
compete more effectively by devoting all of its square footage to the
female customer and focusing all of the Company's resources on meeting
the needs of females between the ages of 16 and 22. The Company is not
new to the female market; in fact, Gadzooks has been providing casual
apparel and related accessories for the junior customer since its
inception twenty years ago. The Company has hired a leading independent
branding firm to help plan and execute the marketing campaign that will
be used to support Gadzooks' new brand image. Additionally, the Company
has hired a nationally recognized firm in store design to lead the effort
of tailoring the store look. As an integral part of the transition, new
fixtures, merchandise displays and signage will be utilized to give the
store environment more of a feminine appeal.

- Multiple Merchandise Categories. A key component of the Company's
merchandising strategy is to limit its dependence on any one fashion,
style, brand or item by offering products in a broad range of categories,
including woven and knit tops, jeans, shorts, junior dresses, swimwear,
t-shirts, footwear, sunglasses, watches, jewelry and other accessory
items. The Company regularly monitors store sales by classification,
style, vendor and size to identify emerging fashion trends, and manages
the product mix in its stores to respond to the spending patterns of its
customers. The Company believes that its success to date has been largely
attributable to its ability to meet the changing fashion preferences of
its customers.

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- Emphasis on Brand Name Merchandise Supplemented by Private
Brands. Another key feature of the Company's merchandising strategy is
to offer a wide variety of popular brand name merchandise based on its
belief that its customers shop primarily for recognized labels and
designs. The Company's merchandise includes high visibility names such as
Candies, ECKO, Fox, Hot Kiss and others. The Company is continuing to
grow its private brand business in order to better meet the needs of its
customers. Private brands comprised 17% and 13% of net sales in 2002 and
2001, respectively, and are expected to comprise between 25% and 30% of
net sales in 2003. Private brands allow the Company the opportunity to
expand its customer base by providing merchandise of comparable quality
to brand name merchandise at competitive prices and to capitalize on
fashion trends when branded vendors are not offering the latest in
trends. The Company concentrates on mainstream merchandise that appeals
to its target customer rather than relying on "cutting edge" products.
The Company believes that this strategy is consistent with its philosophy
of responding to its customers' fashion preferences as opposed to
establishing fashion trends.

- Metropolitan and Middle Market Locations. A central aspect of the
Company's strategy has been the development of a store concept that is
successful in both metropolitan and middle markets. The Company believes
that its customers throughout the United States frequently have similar
fashion preferences as a result of the influence of television programs,
sports, MTV and music and fashion magazines. As a result, the Company has
historically been able to operate stores successfully across a broad
range of demographic and geographic markets, increasing the number of
potential sites available to the Company.

- Attentive Customer Service. The Company is committed to offering
professional and attentive customer service. Gadzooks strives to hire
young, energetic, service-oriented sales associates who understand its
customers and can relate to their changing needs and preferences. The
Company trains sales associates to greet each customer personally, to
inform the customer about new fashion trends and to suggest merchandise
to suit the customer's wardrobe and lifestyle needs. The Company believes
that the high level of service given to its customers differentiates
Gadzooks from its competition.

- Entertaining Store Environment. The Company believes that its stores
provide a fun and enjoyable shopping experience for its customers.
Gadzooks stores are designed to create a high energy, fun environment
using television monitors featuring popular music videos and creative,
eye-catching signage. The Company believes that its entertaining store
design encourages customers to visit the stores more frequently and to
shop in the stores for longer periods of time.

- Investment in Systems and Personnel. The Company is committed to
investing in information systems and using current technology to help
execute its merchandising strategy. The Company's systems provide its
buyers and merchandise planners with daily sales and inventory
information by store, style, vendor and size, allowing Gadzooks to
respond to changing customer preferences and to stock the appropriate
quantities and styles of merchandise at each store. The Company uses a
warehouse management system to efficiently control all warehouse
functions and expedite the flow of merchandise to its stores. The Company
is also committed to attracting and retaining highly qualified,
service-oriented management and sales associates and providing them with
career advancement opportunities. The corporate culture at Gadzooks
promotes the open exchange of new ideas and information between all
levels of the Company, thereby enabling management to supplement the data
from its information systems with the practical experience of its
employees.

- Distribution Capabilities. The Company believes that its 207,000
square-foot facility in the Dallas area can support the merchandising
needs of more than 500 stores, providing the ability for continued store
expansion.

3

STORE LOCATIONS

As of March 31, 2003, the Company operated 430 Gadzooks stores in 41 states
and four Orchid stores in two states. The Gadzooks stores are located in
metropolitan markets such as Dallas, Chicago, Atlanta, Boston and Kansas City,
as well as middle markets such as Amarillo, Texas; Tupelo, Mississippi; and
Roanoke, Virginia. The Orchid stores are located in Houston, Dallas, and New
Orleans. A list of stores by state is as follows:

STORE EXPANSION

The following table provides a history of the Gadzooks store expansion
program over the past five fiscal years, excluding Orchid stores.

The Company opens stores in enclosed shopping malls in both metropolitan
and middle markets. The Company expects to open one new store in 2003; however,
continued expansion has been suspended pending the conversion of the Gadzooks
stores to an all-female merchandise assortment. The transition is scheduled to
take place early in the second half of 2003. The Company believes that the broad
appeal of the Gadzooks concept enables it to operate successfully in diverse
geographic and demographic markets, thereby increasing the total number of
potential sites available to the Company.

The Company typically expands from existing markets into contiguous new
markets and attempts to cluster its stores within a market area in order to
achieve management and operating efficiencies and to enhance its name
recognition. The Company's existing stores average approximately 2,500 square
feet. The Company typically seeks a location of approximately 2,400 to 3,100
square feet with significant mall frontage. In fiscal 2002, the Company opened
its first store in the state of Oregon. The Company closed three under-
performing stores during fiscal 2002 and estimates that an additional 25 to 30
under-performing stores will be closed during fiscal 2003. The Company continues
to analyze stores for potential closing from time to time.

4

MERCHANDISING

Historically, the Company's merchandising strategy has been to provide a
wide range of brand name casual apparel and related accessories that reflect the
fashion preferences of young men and women principally between the ages of 14
and 18. Effective early in the second half of fiscal 2003, the Company plans to
focus exclusively on apparel and accessories for females between the ages of 16
and 22 and will convert the Gadzooks stores to an all-female merchandise
assortment. Prior to the conversion, all of the men's merchandise will be
liquidated.

The Company's merchandise includes highly visible names such as Candie's,
ECKO, Fox, Hot Kiss and others. The Company concentrates on fashionable
mainstream merchandise rather than relying on "cutting edge" products. The
Company believes that this strategy is consistent with its philosophy of
responding to its customers' fashion preferences as opposed to attempting to
establish fashion trends.

The Company has historically classified all its merchandise into one of the
following four categories. As discussed above, beginning with the second half of
fiscal 2003, the Company will discontinue the men's business.

- Juniors: The Juniors category includes casual sportswear
separates designed for fashion-current teenage
girls, such as knit tops, woven shirts and vests,
denim, dresses and swimwear. Key brands in this
category include Candie's, Dollhouse, Hot Kiss,
Billabong and Fox.

- Young Mens: The Young Mens category includes casual sportswear
separates reflecting current fashion trends, such
as woven and knit tops, bottoms made of denim and
other fabrics and t-shirts with logos containing
current topics and humorous designs and phrases.
Key brands in this category include ECKO,
Billabong, Fox, Hurley and Puma.

- Accessories: The Accessories category includes a variety of
male, female and unisex accessories including
sunglasses, watches, wallets, hair accessories,
backpacks, necklaces, hats and other accessories.
Key brands in this category include ECKO, Fossil,
Fox and Candie's.

- Footwear: The Company offers a limited selection of male,
female and unisex footwear including sandals and
active footwear. Key brands in this category
include Candie's, Bongo, Sanuk, Sugar, ECKO and
Puma.

The following table sets forth the Company's merchandise sales by category
as an approximate percentage of total net sales:

By offering products in multiple categories, the Company is able to shift
its merchandise emphasis among and within its core categories to respond to
changing customer preferences. The Company expects to continue

5

to adjust its emphasis in particular categories in response to changing fashion
trends and, therefore, its merchandise mix may vary slightly from time to time.
Effective early in the second half of fiscal 2003, the Company plans to focus
exclusively on apparel and accessories for females and will convert the Gadzooks
stores to an all-female merchandise assortment. Prior to the conversion, all of
the men's merchandise will be liquidated.

The Company continues to supplement its national and teen branded
merchandise with private brand offerings in order to better meet the needs of
its customers. Private brands allow the Company the opportunity to expand its
customer base by providing merchandise of comparable quality to brand name
merchandise at competitive prices and to capitalize on fashion trends when
branded merchandise vendors are not offering the latest in trends. The private
brand merchandise is designed internally by the Company's product design team
and buying staff. This merchandise is primarily sourced domestically to allow
the buying staff to react quickly to developing trends. Private brand sales,
including merchandise designed and sourced by Gadzooks under the Candie's label,
accounted for approximately 17 percent and 13 percent of the Company's sales in
fiscal 2002 and fiscal 2001, respectively.

In an effort to keep the stores fresh and exciting, the Company's visual
merchandising department, in conjunction with the marketing and buying staff,
provides specific floor sets and merchandising ideas to the stores and regularly
instructs district and store managers on the creative display of merchandise.
The merchandise presentation in the stores is significantly changed four times
each year to highlight specific merchandise for each of the Company's spring,
summer, back-to-school and holiday selling seasons and to maintain a current
look. In addition, the Company maintains a constant flow of new merchandise to
the stores through shipments from its distribution center on a daily basis to
encourage customers to frequently visit its stores. To reduce the risk
associated with the introduction of new products, the Company tests certain
products in selected stores before determining if it will purchase the product
for a broader group of stores.

PURCHASING

The Company's purchasing staff consists of a Chief Merchandising Officer,
General Merchandising Manager, Divisional Merchandising Managers, buyers and
assistant buyers. The purchasing staff analyzes current fashion directions by
visiting major fashion markets, maintaining close relationships with the
Company's vendors and utilizing focus groups in order to identify styles and
trends. The Chief Merchandising Officer, General Merchandising Manager,
Divisional Merchandising Managers and the buyers regularly monitor merchandise
flow through the stores and strive to maintain the appropriate merchandise mix
to meet customer demand.

Due to changes in fashion trends and seasonality, the Company purchases
merchandise from numerous vendors throughout the year. During fiscal 2002, the
Company did business with approximately 700 vendors. No single vendor accounted
for more than ten percent of merchandise purchases. Gadzooks believes that
strong vendor relationships are important to the growth and success of the
Company.

In addition, the Company uses private label merchandise to supplement its
primarily branded product line. Bad Kitty, Misdemeanor and Taunt are the private
label brands established for the junior's category, and Epidemic, Decibel and
Verbal Assault were established for the young men's category.

PLANNING AND ALLOCATION

The Company continually strives to improve its merchandising, distribution,
planning and allocation methods to manage its inventory more productively. The
Company's planning and allocation staff work closely with the buyers to
determine the correct inventory levels for all stores and merchandise
categories. The Company divides its stores into different categories based upon,
among other things, geographic location, demographics, sales volume, competition
and store capacity. Merchandise allocation is based in part on sales and
inventory analysis of the stores by category. Information from the Company's
point-of-sale computer system is regularly reviewed and analyzed to assist in
making merchandise allocation and markdown decisions.

6

In May 1997, the Company relocated its headquarters to a 207,000 square
foot site in the Dallas metropolitan area, which includes a distribution
facility and the Company's corporate offices. Vendors deliver merchandise to
this facility, where it is inspected, received into the Company's merchandising
system, allocated to stores and boxed for distribution to the Company's stores.
Merchandise is typically shipped to stores daily, providing Gadzooks' stores
with a steady flow of new merchandise. For certain key products, the Company
maintains a backstock at its distribution center that is allocated and
distributed to the stores through an automated replenishment system.

STORE OPERATIONS

Gadzooks stores are open seven days a week during normal mall hours. The
Company's store operations are managed by a Vice President of Store Operations,
Regional Sales Directors and District Sales Managers, who generally have
responsibility for eight to ten stores within a geographic district. Individual
stores are managed by a store manager and two assistant store managers. A
typical store has six to 12 part-time sales associates, depending on the season.
Gadzooks compensates its district and store managers with a base salary and
performance bonuses, based on store sales and shrink results. Sales associates
are compensated on an hourly basis.

The Company believes that its continued success is dependent in part on its
ability to attract, retain and motivate quality employees. The Company has an
established training program for future district sales managers. Store managers,
many of whom are selected from among the Company's assistant managers, currently
complete a one-week training program with a designated training store manager
before taking responsibility for a store. A formalized one-week training program
for assistant managers was rolled out to the stores in fiscal 2002. The hiring
and training of new sales associates and assistant managers are the
responsibility of store managers, and the Company has established training and
operations manuals to assist them in this process.

Management considers its employees' knowledge of the Company's customers
and merchandise to be significant to its marketing approach and customer
satisfaction. While all Gadzooks store employees are responsible for the general
appearance of the store and merchandise presentation, the Company's major
emphasis in training its store employees is to give priority to customer service
and assistance. Sales associates regularly act as greeters, meeting customers as
they enter the store and offering assistance. The Company trains its sales
associates to inform the customer about new fashion trends and to suggest
merchandise that suits the customer's wardrobe and lifestyle needs. The Company
monitors customer service at the store level through various programs, including
unannounced visits to the stores by store operations personnel and by regularly
reviewing and responding to customer feedback.

STORE ENVIRONMENT

The Company believes that its stores provide a fun and enjoyable shopping
experience for its customers. Gadzooks stores are designed to create a high
energy, fun environment using television monitors featuring popular music videos
and creative, eye-catching signage. Historically, the Company has displayed a
significant amount of merchandise on the walls of the store, with male
merchandise along one side and female merchandise along the other. Early in the
second half of fiscal 2003, however, the Company will convert the Gadzooks
stores to an all-female merchandise assortment. As a result of the conversion,
new fixtures and merchandise displays will be utilized to give the store
environment more of a feminine appeal. Stores typically feature large windows
along the mall which provide an open view of the entire store to mall traffic
and are merchandised to draw customers into the store.

MANAGEMENT INFORMATION SYSTEMS

Each Gadzooks store is linked to the Company's headquarters through a
point-of-sale system that interfaces with an IBM RS6000 computer equipped with
an integrated merchandising, distribution and accounting software package. The
Company's point-of-sale computer system has several features, including
merchandise scanning, "price look-up," updated sales reports and on-line credit
card approval. These features

7

improve transaction accuracy, speed and checkout time, increase overall store
efficiency and enable the Company to track the productivity of individual sales
associates.

The Company's management information and control systems enable the
Company's corporate headquarters personnel to promptly identify sales trends,
replenish depleted store inventories, reprice merchandise and monitor
merchandise mix and inventory shrinkage at individual stores and throughout the
Company's store network. Management believes that these systems provide a number
of benefits, including improved store inventory management, better in-stock
availability, higher operating efficiency and fewer markdowns.

The Company believes that its current management information and control
systems are adequate to support the Company's existing and planned operations,
but regularly evaluates its systems to determine when upgrades or replacements
are needed. The Company implemented enhanced planning and allocation systems in
fiscal 2000. These changes allow the Company to more efficiently manage and
respond to merchandise mix changes at a chain and store level. The Company
implemented a new financial system that was fully operational by the end of the
third quarter of fiscal 2001. During fiscal 2002, a warehouse management system
was installed and implemented prior to the holiday season. Warehouse
productivity and accuracy have been improved with online, real-time, detailed
task tracking and barcode scanning through the use of wireless devices. In
fiscal 2002, the Company improved its communications with its regional and
district store managers through the implementation of remote access
capabilities. Additionally, the Company has signed a contract to license new
point-of-sale and merchandising systems to be installed and implemented over the
course of the next few years.

ADVERTISING AND PROMOTION

The Company relies primarily on mall traffic, the enthusiasm of its sales
associates and existing customers, highly visible store locations and
eye-catching signage to attract new customers to the stores. The Company has
generally found this approach to be more cost effective than more traditional
media advertising. During fiscal 2001, the Company began building an e-mail
database of customers. The database is used to advertise and promote merchandise
offerings and contests via e-mail blasts as a means to increase customer traffic
at the stores. During the fourth quarter of fiscal 2002, the Company began
building a mailing list of its customers. The mailing list includes general
demographic information and will be utilized in a direct mail campaign to
support the Company's transition to an all-female merchandise assortment in the
second half of fiscal 2003. Additionally, the Company has hired a leading
independent branding firm to help plan and execute the marketing and advertising
campaign that will be used to support Gadzooks' new brand image.

The Company plans the opening of new stores to coincide with peak shopping
seasons and mall grand openings when customer traffic is greater. The Company
also uses promotions to generate repeat visits to its stores and plans on
increasing its advertisements in national magazines, such as Seventeen, YM, Teen
Vogue and Teen People, in partnership with certain of its vendors. The Company
also benefits from advertising by its vendors, especially where Gadzooks is
listed as a retailer of their products. The Company's redesigned website
features music videos, movie previews, horoscopes, current store fashions and
promotions to capture the attention of its target customers and attract them to
the stores. The Company has also been active in sponsoring concerts and other
teen-related promotional events.

TRADEMARKS

The Company has registered on the Principal Register of the United States
Patent and Trademark Office "Gadzooks" (in various formats), "Decibel,"
"Epidemic" and "Verbal Assault" and currently has pending applications for "Bad
Kitty," "Misdemeanor," "Orchid" and "Taunt." Each federal registration is
renewable indefinitely if the mark is in use at the time of the renewal. The
Company is not aware of any claims of infringement or other challenges to the
Company's right to use its marks in the United States.

COMPETITION

The teenage retail apparel and accessories industry is highly competitive.
The Company competes with other retailers for customers, suitable retail
locations and qualified management personnel. Gadzooks

8

currently competes with traditional department stores, with national specialty
chains such as Old Navy and certain divisions of The Limited, with numerous
other retailers such as American Eagle Outfitters, The Buckle, Abercrombie &
Fitch, Pacific Sunwear, Charlotte Russe, Forever 21, Wet Seal and Hot Topic, and
with local specialty stores in certain markets, and to a lesser extent, with
mass merchandisers and companies providing shopping sites via the internet. Many
of the Company's competitors are larger and have substantially greater
financial, marketing and other resources than the Company. The principal
competitive factors in the Company's business are fashion, merchandise
selection, customer service, price and store location.

EMPLOYEES

On March 1, 2003, the Company had 1,531 full-time employees and 2,856
part-time employees. Of the Company's 4,387 employees, 151 were corporate
personnel, 109 were distribution center employees and 4,127 were store
employees. The number of part-time employees varies with seasonal needs. None of
the Company's employees are covered by a collective bargaining agreement. The
Company seeks to create a casual and supportive working environment and believes
its employee relations to be excellent.

9

RISK FACTORS

This Report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21F of the Securities
Exchange Act of 1934. When used in this report, words such as "anticipate,"
"believe," "estimate," "expect," "intend," "predict," "project," "will" and
similar expressions, as they relate to us or our management, identify
forward-looking statements. These forward-looking statements are based on
information currently available to our management. Actual results could differ
materially from those contemplated by the forward-looking statements as a result
of certain factors, including fluctuations in store sales results, changes in
economic conditions, fluctuations in quarterly results and other factors
described under the "Risk Factors" section. Such statements reflect the current
views of our management with respect to future events and are subject to these
and other risks, uncertainties and assumptions relating to our operations,
results of operations, growth strategy and liquidity. All subsequent written and
oral forward-looking statements attributable to us, or persons acting on our
behalf, are expressly qualified in their entirety by this paragraph.

GROWTH STRATEGY: FUTURE OPERATING RESULTS

The Company's net sales have grown during the past several years, primarily
as a result of the opening of new stores and, to a much lesser extent, increases
in comparable store sales in prior years. The Company expects to open one new
Gadzooks store in 2003; however, continued expansion has been suspended pending
the conversion of the Gadzooks stores to an all-female merchandise assortment.
This transition is scheduled to take place early in the second half of fiscal
2003. The Company has already closed five stores and is currently pursuing the
closure of approximately 20 to 25 additional stores during fiscal 2003. The
Company is still evaluating the Orchid concept. Future operating results will
depend largely on the Company's ability to manage the business through the
transition from a young men's and juniors apparel and accessories store to an
all-female apparel and accessories store targeted to a slightly older age group.
There can be no assurance that the conversion of the Gadzooks stores to an
all-female merchandise assortment will be completed successfully or will be
profitable. In the future, the Company may enter new markets in various regions
of the United States. Expansion into new markets may present competitive and
merchandising challenges that are different from those currently encountered by
the Company in its existing markets and future expansion will be dependent on
the successful conversion to an all-female merchandise assortment.

The Company anticipates capital expenditures of $6 million to $8 million in
fiscal 2003 to open one new Gadzooks store, remodel two existing stores, update
the look of all Gadzooks stores as part of the transition to an all-female
merchandise selection and purchase and/or upgrade information systems. The
Company has hired a consultant to review the current store base and provide
recommendations on ways to update the store environment to have more of a
feminine appeal. The actual costs that the Company will incur in connection with
transitioning its stores cannot be predicted with precision because such costs
will vary based upon, among other things, geographic location, store size and
the extent of the modifications required at the selected site. Even though the
Company believes that its existing cash balances, cash generated from operations
and funds available under the Company's secured line of credit will be
sufficient to fund its transition requirements through at least fiscal 2003, the
Company may be required to seek additional sources of funds for such transition.
If the Company does need to seek additional funding, no assurance can be given
that the Company will be able to obtain such funding on acceptable terms.

CONVERSION TO AN ALL-FEMALE MERCHANDISE ASSORTMENT

Early in the second half of fiscal 2003, the Company plans to focus
exclusively on apparel and accessories for females and will convert the Gadzooks
stores to an all-female merchandise assortment. The Company believes that the
conversion will have a positive impact on the business due to the Company's
historical performance and expertise in the junior's category. The Company
believes that the additional square footage devoted to the female customer will
allow the stores to compete more effectively and will give the stores more
focus. The Company's failure to successfully convert to an all-female
merchandise assortment or its failure to liquidate the men's merchandise at the
planned prices would likely have a material adverse effect on the Company's
business, financial condition, operating results, comparable store sales results
and image with its

10

customers. In addition, if the anticipated increase in female business does not
occur as planned, the Company's sales and revenues are likely to suffer.

FLUCTUATIONS IN COMPARABLE STORE SALES RESULTS

A variety of factors affect the Company's comparable store sales results,
including economic conditions, fashion trends, the retail sales environment,
competition, sourcing and distribution of products and the Company's ability to
execute its business strategy efficiently. The liquidation of the Company's
men's inventory and subsequent change to an all-female merchandise assortment
are also likely to cause unusual fluctuations in comparable store sales results
particularly in fiscal 2003. The Company's quarterly comparable store sales
results have varied significantly in the past. The Company's comparable store
sales results were (2.2)%, (3.3)%, (5.1)% and (3.1)% in the first, second, third
and fourth quarters of fiscal 2002, respectively, and (4.6)%, (8.9)%, (3.2)% and
(3.9)% in the first, second, third and fourth quarters of fiscal 2001,
respectively.

CHANGES IN FASHION TRENDS

The Company's profitability is largely dependent upon its ability to
anticipate the fashion tastes of its customers and to provide merchandise and
brands that appeal to their preferences in a timely manner. The fashion tastes
of the Company's customers may change frequently. The Company's failure to
anticipate, identify or react appropriately to changes in styles, trends or
brand preferences could lead to, among other things, excess inventories and
higher markdowns, which could have a material adverse effect on the Company's
operating results, comparable store sales results and image with its customers.
See Item 1, "Business -- Merchandising."

PRIVATE LABEL MERCHANDISE

Sales from private label merchandise, including merchandise designed and
sourced by Gadzooks under the Candie's label, accounted for approximately 17%
and 13% of net sales in fiscal 2002 and fiscal 2001, respectively. The Company
expects to increase the percentage of net sales in private label merchandise in
the future, although there can be no assurance that the Company will be able to
achieve increases in private label merchandise sales as a percentage of net
sales. Because the Company's private label merchandise generally carries higher
merchandise margins than its other merchandise, the Company's failure to
anticipate, identify and react in a timely manner to fashion trends with its
private label merchandise, particularly if the percentage of net sales derived
from private label merchandise increases, may have a material adverse affect on
the Company's business, financial condition and results of operations. See Item
1, "Business -- Merchandising."

IMPACT OF ECONOMIC CONDITIONS

Certain economic conditions affect the level of consumer spending on
merchandise offered by the Company, including business conditions, interest
rates, taxation and consumer confidence in future economic conditions. If the
demand for apparel and related merchandise by its female customers declines, the
Company's business, comparable store sales results and results of operations
would be materially and adversely affected. Although the Company advertises on
its website, through e-mail blasts and to a limited extent in national magazines
through cooperative agreements with certain of its vendors, its stores rely
principally on mall traffic for customers. Therefore, the Company is dependent
upon the continued popularity of malls as a shopping destination and the ability
of mall anchor tenants and other attractions to generate customer traffic for
its stores. A decrease in mall traffic or a decline in economic conditions in
the markets in which the Company's stores are located would adversely affect the
Company's growth, net sales, comparable store sales results and profitability.
See Item 1, "Business."

DEPENDENCE ON SINGLE DISTRIBUTION FACILITY

The Company's distribution functions for all its stores are handled from a
single facility in Carrollton, Texas. Any significant interruption in the
operation of the distribution facility due to natural disasters,

11

accidents, system failures or other unforeseen causes could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company's distribution center
will be adequate to support the Company's anticipated future growth.

QUARTERLY RESULTS AND SEASONALITY

The Company's quarterly results of operations may fluctuate materially
depending on, among other things, the timing of new store openings, net sales
contributed by new stores, increases or decreases in comparable store sales,
shifts in timing of certain holidays and changes in the Company's merchandise
mix. The Company's business is also subject to seasonal influences, with heavier
concentrations of sales during the Christmas holiday, back-to-school and spring
break seasons. The Company has experienced quarterly losses in the past and is
likely to experience such losses in the future, especially during the conversion
to an all-female merchandise assortment. Because of these fluctuations in net
sales and net income, the results of operations of any quarter are not
necessarily indicative of the results that may be achieved for a full fiscal
year or any future quarter.

ECONOMIC IMPACT OF WAR AND TERRORIST ATTACKS

As a result of the war in Iraq and the lingering effects of the attacks on
September 11, 2001, security has been heightened in public areas, including the
regional shopping malls where the Company's stores are located. Any further
threat of terrorist attacks or actual terrorist events could lead to lower
customer traffic in regional shopping malls. The decline in tourism has also had
a negative impact on stores located in Florida. A continued decline in tourism
in this market could have a material effect on the Company's sales and
profitability. In addition, local authorities or mall management could close
regional shopping malls in response to any immediate security concern. For
example, on September 11, 2001, substantially all the Company's stores were
closed early due to closure of the malls in response to the terrorist attacks.
Mall closures, as well as lower customer traffic due to security concerns, could
result in decreased sales that would have a material adverse effect on the
Company's business, financial condition and results of operations.

DEPENDENCE ON KEY VENDORS

The Company's business depends on its ability to purchase current season,
brand name apparel in sufficient quantities at competitive prices. The inability
or failure of key vendors to supply the Company with adequate quantities of
desired merchandise, the loss of one or more key vendors or a material change in
the Company's current purchase terms could have a material adverse effect on the
Company's business. Many of the Company's smaller vendors have limited
resources, production capacities and operating histories, and many have limited
the distribution of their merchandise in the past. The Company has no long-term
purchase contracts or other contractual assurances of continued supply, pricing
or access to new products. There can be no assurance that the Company will be
able to acquire desired merchandise in sufficient quantities on terms acceptable
to the Company in the future. During the Company's 2002 fiscal year, no single
vendor accounted for more than 10% of the Company's merchandise purchases. See
Item 1, "Business -- Merchandising" and "Business -- Purchasing."

DEPENDENCE ON KEY PERSONNEL

The Company's success depends largely on the efforts and abilities of
senior management. The loss of the services of any member of senior management
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the
Company's existing management team will be able to manage the Company or its
growth or that the Company will be able to retain current and attract additional
qualified personnel as needed in the future.

COMPETITION

The Company operates in a highly competitive environment, which has
experienced aggressive growth in the number of competitors, the number of stores
and the amount of square footage dedicated specifically to

12

teen retailing. The Company currently competes with traditional and department
stores, with national specialty chains such as Old Navy and certain divisions of
The Limited, with numerous other teen retailers, such as American Eagle
Outfitters, The Buckle, Abercrombie & Fitch, Charlotte Russe, Forever 21,
Pacific Sunwear, Wet Seal and Hot Topic, with smaller chains and local specialty
stores, and to a lesser extent, with mass merchandisers and companies providing
shopping sites via the internet. Many of these competitors are larger and have
substantially greater resources than the Company. Direct competition with these
and other retailers may increase significantly in the future, which could
require the Company, among other things, to lower its prices and/or increase its
advertising expenses. Increased competition could have a material adverse effect
on the Company's operations and comparable store sales results. See Item
1,"Business -- Competition."

STOCK PRICE VOLATILITY

The market price of the Company's Common Stock has fluctuated substantially
since the Company's initial public offering in October 1995. The Company's
Common Stock is quoted on The Nasdaq Stock Market, which has experienced, and is
likely to experience in the future, significant price and volume fluctuations
which could adversely affect the market price of the Common Stock without regard
to the operating performance of the Company. In addition, the Company believes
that factors such as quarterly fluctuations in the financial results of the
Company, the Company's comparable store sales results, announcements by other
apparel retailers, the overall economy and the condition of the financial
markets could cause the price of the Company's Common Stock to fluctuate
substantially.

EXCHANGE LISTING

The Company's ability to remain listed on the Nasdaq National Market
depends on the Company's ability to satisfy applicable Nasdaq criteria including
its ability to maintain a minimum bid price per share of $1.00. If the Company's
stock price continues to decline and the Company is unable to continue to
satisfy this and other criteria, Nasdaq may begin procedures to remove the
Company's common stock from the Nasdaq National Market. If the Company is
delisted from the Nasdaq National Market, an active trading market for the
Company's common stock may no longer exist.

ANTI-TAKEOVER MATTERS

The Company's Restated Articles of Incorporation and its Bylaws contain
provisions that may have the effect of delaying, deterring or preventing a
takeover of the Company that shareholders may consider to be in their best
interests. The Company's Restated Articles of Incorporation and Bylaws provide
for a classified Board of Directors serving staggered terms of three years, the
prohibition of shareholder action by written consent in certain circumstances
and certain "fair price provisions." Additionally, the Board of Directors has
the authority to issue up to 1,000,000 shares of preferred stock having such
rights, preferences and privileges as designated by the Board of Directors
without shareholder approval.

The Company has a Shareholder Rights Plan, which is intended to deter an
unfriendly takeover of the Company and to help ensure that current shareholders
receive fair value upon the sale of their stock to another party seeking control
of the Company. See Item 8, "Notes to Consolidated Financial Statements -- Note
13 -- Shareholder Rights Plan," located on page 40 of this Form 10-K.

ITEM 2. PROPERTIES.

All of the existing stores are leased by the Company, with lease terms
(excluding renewal option periods exercisable by the Company at escalating
rents) expiring between April 2003 and January 2013. The leases for most of the
existing stores are for terms of ten years and provide for contingent rent based
upon a percent of sales in excess of specified minimums.

The Company leases its office and distribution center located in
Carrollton, Texas under a lease that is scheduled to expire on May 1, 2007.

13

ITEM 3. LEGAL PROCEEDINGS.

In the ordinary course of its business, the Company is periodically a party
to lawsuits. The Company does not believe that any resulting liability from
existing legal proceedings, individually or in the aggregate, will have a
material adverse effect on its operations or financial condition. However, there
can be no assurance that future costs will not be material to operating results
and liquidity.

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

No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the fiscal year covered by this report.

PART II

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

The following table sets forth, for the quarterly periods indicated, the
high and low sales prices per share of the common stock as reported on The
Nasdaq Stock Market:

On March 31, 2003 the closing sales price on The Nasdaq Stock Market was
$2.42. As of March 31, 2003, the approximate number of common shareholders of
record was 94, although the Company believes that the actual number of
beneficial owners is significantly higher. The Company presently intends to
retain earnings for use in its business and therefore does not anticipate
declaring a cash dividend in the near future.

14

ITEM 6. SELECTED FINANCIAL DATA.

The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto included
elsewhere in this Annual Report on Form 10-K.

- ---------------

(1) A store becomes comparable after it has been open for 14 full fiscal months.

15

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

GENERAL

Gadzooks is a mall-based specialty retailer of casual apparel and related
accessories for young men and women, principally between the ages of 14 and 18.
On January 9, 2003, the Company announced plans to focus exclusively on apparel
and accessories for females. The conversion of the Gadzooks stores to an all-
female merchandise assortment is scheduled to take place early in the second
half of fiscal 2003. In the second half of fiscal 2001, the Company began
testing a new retail concept with the opening of four Orchid stores. The Orchid
concept caters to the unique innerwear and sleepwear needs of females between
the ages of 14 and 22. The Company opened its first store in 1983, and at fiscal
year-end 2002, operated 435 Gadzooks stores and four Orchid stores in 41 states.
The Company opened 11 Gadzooks stores in fiscal 2002, 56 Gadzooks stores and
four Orchid stores in fiscal 2001 and 52 Gadzooks stores in fiscal 2000. Three
Gadzooks stores were closed during fiscal 2002, four Gadzooks stores were closed
during fiscal 2001 and three Gadzooks stores were closed during fiscal 2000.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of Gadzooks' consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the balance sheet date, as well as the reported amounts of
revenues and expenses during the reporting period. On an ongoing basis,
management evaluates such estimates including sales return rates, inventory
reserves, impairment of long-lived assets, income taxes and accrued expenses.
Actual results may differ from these estimates.

Gadzooks' accounting policies are generally straightforward, however, the
following require more significant management judgments and estimates.

Revenue Recognition. As discussed in Note 2 to the consolidated financial
statements, retail merchandise sales are recognized at the point of sale less
sales returns and employee discounts. Management records a provision for
estimated sales returns based on historical return rates. If sales return rates
increase, an additional allowance may be required.

Inventory Valuation. As discussed in Note 2 to the consolidated financial
statements, inventories are valued at the lower of average cost or market. Cost
is determined using the weighted-average method. Markdown allowances received
from vendors are recorded as a reduction of inventory cost and therefore as a
reduction of cost of goods sold in the period in which the related merchandise
is sold. In addition, inventories include an allocation of buying and
distribution costs to prepare product for the stores. This inventory valuation
method requires certain management estimates and judgments, including estimates
of merchandise markdowns, which could significantly affect gross margin.
Management estimates the markdown reserve based on several factors, including
but not limited to, merchandise quantities, historical markdown percentages,
aged seasonal merchandise and future merchandise plans. If future demand or
merchandise markdowns are less favorable than those projected by management,
additional inventory adjustments may be required. On a monthly basis, management
estimates shrink based on historical shrink rates. These estimates are compared
to actual results as inventory counts are taken and reconciled to the general
ledger. Gadzooks has not experienced significant fluctuations in historical
shrink rates.

Long-Term Asset Impairment. As discussed in Note 3 of the consolidated
financial statements, management periodically reviews its long-lived assets for
impairment and records a provision whenever events or circumstances indicate
that the net book value of the asset may not be recoverable. Impairment is
determined based on several factors, including but not limited to, current year
operating loss or cash flow loss combined with a history and forecast of
operating or cash flow losses, significant negative industry or economic trends
and a current expectation, that more likely than not, the asset will be disposed
of significantly before the end of its previously estimated useful life. If
management determines that an impairment exists, an impairment loss is
recognized if the sum of the expected future cash flows (undiscounted and before
interest)

16

from the use of the assets is less than the net book value of the assets. The
amount of the impairment loss is measured as the difference between the net book
value of the assets and the estimated fair market value of the related assets.

Deferred Tax Assets. As discussed in Note 8 of the consolidated financial
statements, the Company does not currently have a valuation allowance recorded
against its deferred tax assets. If management determines it is more likely than
not that its deferred tax assets would not be realizable in the future, a
valuation allowance would be recorded to reduce the deferred tax asset to its
net realizable value. The Company anticipates an operating loss during the
transition phase in fiscal 2003 and expects to return to profitability in fiscal
2004; however, should the loss for fiscal 2003 exceed projections, the Company
may need to recognize a valuation allowance to reduce its deferred tax assets.

Accrued Expenses. On a monthly basis, certain expenses are estimated in an
effort to reflect these expenses in the proper period. Gadzooks' most material
estimates relate to self-insurance reserves, store level operating expenses and
bonuses. The self-insurance reserves for medical and worker's compensation
claims are recorded based on historical claim levels adjusted for growth in the
employee base. If the historical claims used to calculate these estimates are
not reflective of actual results, additional expenses may be incurred up to the
point that the Company's stop loss insurance begins. The Company is self-insured
for property and casualty claims at the store level. Property and casualty
claims at the store level are estimated and recognized as incurred. Accrued
store level operating expenses are estimated based on current activity and
historical results. Bonuses are based on performance and projected performance
for the remainder of the bonus period. If actual results are significantly
different from Gadzooks' expectations, an adjustment to expenses may be
required.

CONVERSION TO ALL-FEMALE MERCHANDISE ASSORTMENT

The conversion of the Gadzooks stores to an all-female merchandise
assortment is scheduled to take place early in the second half of fiscal 2003.
The Company anticipates an operating loss during the transition phase in fiscal
2003 and expects to return to profitability in fiscal 2004. Although it is not
possible to predict all of the costs associated with the transition, the Company
does plan to spend at least $1.5 million to $2.5 million in fiscal 2003 to
market the new concept. However, no assurance can be given that the conversion
will be successfully completed during fiscal 2003, that the Company will be
profitable in fiscal 2004 or that the direct costs related to the conversion
will not exceed the range provided.

STORE CLOSINGS

The Company has already closed five stores and is currently pursuing the
closure of approximately 20 to 25 additional under-performing stores in fiscal
2003. The costs associated with the closing of these stores, including, but not
limited to lease termination costs and employee severance, is expected to be
between $2.5 million and $3.5 million in the aggregate. As of February 1, 2003,
the Company has not accrued any costs associated with the closing of the stores.
Costs and expenses associated with store closures will be recognized at the time
the liability is incurred. No assurance can be given however, that these stores
will be closed during fiscal 2003, that additional stores will not be closed
during fiscal 2003 or that the costs related to the closing of the stores will
not exceed the range provided.

17

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated certain selected
income statement data expressed as a percentage of net sales and certain store
data:

Fiscal Year. The Company's fiscal year is the 52- or 53-week period that
ends on the Saturday nearest January 31. Fiscal 2002 was the 52-week period
ending February 1, 2003. The Company estimates that the 53rd, or "extra," week
included in fiscal 2000 increased net income by about $450,000, or $.05 per
diluted share. The estimated impact of this 53rd week on the individual income
statement components is discussed under the respective captions below.

FISCAL 2002 COMPARED TO FISCAL 2001

Net sales increased approximately $11.7 million, or 3.7 percent, to $325.5
million during fiscal 2002 from $313.8 million during fiscal 2001. Net sales for
the 11 new stores opened during fiscal 2002 and for those not yet qualifying as
comparable stores accounted for $22.0 million of total sales. These sales were
primarily offset by a comparable store sales decrease of $10.3 million, or 3.4
percent, in fiscal 2002. Sales per average store by category compared to the
prior year were as follows: shoes -- increased 2.3 percent; men's apparel --
decreased 5.4 percent; accessories -- decreased 6.8 percent and junior apparel
was flat to last fiscal year. The decrease in comparable store sales is
attributed to increased competition and a difficult retail environment. The
average dollar sale increased by 3.1 percent for the year, and the number of
transactions per average store declined by 6.3 percent. A store becomes
comparable after it has been open for 14 full fiscal months.

Gross profit increased approximately $1.4 million to $81.2 million during
fiscal 2002 from $79.8 million in fiscal 2001. As a percentage of net sales,
gross profit decreased 0.5 percent to 24.9 percent from 25.4 percent in fiscal
2001. Merchandise margin as a percentage of sales was 0.8 percent higher than
the prior year. This increase is primarily attributable to improved inventory
shrinkage results as well as higher merchandise margins resulting from a shift
in the merchandise mix to increased levels of private-label merchandise.
Offsetting the improvement in merchandise margin was a 1.3 percent increase in
occupancy costs as a percentage of sales. Of the increase in store occupancy
costs as a percentage of sales, 0.6 percent was due to negative sales leverage,
and the rest was the result of a 4.0 percent increase in occupancy costs per
average square foot due to the higher costs associated with new stores and
remodels as well as higher depreciation expense associated with store
refurbishments. Buying and distribution costs as a percentage of sales were
essentially flat to last year.

Selling, general and administrative, or SG&A expenses, increased
approximately $7.5 million to $77.3 million in fiscal 2002 from $69.8 million in
fiscal 2001. The aggregate increase in SG&A is primarily attributable to
additional store expenses as a result of the Company's expanded store base
during the past

18

fiscal year and an increase in administrative costs to support the larger store
base. As a percentage of net sales, SG&A increased 1.5 percent to 23.7 percent
from 22.2 percent in fiscal 2001. The increase in the SG&A percentage is
primarily the result of the negative leverage effect of the comparable store
sales decrease, an increase in store payroll expense, increased advertising and
visual marketing costs, accelerated depreciation and the write-off of certain
project costs related to an abandoned information systems project.

The Company's net interest income decreased $220,000 to $74,000 in 2002
from $294,000 in fiscal 2001, due to both lower average cash balances and lower
interest rates in fiscal 2002.

The Company's effective tax rate decreased to 35.0 percent in fiscal 2002
from 38.3 percent in fiscal 2001. This decrease is primarily due to a change in
mix of contribution to income from different states in fiscal 2002 as compared
to fiscal 2001.

Provision for Asset Impairments. As indicated in Note 3 of the
consolidated financial statements, during fiscal 2002, the Company recorded a
non-cash impairment charge of $5,870,000 to reflect fixtures and leasehold
improvements at their respective estimated fair value in a total of 71
under-performing stores. The Company closed one of these stores in February 2003
and four of these stores in March 2003. The Company is currently pursuing the
closure of approximately 20 to 25 additional under-performing stores in fiscal
2003. The total impairment charge is expected to reduce depreciation expense by
approximately $978,000 annually over the average remaining useful lives of these
assets (approximately 6.1 years). Management will continue to monitor these
stores along with its regular review of the performance of all the Company's
stores. If management determines that it is unlikely that a store's expected
future operating results will be sufficient to meet the Company's financial
objectives, management will consider remedial actions up to and including
closing the store. If management approves a plan for closing a store or stores,
the Company will recognize the liability for the costs associated with the plan
as the liabilities are incurred. Costs to close a store can vary greatly based
on the remaining life of a lease, buyout options with landlords and severance
costs.

FISCAL 2001 COMPARED TO FISCAL 2000

Net sales increased approximately $25.4 million, or 8.8 percent, to $313.8
million during fiscal 2001 from $288.4 million during fiscal 2000. Excluding
sales of $4.5 million from the additional week in fiscal 2000, net sales
increased 10.5 percent in fiscal 2001. Net sales for the new stores opened
during fiscal 2001 and for those not yet qualifying as comparable stores
accounted for $39.2 million of the total increase in sales. Comparable store
sales decreased by $13.8 million, or 5.1 percent, in fiscal 2001. The Company
experienced comparable store sales decreases in all of its merchandise
categories. The decrease in comparable store sales is attributed to increased
competition and a difficult retail environment. The average dollar sale
increased by 2.5 percent for the year, and the number of transactions per
average store declined by 8.1 percent.

Gross profit decreased approximately $3.1 million to $79.8 million during
fiscal 2001 from $82.9 million in fiscal 2000. As a percentage of net sales,
gross profit decreased by 3.4 percent to 25.4 percent from 28.8 percent in
fiscal 2000. The Company estimates that $1.7 million in gross profit was
attributable to the additional week in fiscal 2000. The 3.4 percent decline was
the result of a 1.8 percent increase in store occupancy costs as a percentage of
sales, a 1.4 percent decrease in merchandise margin and a 0.2 percent increase
in buying and distribution costs as a percentage of sales. Of the increase in
store occupancy costs as a percentage of sales, 1.3 percent was due to negative
sales leverage, and the rest was the result of a 2.8 percent increase in
occupancy costs per average square foot due to the higher costs associated with
new stores. The decrease in merchandise margin of 1.4 percent resulted from
increased markdowns taken to manage inventory levels. Buying and distribution
costs as a percent of sales increased by 0.2 percent due to negative sales
leverage.

Selling, general and administrative expenses increased approximately $6.3
million to $69.8 million in fiscal 2001 from $63.5 million in fiscal 2000. The
Company estimates that an additional $1.0 million in SG&A costs were
attributable to the additional week in fiscal 2000. The aggregate increase in
SG&A is primarily attributable to additional store expenses as a result of the
Company's expanded store base during the past year and an increase in
administrative costs to support the larger store base. As a percentage of net
sales, SG&A increased 0.2 percent to 22.2 percent from 22.0 percent in fiscal
2000. The increase in SG&A as a percentage

19

of sales is primarily due to negative sales leverage, and a charitable
contribution accrual for over $300,000 related to a t-shirt program to raise
funds for the victims of the September 11, 2001 attack on the United States.
This increase was partially offset by the leveraging of corporate expenses over
a larger store base, a reduction in performance-based compensation and the
favorable settlement of litigation against another mall tenant during the third
quarter of fiscal 2001 that resulted in a gain of approximately $740,000.

The Company's net interest income decreased $498,000 to $294,000 in 2001
from $792,000 in fiscal 2000, due to both lower average cash balances and lower
interest rates in fiscal 2001.

The Company's effective income tax rate increased to 38.3 percent in fiscal
2001 from 36.8 percent in fiscal 2000. This increase is primarily due to an
increase in state income taxes resulting from an increase in the percentage of
income contributed by states at a higher tax rate.

Provision for Asset Impairments. As indicated in Note 3 of the
consolidated financial statements, during fiscal 2001, the Company recorded a
non-cash impairment charge of $563,000 to reflect fixtures and leasehold
improvements at their respective estimated fair value in a total of six
under-performing stores. The Company closed two of these stores in fiscal 2002.
Two of the remaining locations are currently targeted for closure. The total
impairment charge is expected to reduce depreciation expense by approximately
$104,000 annually over the average remaining useful lives of these assets
(approximately 5.4 years). Certain stores have been negatively impacted by the
effects of the September 11, 2001 terrorist attacks as well as by the entrance
into new markets, as such, no assurance can be given as to whether an impairment
charge will be necessary in the future. Management will continue to monitor
these stores along with its regular review of the performance of all the
Company's stores. If management determines that it is unlikely that a store with
negative cash flows will increase its sales volume to a level that would allow
the store to generate positive cash flow, management will consider remedial
actions up to and including closing the store. If management approves a plan for
closing a store or stores, the Company will recognize a provision for store
closing costs during the quarter in which such approval is granted.

QUARTERLY RESULTS AND SEASONALITY

The Company's quarterly results of operations may fluctuate materially
depending on, among other things, the timing of new store openings, net sales
contributed by new stores, increases or decreases in comparable store sales and
changes in the Company's merchandise mix. In fiscal 2003 particularly, the
Company's quarterly results are also likely to fluctuate significantly due to
the liquidation of the men's business and conversion to an all-female
merchandise assortment.

The Company's business is also subject to seasonal influences, with higher
sales during the Christmas holiday, back-to-school, and spring break seasons.
The Christmas holiday season remains the Company's single most important selling
season. The Company believes, however, that the significance of the back-to-
school season (which affects operating results in the second and third quarters)
and the spring break season (which affects operating results in the first
quarter) reduces somewhat the Company's dependence on the Christmas holiday
selling season.

The following table sets forth certain statement of income and operating
data for each of the Company's last eight fiscal quarters. The following
quarterly data was derived from unaudited financial statements of the Company,
which in the opinion of management of the Company, contain all adjustments
(consisting only of

20

normal recurring adjustments) necessary for fair presentation thereof. Results
for any quarter are not necessarily indicative of results that may be achieved
for a full fiscal year.

- ---------------

(1) Includes a charge for asset impairments of $5,870,000 ($3,816,000 after tax,
or $0.42 per diluted share) during the fourth quarter of 2002 and a charge
for asset impairments of $563,000 ($347,000 after tax, or $0.03 per diluted
share) during the fourth quarter of 2001.

LIQUIDITY AND CAPITAL RESOURCES

General. During the last three fiscal years, the Company's primary uses of
cash have been to finance new store openings, store remodels, and information
system enhancements and to purchase merchandise inventories. The Company has
historically satisfied its cash requirements principally from cash flow from
operations.

Cash Flows. During fiscal 2002, 2001 and 2000, cash flows from operating
activities were $14.9 million, $7.4 million and $14.3 million, respectively.
Cash flow from operations before working capital changes decreased to $11.5
million in fiscal 2002 from $13.8 million in the prior year primarily due to the
decline in operating results discussed above.

Working capital components provided $3.4 million in fiscal 2002. Cash
provided was primarily the result of lower average store inventory levels ($7.5
million), offset in part by an increase in other assets ($4.5 million)
consisting primarily of prepaid monthly store rent, which is due to a timing
difference in rent payments.

Working capital components used $6.4 million in fiscal 2001. Cash used was
primarily the result of funding higher inventory levels ($7.7 million) as a
result of new store openings.

Cash used in investing activities approximated $9.7 million, $14.0 million
and $12.9 million for fiscal 2002, 2001 and 2000, respectively.

The Company spent $9.7 million on capital expenditures during fiscal 2002,
the primary components of which were $1.9 million to open 11 new Gadzooks stores
and remodel one Gadzooks store, $2.2 million to refurbish 91 existing Gadzooks
stores, $3.6 million to update the look of all the Gadzooks stores and $2.0
million to purchase and/or upgrade information systems and for other corporate
purposes.

The Company spent $14.3 million on capital expenditures during fiscal 2001,
the primary components of which were $13.1 million to open new stores or remodel
and refurbish existing stores and $1.2 million to purchase and/or upgrade
information systems and for other corporate purposes. The Company opened 11, 56

21

and 52 new Gadzooks stores in fiscal 2002, 2001 and 2000, respectively, and four
new Orchid stores in fiscal 2001.

Net cash flow provided by financing activities totaled $679,000, $1.2
million and $291,000 for fiscal 2002, 2001 and 2000, respectively. The Company
received $460,000 and $968,000 from the exercise of employee stock options
during fiscal 2002 and fiscal 2001, respectively. The Company received $219,000
and $207,000 for sales of treasury stock in fiscal 2002 and fiscal 2001.

Credit Facility. On April 11, 2003, the Company and Wells Fargo Retail
Finance LLC ("Wells Fargo") entered into a three-year $30 million revolving
credit agreement (the "New Facility"), which is secured by an exclusive and
first priority, perfected interest in all assets of the Company. The Company's
borrowings under the agreement are limited to 85% of the net recovery value of
eligible inventory (as defined by the New Facility) plus 85% of eligible credit
card accounts receivable less certain financial reserves specified by Wells
Fargo. As of April 11, 2003, amounts available to borrow under the new credit
line, as limited as described above and by outstanding letters of credit of $4.2
million, totaled $24.5 million. The credit agreement also provides for the
issuance of letters of credit that are generally used in connection with
international merchandise purchases. Outstanding letters of credit issued by the
bank reduce amounts otherwise available for borrowing under the revolving line
of credit. The credit facility subjects the Company to a minimum maintained
excess availability requirement of $3.0 million (as defined by the New
Facility). Amounts borrowed under the revolving line will bear interest ranging
from 1.25% to 2.00% above LIBOR, or 0.25% below to 0.50% above Wells Fargo's
prime rate based on credit line utilization.

Previously on June 1, 2002, the Company entered into a restated and amended
credit facility (the "Prior Facility")with Wells Fargo Bank (the "Bank"). The
Prior Facility was terminated in connection with the establishment of the New
Facility. The Prior Facility provided an unsecured revolving line of credit
totaling $15 million. The total amount available to borrow pursuant to the Prior
Facility was limited to 140% of cash flow (as defined in the Prior Facility) for
the trailing 12-month period. Amounts borrowed under the Prior Facility bore
interest at the lesser of either the Bank's prime rate, or 195 basis points
above LIBOR. The Prior Facility also provided for the issuance of letters of
credit that are generally used in connection with international merchandise
purchases. Outstanding letters of credit issued by the Bank reduced amounts
otherwise available for borrowing under the revolving line of credit. The Prior
Facility subjected the Company to various restrictions on the incurrence of
additional indebtedness, acquisitions, loans to officers and stock repurchases,
and included various financial covenants.

At November 2, 2002, the Company was in technical default of the covenant
in the Prior Facility that required net income of not less than $1 on a trailing
two-quarter basis determined as of each fiscal quarter end. On November 11,
2002, the Company and the Bank entered into the First Amendment to the First
Amended and Restated Credit Agreement and Waiver of Defaults, which provided the
Bank with a security interest in the Company's inventory, accounts receivable
and other rights to payment, furniture and fixtures, and machinery and equipment
and included a waiver of the specific covenant violation for the quarter ended
November 2, 2002.

At February 1, 2003, the Company was in technical default of the covenant
in the Prior Facility that required net income of not less than $1 on a trailing
two-quarter basis determined as of each fiscal quarter end. Amounts available to
borrow under the line of credit, as limited by the cash flow multiple and/or
outstanding letters of credit, totaled $14.4 million at February 1, 2003. No
borrowings (other than letters of credit, totaling $0.6 million) were
outstanding under the revolving line at February 1, 2003.

The Company has no other long-term financial commitments other than store,
corporate office and distribution center leases as outlined in detail in Note 7
to the consolidated financial statements.

Conversion to All-Female Merchandise Assortment. The conversion of the
Gadzooks stores to an all-female merchandise assortment is scheduled to take
place early in the second half of fiscal 2003. The Company anticipates an
operating loss during the transition phase in fiscal 2003 and expects to return
to profitability in fiscal 2004. Although it is not possible to predict all of
the costs associated with the transition, the Company does plan to spend at
least $1.5 million to $2.5 million in fiscal 2003 to market the new concept.

22

However, no assurance can be given that the conversion will be successfully
completed during fiscal 2003, that the Company will be profitable in fiscal 2004
or that the direct costs related to the conversion will not exceed the range
provided.

Store Closings. The Company has already closed five stores and is
currently pursuing the closure of approximately 20 to 25 additional
under-performing stores in fiscal 2003. The costs associated with the closing of
these stores, including, but not limited to lease termination costs and employee
severance, is expected to be between $2.5 million and $3.5 million in the
aggregate. No assurance can be given however, that these stores will be closed
during fiscal 2003, that additional stores will not be closed during fiscal 2003
or that the costs related to the closing of the stores will not exceed the range
provided.

Capital Expenditures. The Company anticipates capital expenditures of $6
million to $8 million in fiscal 2003 to open one new Gadzooks store, update the
look and fixtures of all existing stores to coordinate with the all-female
merchandise assortment and purchase and/or upgrade information systems. The
Company has hired a consultant to review the current store base and provide
recommendations on ways to customize the look of the store to complement the
all-female merchandise assortment. During fiscal 2002, the Company had capital
expenditures of $9.7 million, of which $7.7 million was used to open 11 new
Gadzooks stores, remodel one Gadzooks store, refurbish 91 stores and purchase
other assets for open stores. The remaining $2.0 million was used primarily for
corporate purposes, such as the purchase and/or upgrade of information systems.
The Company believes that its existing cash balances, cash generated from
operations, and funds available under the New Facility will be sufficient to
satisfy its cash requirements through fiscal 2003.

NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations", effective for fiscal
years beginning after June 15, 2002. SFAS 143 addresses the financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets. We do not expect that the adoption of SFAS 143 will have a
significant impact on our financial statements.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections", effective for transactions occurring after May 15, 2002. SFAS 145
requires gains and losses from extinguishment of debt to be reported as part of
recurring operations, unless the transaction is considered unusual or infrequent
in which case the transaction would be classified as an extraordinary item. This
standard also eliminates an inconsistency between the accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. The Company's consolidated financial statements
will not be impacted by the adoption of SFAS 145.

SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" was issued on July 30, 2002 and replaces Emerging Issues Task Force
Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity." SFAS 146 requires companies to recognize
certain costs associated with exit or disposal activities when they are incurred
rather than at the date of a commitment to an exit or disposal plan. SFAS 146
will be effective for exit or disposal activities that are initiated after
December 31, 2002.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of SFAS 123." This
statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS 123 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. We have chosen to continue to
account for stock-based compensation using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25 and related interpretations.
Accordingly, compensation expense for stock options is measured as the excess,
if any, of the estimate of the market value of our stock at the date of the
grant over the amount an employee must pay

23

to acquire the stock. We have adopted the annual disclosure provisions of SFAS
No. 148 in our financial reports for the year ended February 1, 2003 and will
adopt the interim disclosure provisions for our financial reports for the
quarter ended May 3, 2003. As the adoption of this standard involves disclosures
only we do not expect a material impact on our results of operations, financial
position or liquidity.

In November of 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 02-16, "Accounting by a Customer (Including a Reseller)
for Certain Consideration Received from a Vendor" ("EITF 02-16"), effective for
fiscal years beginning after December 15, 2002. EITF 02-16 addresses the
accounting for cash consideration given to a reseller of a vendor's products
from a vendor. EITF 02-16 indicates that, generally, cash consideration received
by a customer from a vendor is presumed to be a reduction in the price of the
vendor's products or services and should, therefore, be characterized as a
reduction of cost of sales when recognized in the customer's income statement.
EITF 02-16 also indicates that cash consideration would be characterized as
revenue if the vendor receives, or will receive, an identifiable benefit (goods
or services) in exchange for the consideration, provided that the identified
benefit is sufficiently separable from the customer's purchase of the vendor's
products and the customer can reasonably estimate the fair value of the benefit
provided. We do not expect the adoption of this standard to have a material
impact on our financial statements in 2003.

INFLATION

The Company does not believe that inflation has had a material effect on
net sales or results of operations. The Company has generally been able to pass
on increased costs through increases in selling prices.

STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE

Certain sections of this Annual Report, including the preceding
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," contain various forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934. This Report contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21F of the Securities Exchange Act of 1934. When used in this report,
words such an "anticipate," "believe," "estimate," "expect," "intend,"
"predict," "project," "will" and similar expressions, as they relate to us or
our management, identify forward-looking statements. These forward-looking
statements are based on information currently available to our management.
Actual results could differ materially from those contemplated by the
forward-looking statements as a result of certain factors, including but not
limited to fluctuations in store sales results, changes in economic conditions,
fluctuations in quarterly results and other factors described under the "Risk
Factors" section of the Company's Annual Report on Form 10-K for the fiscal year
ended February 1, 2003. Such statements reflect the current views of our
management with respect to future events and are subject to these and other
risks, uncertainties and assumptions relating to our operations, results of
operations, growth strategy and liquidity. All subsequent written and oral
forward-looking statements attributable to us, or persons acting on our behalf,
are expressly qualified in their entirety by this paragraph.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company does not engage in trading market risk sensitive instruments
and does not purchase as investments, as hedges, or for purposes "other than
trading" instruments that are likely to expose the Company to market risk,
whether it be from interest rate, foreign currency exchange, commodity price or
equity price risk. The Company has issued no debt instruments, entered into no
forward or futures contracts, purchased no options and entered into no swaps.

The Company's primary market risk exposure is that of interest rate risk. A
change in LIBOR or the Prime Rate as set by Wells Fargo would affect the rate at
which the Company could borrow funds under its New Facility.

24

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

GADZOOKS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

25

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of Gadzooks, Inc.

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Gadzooks, Inc. and its subsidiaries at February 1, 2003 and February 2, 2002,
and the results of their operations and their cash flows for each of the three
years in the period ended February 1, 2003 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

/s/ PRICEWATERHOUSECOOPERS LLP

Dallas, Texas
March 7, 2003, except as to the first paragraph
of Note 6, which is as of April 11, 2003

26

GADZOOKS, INC.

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial
statements.

27

GADZOOKS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these consolidated financial
statements.

28

GADZOOKS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

The accompanying notes are an integral part of these consolidated financial
statements.
29

GADZOOKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these consolidated financial
statements.

30

GADZOOKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND NATURE OF THE COMPANY

Gadzooks, Inc. ("Gadzooks" or the "Company") is a mall-based, specialty
retailer of casual apparel and related accessories for young men and women
principally between the ages of 14 and 18. In the second half of fiscal 2001,
the Company began testing a new retail concept with the opening of four Orchid
stores. The Orchid concept caters to the unique innerwear and sleepwear needs of
females between the ages of 14 and 22. At February 1, 2003, the Company had 439
company-owned stores in metropolitan and middle markets in 41 states of which
435 were Gadzooks stores and four were Orchid stores.

On January 9, 2003, the Company announced plans to focus exclusively on
apparel and accessories for females. The conversion of the Gadzooks stores to an
all-female merchandise assortment is scheduled to take place early in the second
half of fiscal 2003. Prior to the conversion, all men's merchandise is expected
to be liquidated. Marketing and advertising campaigns will be utilized to
support the transition with an emphasis on the grand reopening of Gadzooks as a
female-only apparel and accessories store. The store environment will also be
updated to have more of a feminine appeal both in its signage and fixture
presentations.

The Company's fiscal year ends on the Saturday nearest January 31. All
references in these financial statements to fiscal years are to the calendar
year in which the fiscal year begins. Fiscal year 2000 represents the 53-week
period ended February 3, 2001 and fiscal years 2002 and 2001 represent the
52-week periods ended February 1, 2003 and February 2, 2002, respectively.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation. In June 2000, the Company completed a
corporate restructuring. The consolidated financial statements include the
accounts of Gadzooks, Inc. and its wholly-owned affiliates, Gadzooks Holding
Company and Gadzooks Management, L.P. All significant intercompany accounts and
transactions have been eliminated in consolidation. Effective December 31, 2002,
the Company again restructured, whereby Gadzooks Management, L.P. and Gadzooks
Holding Company were merged into Gadzooks, Inc.

Use of Estimates. The preparation of the financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make certain estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at February 1, 2003 and February 2, 2002 and
the reported amounts of revenues and expenses during each of the three years in
the period ended February 1, 2003. On an ongoing basis, management evaluates
such estimates including sales return rates, inventory reserves, impairment of
long-lived assets, income taxes and accrued expenses. The Company bases its
estimates on historical experience and on various other assumptions that the
Company believes to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. The self-insurance
reserves for medical and worker's compensation claims are recorded based on
historical claim levels adjusted for growth in the employee base. If the
historical claims used to calculate these estimates are not reflective of actual
results, additional expenses may be incurred up to the point that the Company's
stop loss insurance begins. The Company is self-insured for property and
casualty claims at the store level. Property and casualty claims at the store
level are estimated and recognized as incurred. Actual results could differ from
these estimates.

Cash and Cash Equivalents. Cash and cash equivalents include cash on hand
and marketable securities with original maturities of three months or less.

Inventory. Inventory is valued at the lower of average cost or market.
Cost is determined using the weighted-average method. Markdown allowances
received from vendors are recorded as a reduction of inventory cost and
therefore as a reduction of cost of goods sold in the period in which the
related merchandise is sold. In addition, inventories include an allocation of
buying and distribution costs to prepare product for the

31

GADZOOKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

stores less an estimate for shrink, which is based on historical shrink rates
and adjusted to actual levels based on physical inventory results.

Leaseholds, Fixtures and Equipment. Leaseholds, fixtures and equipment are
stated at cost. Depreciation of fixtures and equipment is based upon the
estimated useful lives of the assets, generally from five to ten years, computed
on the straight-line method. Amortization of leasehold improvements is computed
on the straight-line method over estimated useful lives or lease terms, if
shorter. The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate the respective net carrying amounts
may not be recoverable. An impairment loss is recognized if the sum of the
expected future cash flows (undiscounted and before interest) from the use of
the assets is less than the net book value of the assets. The amount of the
impairment loss is measured as the difference between the net book value of the
assets and the estimated fair value of the related assets. Fair value is
determined using a traditional present value method, which requires estimated
future cash flows to be discounted using an interest rate commensurate with the
associated risk. Impairment review of long-lived assets is performed at the
store level.

Revenue Recognition. Retail merchandise sales are recognized at the point
of sale less sales returns and employee discounts. Management records a
provision for estimated sales returns based on historical return rates. If sales
return rates increase, an additional allowance may be required.

Advertising. Advertising costs are expensed when incurred. Advertising
costs were $2,063,563, $1,270,772 and $1,212,657 for fiscal years 2002, 2001 and
2000, respectively.

Store Pre-Opening Costs. Costs incurred with the setup of a new store
prior to its opening for business are expensed as incurred.

Income Taxes. Deferred income taxes are provided on the liability method.
Under this method, deferred tax assets and liabilities are recognized based on
differences between the financial statement and the tax basis of assets and
liabilities using presently enacted tax rates. The Company reviews its deferred
tax assets for ultimate realization and will record a valuation allowance to
reduce the deferred tax asset if it is more likely than not that some portion,
or all, of these deferred tax assets will not be realized.

Earnings per Share. Basic earnings per share are computed by dividing net
income by the weighted average number of shares outstanding during each period.
Diluted earnings per share are computed by dividing net income by the weighted
average number of shares outstanding during each period after giving effect to
dilutive potential common shares resulting from stock options.

Fair Value of Financial Instruments. All financial instruments are
recorded at cost, which approximates fair value due to the short maturity of
these instruments. During fiscal 2002 and 2001, no financial instruments were
held or issued for trading purposes.

Stock Option Plans. The Company has adopted the disclosure-only provisions
of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation". In accordance with the provisions of SFAS 123, the
Company applies Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations in accounting for
the plans and, accordingly, does not recognize compensation expense for stock
option plans because the Company issues options at exercise prices equal to the
market value at date of grant.

The following table shows Gadzooks' net income (loss) for the years ended
February 1, 2003, February 2, 2002 and February 3, 2001, had compensation
expense for Gadzooks' stock option plans applicable to the Company's employees
been determined based upon the fair value at the grant date for awards
consistent with the methodology prescribed by SFAS 123 (these pro forma effects
may not be representative of expense in

32

GADZOOKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

future periods since the estimated fair value of stock options on the date of
grant is amortized to expense over the vesting period, and additional options
may be granted or cancelled in future years):

New Accounting Pronouncements. In June 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", effective for fiscal years beginning after June 15, 2002. SFAS 143
addresses the financial accounting and reporting for obligations associated with
the retirement of tangible long-lived assets. We do not expect that the adoption
of SFAS 143 will have a significant impact on our financial statements.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections", effective for transactions occurring after May 15, 2002. SFAS 145
requires gains and losses from extinguishment of debt to be reported as part of
recurring operations, unless the transaction is considered unusual or infrequent
in which case the transaction would be classified as an extraordinary item. This
standard also eliminates an inconsistency between the accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. The Company's consolidated financial statements
will not be impacted by the adoption of SFAS 145.

SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" was issued on July 30, 2002 and replaces Emerging Issues Task Force
Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity." SFAS 146 requires companies to recognize
certain costs associated with exit or disposal activities when they are incurred
rather than at the date of a commitment to an exit or disposal plan. SFAS 146
will be effective for exit or disposal activities that are initiated after
December 31, 2002.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of SFAS 123." This
statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS 123 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. We have chosen to continue to
account for stock-based compensation using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25 and related interpretations.
Accordingly, compensation expense for stock options is measured as the excess,
if any,

33

GADZOOKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of the estimate of the market value of our stock at the date of the grant over
the amount an employee must pay to acquire the stock. We have adopted the annual
disclosure provisions of SFAS No. 148 in our financial reports for the year
ended February 1, 2003 and will adopt the interim disclosure provisions for our
financial reports for the quarter ended May 3, 2003. As the adoption of this
standard involves disclosures only we do not expect a material impact on our
results of operations, financial position or liquidity.

In November of 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 02-16, "Accounting by a Customer (Including a Reseller)
for Certain Consideration Received from a Vendor" ("EITF 02-16"), effective for
fiscal years beginning after December 15, 2002. EITF 02-16 addresses the
accounting for cash consideration given to a reseller of a vendor's products
from a vendor. EITF 02-16 indicates that, generally, cash consideration received
by a customer from a vendor is presumed to be a reduction in the price of the
vendor's products or services and should, therefore, be characterized as a
reduction of cost of sales when recognized in the customer's income statement.
EITF 02-16 also indicates that cash consideration would be characterized as
revenue if the vendor receives, or will receive, an identifiable benefit (goods
or services) in exchange for the consideration, provided that the identified
benefit is sufficiently separable from the customer's purchase of the vendor's
products and the customer can reasonably estimate the fair value of the benefit
provided. We do not expect the adoption of this standard to have a material
impact on our financial statements in 2003.

3. IMPAIRMENT OF LONG-LIVED ASSETS

In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," which requires that long-lived assets held and used or to
be disposed of by an entity be reviewed for impairment whenever events or
circumstances indicate that the net book value of the asset may not be
recoverable, the Company recorded a non-cash impairment charge of $5,870,000 in
fiscal 2002 to reflect fixtures and leasehold improvements at their respective
estimated fair value in a total of 71 under-performing stores. If management
determines that it is unlikely that a store with negative cash flows will
increase its sales volume to a level that would allow the store to generate
positive cash flow, management will consider remedial actions up to and
including closing the store. If management initiates the closing of a store or
stores, the Company will recognize a provision for store closing costs during
the quarter in which the liability is incurred.

During the second quarter of 2002, the Company abandoned its point of sale
software implementation project after learning that the software provider would
offer a new point of sale software product in 2003 and would discontinue sales
of the current software. As a result of the abandonment of the project, certain
costs related to the original project were written off. The total impact of the
write-off was a $310,000 ($191,000 after tax) loss on disposal during the second
quarter of fiscal 2002.

In the first quarter of fiscal 2002, the Company hired a consulting firm to
review the current store base and provide recommendations on ways to update the
look of more mature stores and enhance visual merchandising in all stores. The
store update and visual enhancement program developed in conjunction with the
consulting firm was finalized during the second quarter and was implemented
primarily during the second and third quarters of 2002 in an attempt to increase
the visual appeal, flow and shopability of all stores. The program includes the
removal of certain leasehold improvements and fixtures prior to the end of their
estimated useful life. As a result, the Company recognized accelerated
depreciation and loss on disposal of assets related to the project of
approximately $365,000 ($224,000 after tax) and $61,000 ($38,000 after tax) in
the second and third quarters of fiscal 2002, respectively.

In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed of," which requires that long-lived assets held
and used by an entity be reviewed for impairment whenever events or
circumstances indicate that the net book value of the asset may not be
recoverable, the Company recorded a non-cash impairment charge of $563,000 in
fiscal 2001 to reflect fixtures and leasehold improvements at their respective
estimated fair value in a total of six under-performing stores. In fiscal 2002,

34

GADZOOKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the Company closed two of these stores, the effect of which was not material to
the consolidated financial statements.

4. LEASEHOLDS, FIXTURES AND EQUIPMENT

Leaseholds, fixtures and equipment are summarized as follows:

5. PROVISION FOR STORE CLOSINGS

During 1999, the Company decided to close eight stores that had been
identified as under-performing, and recognized a $1,189,000 pre-tax provision
for costs related to closing the facilities. As of March 3, 2001, all of the
eight stores had been closed. As of February 2, 2002, all costs to close the
eight stores had been incurred. The components of the provision and an analysis
of the amounts charged against the accrual are outlined below.

As a result of a change in estimates, the Company recorded $6,000 of the
original store closing provision as a reduction to selling, general and
administrative expenses in fiscal 2001.

Sales and operating losses of the eight stores are shown below for the
years ended February 2, 2002 and February 3, 2001 (unaudited):

6. LONG-TERM OBLIGATIONS

On April 11, 2003, the Company and Wells Fargo Retail Finance LLC ("Wells
Fargo") entered into a three-year $30 million revolving credit agreement (the
"New Facility"), which is secured by an exclusive and first priority, perfected
interest in all assets of the Company. The Company's borrowings under the
agreement are limited to 85% of the net recovery value of eligible inventory (as
defined by the New Facility) plus 85% of eligible credit card accounts
receivable less certain financial reserves specified by Wells Fargo. The credit
agreement also provides for the issuance of letters of credit that are generally
used in connection with international merchandise purchases. Outstanding letters
of credit issued by the bank reduce amounts

35

GADZOOKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

otherwise available for borrowing under the revolving line of credit. The credit
facility subjects the Company to a minimum maintained excess availability
requirement of $3.0 million (as defined by the New Facility). Amounts borrowed
under the revolving line will bear interest ranging from 1.25% to 2.00% above
LIBOR, or 0.25% below to 0.50% above Wells Fargo's prime rate based on line
utilization.

On June 1, 2002, the Company entered into a restated and amended credit
facility (the "Prior Facility") with Wells Fargo Bank (the "Bank"). The Prior
Facility was terminated in connection with the establishment of the New
Facility. The Prior Facility provided an unsecured revolving line of credit
totaling $15 million. The total amount available to borrow pursuant to the Prior
Facility was limited to 140% of cash flow (as defined in the Prior Facility) for
the trailing 12-month period. Amounts borrowed under the Prior Facility bore
interest at the lesser of either the Bank's prime rate, or 195 basis points
above LIBOR. The Prior Facility also provided for the issuance of letters of
credit that are generally used in connection with international merchandise
purchases. Outstanding letters of credit issued by the Bank reduced amounts
otherwise available for borrowing under the revolving line of credit. The Prior
Facility subjected the Company to various restrictions on the incurrence of
additional indebtedness, acquisitions, loans to officers and stock repurchases,
and included various financial covenants.

At November 2, 2002, the Company was in technical default of the covenant
in the Prior Facility that required net income of not less than $1 on a trailing
two-quarter basis determined as of each fiscal quarter end. On November 11,
2002, the Company and the Bank entered into the First Amendment to the First
Amended and Restated Credit Agreement and Waiver of Defaults, which provided the
Bank with a security interest in the Company's inventory, accounts receivable
and other rights to payment, furniture and fixtures, and machinery and equipment
and included a waiver of the specific covenant violation for the quarter ended
November 2, 2002.

At February 1, 2003, the Company was in technical default of the covenant
in the Prior Facility that required net income of not less than $1 on a trailing
two-quarter basis determined as of each fiscal quarter end. Amounts available to
borrow under the line of credit, as limited by the cash flow multiple and/or
outstanding letters of credit, totaled $14.4 million at February 1, 2003. No
borrowings (other than letters of credit, totaling $0.6 million) were
outstanding under the revolving line at February 1, 2003.

7. COMMITMENTS AND CONTINGENCIES

Operating Leases. The Company leases store, office, and warehouse space
under non-cancelable leases with terms that generally range from five to ten
years. Most of the store leases provide for additional rentals based on a
percentage of store sales and specify rental increases over the term of the
lease. Total rent expense under these operating leases was $30,976,603,
$28,029,808 and $23,112,695, for fiscal years 2002, 2001 and 2000, respectively.
Included in these total rent figures are $567,000, $735,000 and $608,000 of
contingent rent for fiscal years 2002, 2001 and 2000, respectively. Accrued rent
of $4,124,012 as of February 1, 2003 and $3,726,255 as of February 2, 2002 has
been provided to account for rent expenses on a straight-line basis. Future
minimum lease payments under non-cancelable operating leases as of February 1,
2003 are as follows:

FISCAL YEAR
2003........................................................ $ 29,470,023
2004........................................................ 28,815,870
2005........................................................ 27,521,374
2006........................................................ 24,873,133
2007........................................................ 20,702,163
Thereafter.................................................. 48,424,191
------------
Total minimum lease payment................................. $179,806,754
============

36

GADZOOKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Litigation. In the ordinary course of business, the Company is
periodically a party to lawsuits. The Company does not believe that any
resulting liability from existing legal proceedings, individually or in the
aggregate, will have a material adverse effect on its operations or financial
condition. However, there can be no assurances that future costs will not be
material to operating results and liquidity. During the third quarter of fiscal
2001, the Company favorably settled a lawsuit against another mall tenant, which
resulted in a gain of approximately $740,000.

8. INCOME TAXES

The provision (benefit) for federal and state income taxes consists of the
following:

The following table reconciles the provision for income taxes to the amount
computed by applying the U.S. statutory federal tax rate of 34% to pre-tax
income (loss):

Deferred tax assets (liabilities) are comprised of the following:

At February 1, 2003 and February 2, 2002, $1,886,249 and $1,160,404,
respectively of net current deferred tax assets were classified as other current
assets. The early disposition of certain qualified stock options and the
exercise of certain nonqualified stock options in fiscal 2002, 2001 and 2000
resulted in income tax benefits to the Company of $82,954, $280,912 and $162,466
respectively, which was credited to additional paid-in capital. The income tax
benefit is the tax effect of the difference between the market price on the date
of exercise and the option price.

37

GADZOOKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. EMPLOYEE BENEFIT PLANS

Effective January 1, 1995, the Company established the Gadzooks, Inc.
Employees' Savings Plan (the "401(k) Plan"). The 401(k) Plan is open to
substantially all employees who have been employed at least one year and who
work at least 1,000 hours per year. Under the 401(k) Plan, a participant may
contribute up to 15% of pre-tax earnings, with the Company matching 50% of the
employee's contribution up to 5% of earnings. Employee and Company contributions
are paid to a corporate trustee and invested in various mutual funds or the
Company's common stock at the discretion of the participant. Company
contributions made to participants' accounts become 100% vested on the fifth
anniversary of the employee's initial participation in the Plan. For the years
ended February 1, 2003, February 2, 2002 and February 3, 2001, the Company
contributed $204,555, $213,362 and $104,854, respectively, in matching
contributions to the 401(k) Plan. During fiscal 2002 and 2001, 1,883 and 252
shares of the Company's treasury stock, respectively, were sold to the 401(k)
plan at the closing price for the respective pay period.

On June 18, 1998, the shareholders approved the Gadzooks, Inc. Employee
Stock Purchase Plan ("ESPP"). The ESPP allows eligible employees the right to
purchase common stock on a monthly basis at 85% of the closing market price of
the shares on the last business day of the respective calendar month. The
aggregate number of shares that may be offered under the ESPP was increased from
60,000 to 110,000 in fiscal 2000. During fiscal 2002, 2001 and 2000, 22,267,
13,482 and 16,751 shares, respectively, of the Company's common stock were sold
to employees pursuant to the plan. The Company may purchase shares of common
stock from time to time on the open market to provide shares for sale pursuant
to the ESPP.

10. STOCK OPTION PLANS

The Company has three incentive and nonstatutory stock option plans. The
"Employee Plan" for employees and consultants was adopted in February 1992; the
"Key Employee Plan" for key employees was adopted in September 1994; and the
"Nonemployee Director Plan" for the Company's outside directors was adopted in
August 1995. Under these plans, options are granted to purchase common stock at
a price no less than fair market value at the grant date. For options granted
prior to the initial public offering, the Board of Directors considered various
factors in determining fair market value including, among other things, the
rights and preferences of holders of other securities issued by the Company, the
financial position and results of operations of the Company, and the liquidity
of the Company's common stock. Subsequent to the initial public offering, all
shares have been granted at the closing price of the Company's common stock
traded on The Nasdaq Stock Market on the date of grant. Options have vesting
periods of generally two to five years from date of grant and may be exercised
at any time once they become vested, but not more than 10 years from the date of
grant.

During fiscal 2000, the Employee Plan was amended to adjust the maximum
aggregate number of shares that may be optioned and sold under the plan to
2,100,000 shares. During fiscal 1998, the Nonemployee Director Plan was amended
to adjust the maximum aggregate number of shares that may be optioned and sold
to 100,000 shares. The maximum aggregate number of shares that may be optioned
and sold under the Key Employee Plan is 272,651 shares.

38

GADZOOKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table includes option information for the Employee Plan, Key
Employee Plan and Nonemployee Director Plan:

The following table summarizes information about stock options outstanding
at February 1, 2003:

The fair value of each option grant is estimated as of the date of grant
using the Black-Scholes Multiple Option pricing model with the following
weighted-average assumptions used for grants:

The weighted average fair value of options granted was $12.55, $19.22 and
$15.23 per share for fiscal 2002, 2001 and 2000, respectively.

39

GADZOOKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. EARNINGS PER SHARE

The following table outlines the Company's calculation of weighted average
shares outstanding:

The treasury stock method is used to determine dilutive potential common
shares outstanding related to stock options. Options which, based on their
exercise price, would be antidilutive are not considered in the treasury stock
method calculation. The options excluded from the earnings per share calculation
due to their antidilutive nature totaled 1,352,101, 225,057 and 51,232 in fiscal
2002, 2001 and 2000, respectively.

12. RETIREMENT AGREEMENT

Effective August 28, 2002, the Company entered into an executive retirement
agreement with Gerald R. Szczepanski, Chairman of the Board and Chief Executive
Officer, pursuant to which Mr. Szczepanski or his estate shall be eligible to
receive certain benefits on termination of his employment with Gadzooks as a
result of either death, termination without cause (solely with respect to the
benefits described in (iv) and (v)) or retirement. Upon such termination (i)
Gadzooks will continue to provide Mr. Szczepanski (and his spouse, if
applicable) medical, dental and life insurance coverage, (ii) Gadzooks will
enter into a consulting relationship with Mr. Szczepanski for 24 months whereby
Mr. Szczepanski will receive a consulting fee of $300,000 per year to facilitate
an orderly transition to Mr. Szczepanski's successor; (iii) Mr. Szczepanski will
receive his pro rata bonus for the fiscal year in which he retires; (iv) all of
Mr. Szczepanski's stock options will become vested in full; and (v) all of Mr.
Szczepanski's stock options with an exercise price equal to or greater than
$9.00 will be amended to include a term equal to the lesser of (a) three years
from such termination or (b) the original expiration date of such stock options.
In addition, Mr. Szczepanski agrees that upon termination of his employment with
Gadzooks, he will not disclose any confidential information relating to Gadzooks
and he will not solicit, interfere or compete with Gadzooks, its business, its
clients or its customers for a period of two years.

Pursuant to the agreement, Mr. Szczepanski is fully vested in the
postretirement insurance benefits available under the executive retirement
agreement. Accordingly, during the third quarter, the Company recognized
$115,000 as selling, general and administrative expense, which represents the
estimated present value of the future health insurance benefits payable pursuant
to the contract.

13. SHAREHOLDER RIGHTS PLAN

On September 3, 1998, the Company declared a dividend of one Preferred
Share Purchase Right ("Right") on each outstanding share of Gadzooks, Inc.
common stock. The dividend distribution was made on September 15, 1998 to
shareholders of record on that date. The Rights become exercisable if a person
or group acquires 20 percent or more of the Company's common stock or announces
its intent to do so. Each Right will entitle shareholders to buy one
one-thousandth of a new series of junior participating preferred stock at an
exercise price of $110. When the Rights become exercisable, the holder of each
Right (other than the acquiring person or members of such group) is entitled (1)
to purchase, at the Right's then current exercise price, a number of the
acquiring company's common shares having a market value of twice such price; (2)
to purchase, at the Right's then current exercise price, a number of the
Company's common shares having a market value of twice such price; or (3) at the
option of the Company, to exchange the Rights (other than

40

GADZOOKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Rights owned by such person or group), in whole or in part, at an exchange ratio
of one share of common stock (or one-thousandth of a share of the new series of
junior participating preferred stock) per Right. The Rights may be redeemed for
one cent each by the Company at any time prior to acquisition by a person (or
group) of beneficial ownership of 20 percent or more of the Company's common
stock. The Rights will expire on September 15, 2008.

41

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Information with respect to Item 10 is incorporated by reference from the
registrant's definitive proxy statement to be filed with the Commission not
later than 120 days after the end of the registrant's fiscal year.

ITEM 11. EXECUTIVE COMPENSATION.

Information with respect to Item 11 is incorporated by reference from the
registrant's definitive proxy statement to be filed with the Commission not
later than 120 days after the end of the registrant's fiscal year.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.

Information with respect to Item 12 is incorporated by reference from the
registrant's definitive proxy statement to be filed with the Commission not
later than 120 days after the end of the registrant's fiscal year.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Information with respect to Item 13 is incorporated by reference from the
registrant's definitive proxy statement to be filed with the Commission not
later than 120 days after the end of the registrant's fiscal year.

ITEM 14. CONTROLS AND PROCEDURES

Within 90 days prior to the filing date of this Annual Report on Form 10-K,
our Chief Executive Officer and Chief Financial Officer conducted an evaluation
of the effectiveness of our disclosure controls and procedures (as defined in
Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended). Based on
that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and include
controls and procedures designed to ensure that information required to be
disclosed by us in such reports is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely discussions regarding required disclosure.

There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date
the Chief Executive Officer and Chief Financial Officer completed their
evaluation.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) 1. The financial statements of the Company filed as part of this report
on Form 10-K are listed in the Index to Consolidated Financial
Statements under Part II, Item 8 of this Form 10-K, on page 25.

2. Financial statement schedules are omitted because they are not
applicable or the required information is shown in the financial
statements or notes thereto.

42

3. Exhibits included or incorporated herein:

See Index to Exhibits.

(b) Reports on Form 8-K:

Form 8-Ks filed under Item 5 -- Other Events and Required FD
Disclosure

On January 9, 2003, Gadzooks filed a Form 8-K reporting a press
release issued by Gadzooks announcing its strategic change to focus
exclusively on apparel and accessories for females.

43

SIGNATURES

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

GADZOOKS, INC.

By /s/ GERALD R. SZCZEPANSKI
------------------------------------
Gerald R. Szczepanski
Chairman of the Board
and Chief Executive Officer

Date: April 29, 2003

Each person whose signature appears below hereby authorizes Gerald R.
Szczepanski and James A. Motley, or either of them, as attorneys-in-fact to sign
on his behalf, individually, and in each capacity stated below and to file all
amendments and/or supplements to the Annual Report on Form 10-K.

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 and on the dates indicated.

44

CERTIFICATION

I, Gerald R. Szczepanski, Chairman of the Board and Chief Executive Officer of
Gadzooks, Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Gadzooks, 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;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act rules 13a-14 and 15d-14) for the registrant and we have:

a) 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;

b) 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

c) 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 registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):

a) 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

b) 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 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.

By: /s/ GERALD R. SZCZEPANSKI
------------------------------------
Gerald R. Szczepanski
Chairman of the Board and
Chief Executive Officer

Date: April 29, 2003

45

CERTIFICATION

I, James A. Motley, Vice President, Chief Financial Officer and Secretary of
Gadzooks, Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Gadzooks, 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;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act rules 13a-14 and 15d-14) for the registrant and we have:

a) 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;

b) 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

c) 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 registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):

a) 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

b) 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 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.

By: /s/ JAMES A. MOTLEY
------------------------------------
James A. Motley
Vice President, Chief Financial
Officer and Secretary

Date: April 29, 2003

46

INDEX TO EXHIBITS

- ---------------

* Filed herewith (unless otherwise indicated, exhibits are previously filed).