Management believes one way the Company can differentiate itself from its competitors is to provide a consistently high level of customer service. The Company has a "Four Star" customer service program, designed to continually emphasize and reward high standards of customer service in the Company's stores. Sales associates are encouraged to keep notebooks of customers' names, clothing sizes, birthdays, and major purchases, to telephone customers about promotional sales and to send thank-you notes and other greetings to their customers during their normal working hours. Product seminars and other training programs are frequently conducted in the Company's stores and its corporate headquarters to ensure that sales associates will be able to provide useful product information to customers. The Company also offers opportunities for management training and leadership classes for those associates identified for promotion within the Company. Various financial incentives are offered to the Company's sales associates for reaching sales performance goals.

In addition to providing a high level of personal sales assistance, management believes that well-stocked stores, a liberal return and exchange policy, frequent sales promotions and a conveniently located and attractive shopping environment enhance its customers' shopping experience and increase customer loyalty. Management also believes that maintaining appropriate staffing levels in its stores, particularly at peak selling periods, is essential for providing a high level of customer service.

Management focus for fiscal 2007 continues to include an increased effort to attract and service the 30 to 55 year old age group, as well as the Hispanic customer that continues to be a growing segment of the customer base in many current markets.

The Company operates a 420,000 square foot distribution center located in Madera, California. The facility, constructed in 1989, is located near the Company's corporate headquarters in Fresno, California. The facility serves all of the Company's store locations, with timely distributions of merchandise to all stores, including its stores located in states outside California.

The Company has continued to improve its logistic systems, focusing on the adoption of new technology and operational best practices, with the goals of receiving, processing and distributing merchandise to stores at a faster rate and at a lower cost per unit. The Company's logistic systems enable the Company to "cross dock" the majority of its merchandise, thereby processing merchandise through the distribution center in several minutes as compared to the several days timeframe required in the past. The Company has formal guidelines for vendors with respect to shipping, receiving and invoicing for merchandise. Vendors that do not comply with the guidelines are charged specified fees depending upon the degree of non-compliance. Such fees are intended to offset higher costs associated with the processing of and payment for such merchandise.

In January 31, 2003, the Company sold its proprietary credit card accounts and accounts receivable to HSBC and entered into a Credit Card Program Agreement (the "CCA").

The CCA sets forth the terms and conditions under which HSBC will issue Gottschalks private-label credit cards and pay the Company for sales made on the cards. The CCA had an initial term of five (5) years expiring January 31, 2008 and was cancellable by either party under certain circumstances. On February 4, 2007, the Company and HSBC entered into a new Credit Card Program Agreement which has a term of six (6) years and is cancelable by either party under certain circumstances. The CCA further provides for the Company to be paid a percentage of Net Cardholder Charges and a percentage of other Revenue (as such terms are defined in the CCA). The new Credit Card Program Agreement provides for enhanced percentage of net sales revenues and guarantees marketing funding.

Management believes the private-label credit card enhances the Company's ability to generate and retain market share as well as increase sales. Private-label credit card sales as a percentage of total sales were 41.7%, 40.0% and 40.1% in fiscal 2006, 2005 and 2004, respectively. The increase in the private card penetration is due to marketing programs by the Company and HSBC and sales associate incentive programs to open new accounts. Efforts are underway between the Company and HSBC to increase the private card penetration further in 2007.

The Company has a variety of credit-related programs which management believes improves customer service and encourages credit-sales. Such programs include:

• An "Instant Credit" program, through which successful credit applicants receive a discount ranging from 10% to 50% (depending on the results of the Instant Credit scratch-off card) on their first purchase and 10% on additional purchases made the remainder of the day the account is opened;
• A "Plus Program (formerly 55+)," charge account program, which offers additional merchandise and service discounts to customers 55 years of age and older;
• Various credit-card related promotional events throughout the year and
• The "Gottschalks Treasure Rewards" program, which has two components. The first component is a program which offers one point for every one dollar in net annual spending using the Company's private label credit card. At the end of each calendar year qualifying customers are sent a merchandise certificate for up to 5% of the total points accumulated, up to a maximum of 10,000 points. Using a "points-based" system allows the Company to offer "double point" opportunities for opening new accounts and other promotions periodically throughout each year. The second component offers a 3-tier membership element where top customers spending $2,000 or more annually receive a Diamond card with the highest level of benefits, including Free Designer Gift Wrap, Priority Customer Service Line and No Coupons Needed Ever. The middle tier customers spending $1,000-$1,999 annually receive a Sapphire card and other middle level benefits and customers spending less than $1,000 per year receive a Treasure card and card benefits, which all 3 customer tiers receive.

See Part I, Item 1A, "Risk Factors - We Face Significant Competition From Other Retailers" and "Risk Factors - Our Business Is Susceptible To Economic Conditions And Other Factors That Affect Our Markets, Some Of Which Are Beyond Our Control".

As of February 3, 2007, the Company had approximately 5,800 employees, including 1,700 employees working part-time (less than 32 hours per week on a regular basis). As of January 28, 2006, the Company had 5,900 employees (including 1,700 working part-time). The decrease in the number of employees from the prior year is partially attributable to three fewer stores. The Company hires additional temporary employees and increases the hours of part-time employees during seasonal peak selling periods. Management considers its employee relations to be good.

The Company has completed two significant acquisitions in its operating history, including the acquisition of 8 stores from The Harris Company ("Harris") in fiscal 1998, and an additional 34 store locations from Lamont's Apparel, Inc. ("Lamonts") in fiscal 2000.

On August 20, 1998, the Company acquired substantially all of the assets and assumed certain liabilities of Harris, a wholly-owned subsidiary of El Corte Ingles ("ECI") of Spain. Harris operated nine full-line department stores located in the Southern California area. As planned, the Company closed one of the acquired stores on January 31, 1999. The purchase price for the assets consisted of 2,095,900 shares of common stock of the Company and a $22.2 million 8% Extendable Subordinated Note, due August 2003 (subsequently extended to May 2009) (the "Subordinated Note"). As a result of the acquisition, Harris became a significant stockholder of the Company, and both Harris and ECI became affiliates of the Company. The Company also leases three of its store locations from ECI.

The Company completed the largest acquisition in its operating history on July 24, 2000, significantly expanding its presence throughout the Pacific Northwest and Alaska. Under the transaction (hereinafter the "Lamonts acquisition"), the Company acquired 37 department store leases, related store fixtures and equipment and one store building from Lamonts, a bankrupt specialty apparel store chain, for a cash purchase price of $20.1 million. Concurrent with the closing of the transaction, the Company sold one of the store leases for $2.5 million, and subsequently terminated two other store leases, resulting in a net cash purchase price of $17.6 million for 34 store leases, related store fixtures and equipment and one store building. The Company did not acquire any of Lamonts' merchandise inventory, customer credit card receivables or other corporate assets in the transaction, nor did the Company assume any material liabilities, other than the 34 store leases. The 34 stores acquired were located in 5 Western states, with 19 stores in Washington, 7 in Alaska, 5 in Idaho, 2 in Oregon and 1 in Utah. The Company converted the acquired stores to the Gottschalks banner and re-opened the stores in late August and early September 2000. The Company continues to close acquired stores that are determined to be either underperforming or inconsistent with the long-term operating strategy of the Company. The Company continues to operate 14 of the original 34 stores acquired from Lamonts, some of which have continued to perform below expectations. In the event the Company is unable to improve the performance of such underperforming stores, the Company may consider the sale, sublease or closure of these stores in the future.

In the fourth quarter, 2006, the Company announced that its Board of Directors formed a special strategic committee to identify and evaluate various strategic alternatives to maximize shareholder value, including, a revised business plan, operating partnerships, joint ventures, strategic alliances, share repurchases, a recapitalization, and the sale or merger of the Company. The special strategic committee is comprised of the Board's six independent directors for the alternative review process.

The Company also announced that the Board of Directors' has retained UBS Investment Bank to assist its special strategic committee in exploring various alternatives available to the Company. The Company will also continue to use the financial advisory services of Financo, Inc.

The Company has not set a definitive timetable for completion of its review of strategic alternatives and further advises that there can be no assurances that the evaluation process will result in any transaction. The Company does not intend to disclose developments regarding its evaluation of strategic alternatives unless and until the Board of Directors has approved a specific transaction.

Information relating to the Company's executive officers is included in Part III, Item 10 of this report and is incorporated herein by reference.

This Form 10-K contains certain "forward-looking statements" regarding activities, developments and conditions that the Company anticipates may occur or exist in the future relating to things such as:

• the Company's ability to meet debt obligations and adhere to the restrictions and covenants imposed under its various debt agreements;
• the timely receipt of merchandise and the Company's ability to obtain adequate trade credit from its key factors and vendors;
• the Company's ability to either improve the operating results and cash flows of underperforming stores, or to sell, sublease or close those stores that continue to be underperforming;
• the impact of higher interest rates;
• the impact of higher operating costs, including workers' compensation, property and casualty insurance, unemployment compensation, health care and energy costs;
• future capital expenditures;
• the Company's competitive strategy, competitive pricing and other competitive pressures;
• the effect of the adoption of new accounting standards by the Company;
• the realization of the Company's deferred tax assets;
• the Company's assumptions and expectations underlying its critical accounting policies (see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations");
• the overall level of consumer spending and demand for the products offered;
• general economic conditions;
• the impact of sales promotions and customer service programs on consumer spending;
• lease extensions and suitable alternative store locations; and
• the future cost and utilization of consumer credit programs under the CCA.

Such forward-looking statements can be identified by words such as: "believes," "anticipates," "expects," "intends," "seeks," "may," "will," "projects," "forecasts," "plans" and "estimates". The Company bases its forward-looking statements on its current views and assumptions. As a result, those statements are subject to risks and uncertainties that could cause actual results to differ materially from those predicted. Some of the factors that could cause the Company's results to differ from those predicted include the risk factors discussed under Item 1A, "Risk Factors", as well as other risks and uncertainties discussed in other documents filed by the Company with the Securities and Exchange Commission. In addition, the Company typically earns a disproportionate share of its operating income in the fourth quarter because of seasonal buying patterns, which are difficult to forecast with certainty. While the Company believes that its assumptions are reasonable, it cautions that it is impossible to predict the impact of such factors which could cause actual results to differ materially from predicted results.

Our business is subject to certain risks, and those risks should be considered while evaluating our business and financial results. Any of the risks discussed below could materially and adversely affect our operating results and financial condition, as well as the projections and beliefs about our future performance. Accordingly, our results could differ materially from those projected in our forward-looking statements. In addition, the preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts and timing of revenue and expenses, the reported amounts and classification of assets and liabilities and the disclosure of contingent assets and liabilities. Actual results could differ materially from our estimates and assumptions. (See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies".)

Our working capital requirements are currently met through a combination of cash generated by operations, borrowings under our senior revolving credit facility, short-term trade and factor credit, and by proceeds from external financings and sale transactions. In the event these sources of liquidity are not adequate, we may be required to pursue one or more alternative sources, which could include the sale of stores or the issuance of additional equity or equity-linked securities. If the estimates or assumptions relative to any one of these sources of liquidity are not realized, our business, financial condition and results of operations may be materially adversely affected.

Although we have significantly improved our leverage position, the ability to obtain additional or alternative sources of financing in the future for working capital, capital expenditures, new store openings, acquisitions and other general corporate purposes may be limited. This limited financial flexibility may result in increased vulnerability to general adverse economic and industry conditions, a more limited ability to react to changes in the business environment and the industry in which we compete, and being at a competitive disadvantage with competitors that have less debt and greater access to capital resources.

Our existing debt agreements impose operating and financial restrictions that limit our ability to make dividend payments and grant liens, among other matters.

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

The retail business is highly competitive, and if we fail to compete effectively, we could lose market share. Our primary competitors include national, regional and local chain department and specialty stores, general merchandise stores, discount and off-price retailers and outlet malls. Increased use and acceptance of the internet and other home shopping formats also creates increased competition. Some of these competitors offer similar or better-branded merchandise and have greater financial resources to purchase larger quantities of merchandise at lower prices. Our ability to counteract these competitive pressures depends on our ability to:

• offer merchandise which reflects the different regional and local needs of our customers;
• differentiate and market ourselves as a home-town, locally-oriented store (as opposed to our more nationally focused competitors); and
• continue to offer adequate quantities of better to moderately priced branded and private label merchandise at comparable profit margins.

General Economic and Market Conditions. Our stores are located primarily in non-major metropolitan, suburban and agricultural areas in the western United States. A substantial portion of the stores are located in California and Washington. Our success depends upon consumer spending, which may be materially and adversely affected by any of the following events or conditions:

• a downturn in the national, California or Pacific Northwest economies;
• a downturn in the local economies where the stores are located;
• a decline in consumer confidence;
• an increase in interest rates;
• inflation or deflation;
• consumer credit availability;
• consumer debt levels;
• higher energy costs in California and the Pacific Northwest;
• higher healthcare and workers' compensation insurance costs;
• higher property and casualty insurance costs;
• tax rates and policy; and
• unemployment trends.

Seasonality and Weather. Seasonal influences affect our sales and profits. We experience our highest levels of sales and profits during the Christmas selling months of November and December, and, to a lesser extent, during the Easter holiday and Back-to-School seasons. We have increased working capital needs prior to the Christmas season to carry significantly higher inventory levels and generally increase our selling staff levels to meet anticipated demands. Any substantial decrease in sales during our traditional peak selling periods could materially adversely impact our business, financial condition and results of operations.

We also depend on normal weather patterns across our markets. Historically, unusual weather patterns have significantly impacted our business.

Consumer Trends. Our success partially depends on our ability to anticipate and respond to changing consumer preferences and fashion trends in a timely manner. However, it is difficult to predict what merchandise consumers will demand, particularly merchandise that is trend driven. Failure to accurately predict constantly changing consumer tastes, preferences and spending patterns could adversely affect short and long-term results.

War and Acts of Terrorism. The involvement of the United States in war or other conflicts have had an adverse impact on us by, among other things, adversely affecting retail sales as a result of reduced consumer spending, and by causing substantial increases in fuel prices thereby increasing the costs of doing business. Any war, political conflict or significant act of terrorism on U.S. soil or elsewhere could have an adverse effect on us and could impede the flow of imports or domestic products to the Company.

Approximately 67% of our debt at February 3, 2007 has underlying variable interest rates, which may result in higher interest expense in the event interest rates are raised. (See Item 7A "Qualitative and Quantitative Disclosures about Market Risk")

A substantial portion of our stores are located in California and Washington. As a result, we are particularly sensitive to negative occurrences in those states. Our inability to adequately address such problems could have a material adverse affect on our financial position and results of operations. In addition, we are facing higher unemployment compensation, health insurance and property and casualty insurance costs in the market areas in which we operate. There can be no assurance that we will be able to fully offset the negative impact of such higher costs.

Our success depends to a large extent on our executive management team. The loss of the services of certain of our executives could have a material adverse effect on us. We cannot guarantee that we will be able to retain such key personnel or attract additional qualified members to our management team in the future.

We also depend on attracting and retaining a large number of qualified employees to maintain and increase sales and to execute our customer service programs. Many of our employees are in entry level or part-time positions with historically high levels of turnover. Our ability to meet our employment needs is dependent on a number of factors, including the following factors which affect our ability to hire or retain qualified employees:

• unemployment levels;
• minimum wage legislation;
• rising health care costs; and
• changing demographics in the local economies where stores are located.

None

Corporate Office and Distribution Center

The Company's corporate headquarters is located in an office building in Fresno, California. The building was constructed in 1991 and is owned by a limited partnership in which the Company holds a 36% interest as the sole limited partner. The Company leases 89,000 square feet of the 176,000 square foot building under a twenty-year lease expiring in 2011. The lease contains two consecutive ten-year renewal options and the Company receives favorable rental terms under the lease. As described in Note 5 to the Financial Statements, the Company has financed its interest in the partnership at a fixed interest rate of 7.5% due in February 2010. The Company believes that its current office space is adequate to meet its office space requirements for the foreseeable future.

The Company's distribution center, constructed in 1989, is a 420,000 square foot distribution facility located in Madera, California, which is in close proximity to the Company's corporate headquarters. The facility was originally designed to provide for the future growth of the Company and its processing capacity and physical size is readily expandable. The Company leases the distribution facility from an unrelated party under a 20-year lease expiring in the year 2009, with six consecutive five-year renewal options.

Store Leases and Locations

The Company owns six of its 60 department stores, only one of which is subject to a mortgage loan, and leases the remaining 54 department stores and all of its 5 specialty stores. The Company's department store leases expire in various years through 2025, and have renewal options for one or more periods ranging from five to 10 years. While there is no assurance that the Company will be able to negotiate further extensions of any particular lease, management believes that satisfactory extensions or suitable alternative store locations will be available.

Certain of the department and specialty store leases provide for the payment of additional contingent rentals based on a percentage of sales, require the payment of property taxes, insurance and maintenance costs, and, in certain cases, also provide for rent abatements and scheduled rent increases during the lease terms. The Company leases three of its department stores from ECI, an affiliate of the Company. Additional information pertaining to the Company's store leases is included in Note 8 to the Financial Statements.

The following table contains additional information about the Company's stores open as of the end of fiscal 2007:

                              #        Gross
                             of       Square
          State            Stores   Footage(1)
------------------------- --------- -----------
Department Stores:                             
  California.............       38   4,127,488
  Washington.............        8     407,605
  Alaska.................        6     349,399
  Oregon.................        4     281,798
  Nevada.................        2     208,411
  Idaho..................        2      71,150

                          --------- -----------
     Total                      60   5,445,851
                          ========= ===========

Specialty Stores:                              
  California.............        4      23,629
  Nevada.................        1       3,211
                          --------- -----------
    Total                        5      26,840
                          ========= ===========

_______________________

On September 19, 2005, the Company became subject to a complaint filed in the Superior Court of California for the County of Santa Cruz alleging violation of California law regarding payment of accrued vacation upon termination of employment. The complaint sought wage payments for employees who allegedly forfeited accrued vacation, waiting time penalties, interest, injunctive relief and costs. The Company believed settlement of this matter was in its best interests and entered into a memorandum of understanding for class settlement, which was given final court approval in September 2006. The Company accrued $1.8 million during the fourth quarter of fiscal 2005 for estimated legal fees and settlement costs and an additional $60,000 during the fourth quarter of fiscal 2006. All payments were made in December 2006 and final accounting for actual expenses will take place in fiscal 2007. Management does not believe the ultimate resolution will have a material adverse effect on the Company's business, financial condition or results of operations.

The Company is party to other legal proceedings and claims which have arisen during the ordinary course of business. In the opinion of management, the ultimate outcome of such litigation and claims is not expected to have a material adverse effect on the Company's financial position or results of its operations.

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

The Company's common stock is listed for trading on the New York Stock Exchange ("NYSE"). The following table sets forth the high and low sales prices per share of common stock as reported on the NYSE Composite Tape under the symbol "GOT" during the periods indicated:

                            2006              2005
                       ----------------  ----------------
Fiscal Quarters         High      Low     High      Low
---------------------  -------  -------  -------  -------
   1st Quarter....... $  9.80  $  8.60  $ 12.45  $  7.99
   2nd Quarter....... $  9.35  $  6.29  $ 11.85  $  9.56
   3rd Quarter....... $  9.33  $  7.85  $ 11.80  $  8.20
   4th Quarter....... $ 11.89  $  9.25  $  9.81  $  7.77

On March 30, 2007, the Company had 667 stockholders of record, some of which were brokerage firms or other nominees holding shares for multiple stockholders. The closing price of the Company's common stock as reported by the NYSE on March 30, 2007 was $14.27 per share.

The Company has not paid a cash dividend since its initial public offering in 1986. The Board of Directors has no present intention to pay cash dividends in the foreseeable future, and will determine whether to declare cash dividends in the future depending on the Company's earnings, financial condition and capital requirements. In addition, the Company's senior revolving credit agreement and certain of its other debt agreements prohibit the Company from paying dividends without prior written consent from those lenders. (See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations.")

The following table provides information as of February 3, 2007 about the Company's common stock that may be issued upon the exercise of options granted to employees or members of the Board of Directors under all of the Company's existing equity compensation plans.

                                                                                   Number of
                                                                                  securities
                                                                                   remaining
                                                                                 available for
                                                                                future issuance
                                                                                 under equity
                                                Number of         Weighted-      compensation
                                             securities to be      average           plans
                                               issued upon        exercise        (excluding
                                                exercise of        price of        securities
                                                outstanding     outstanding      reflected in
Plan Category                                     options          options        column (a))
-------------------------------------------- ----------------- --------------- -----------------
Equity compensation plans approved by
  security holders..........................     1,159,375          $6.43          1,437,500
Equity compensation plans not approved
  by security holders.......................        N/A              N/A              N/A
                                             ----------------- --------------- -----------------
Total.......................................     1,159,375          $6.43          1,437,500
                                             ================= =============== =================

The following graph compares the cumulative total return on the Company's common stock with the cumulative total return of the S & P Smallcap 600 Index and the S & P Department Stores Index for the five-year period commencing January 31, 2002. The stock price performance shown on the graph below is not necessarily indicative of future price performance.

The Company reports on a 52/53 week fiscal year ending on the Saturday nearest to January 31. The fiscal years ended February 3, 2007, January 28, 2006, January 29, 2005, January 31, 2004 and February 1, 2003 are referred to herein as fiscal 2006, 2005, 2004, 2003 and 2002, respectively. All fiscal years noted include 52 weeks with the exception of fiscal 2006 which includes 53 weeks.

The selected unaudited financial data below should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Financial Statements of the Company and related notes included elsewhere herein.

The Company has reclassified the results of operations of certain stores closed in fiscal 2006 to discontinued operations in 2005, 2004, 2003 and 2002.

                                                                Fiscal Years
                                         ------------- ---------------------------------------------------
                                           2006          2005          2004          2003          2002
                                         ---------     ---------     ---------     ---------     ---------
                                                   (In thousands of dollars, except share data)
RESULTS OF OPERATIONS:
Net sales.............................. $ 680,966     $ 665,460     $ 650,256     $ 649,087     $ 655,557
Net credit revenues....................     3,087         3,084         3,106         3,729         8,225
Net leased department
  revenues (1).........................     3,428         3,506         3,515         3,525         3,557
                                         ---------     ---------     ---------     ---------     ---------
   Total revenues......................   687,481       672,050       656,877       656,341       667,339
                                         ---------     ---------     ---------     ---------     ---------
Costs and expenses:
  Cost of sales........................   446,619       434,387       424,775       427,221       434,563
  Selling, general and
   administrative expenses.............   212,355       204,945       201,073       198,069       201,830
  Depreciation and
   amortization (2)....................    15,276        13,242        12,830        14,026        13,944
  Gain on sale of aircraft (3).........      (946)
  VEBA litigation (4)..................        60         1,811
  New store opening costs (5)..........       376           688
  Asset impairment charges (6).........                                                             9,502
  Receivables sale costs (7)...........                                                             1,749
                                         ---------     ---------     ---------     ---------     ---------
   Total costs and expenses............   673,740       655,073       638,678       639,316       661,588
                                         ---------     ---------     ---------     ---------     ---------
Operating income ......................    13,741        16,977        18,199        17,025         5,751
                                         ---------     ---------     ---------     ---------     ---------
Other (income) expense:
 Interest expense......................    10,058         9,242         9,509        13,296        15,883
 Losses on early extinguishment
   of debt (8).........................                                                             3,695
 Miscellaneous income..................    (1,389)       (1,515)       (1,565)       (2,262)       (1,802)
                                         ---------     ---------     ---------     ---------     ---------
                                            8,669         7,727         7,944        11,034        17,776
                                         ---------     ---------     ---------     ---------     ---------
Income (loss) from continuing
   operations before income taxes......     5,072         9,250        10,255         5,991       (12,025)

Income tax expense (benefit)...........     1,631         3,107         3,676         2,097        (5,910)
                                         ---------     ---------     ---------     ---------     ---------
Income (loss) from
   continuing operations...............     3,441         6,143         6,579         3,894        (6,115)
                                         ---------     ---------     ---------     ---------     ---------
Discontinued operations:
  Loss from operation of closed stores.    (1,102)       (1,609)       (1,935)       (3,060)       (4,679)
  Gain (loss) on store closures (9)....       (98)          180           (31)         (789)       (4,801)
  Income tax benefit...................       408           486           668         1,309         3,223
                                         ---------     ---------     ---------     ---------     ---------
Loss on discontinued operations........      (792)         (943)       (1,298)       (2,540)       (6,257)
                                         ---------     ---------     ---------     ---------     ---------
Net income (loss)...................... $   2,649     $   5,200     $   5,281     $   1,354     $ (12,372)
                                         =========     =========     =========     =========     =========


                                                                Fiscal Years
                                         ------------- ---------------------------------------------------
                                           2006          2005          2004          2003          2002
                                         ---------     ---------     ---------     ---------     ---------
                                                   (In thousands of dollars, except share data)
Net income (loss) per common share
Basic:
   Income (loss) from continuing
    operations......................... $    0.26     $    0.46     $    0.51     $    0.30     $   (0.48)
   Loss on discontinued operations.....     (0.06)        (0.07)        (0.10)        (0.20)        (0.49)
   Net income (loss) per common share..      0.20          0.39          0.41          0.10         (0.97)
Diluted:
   Income (loss) from continuing
    operation..........................      0.25          0.45          0.49          0.30         (0.48)
   Loss on discontinued operations.....     (0.06)        (0.07)        (0.09)        (0.20)        (0.49)
   Net income (loss) per common share.. $    0.19     $    0.38     $    0.40     $    0.10     $   (0.97)

Weighted-average number of
  common shares outstanding:
     Basic.............................    13,428        13,245        12,922        12,830        12,747
     Diluted...........................    13,758        13,797        13,352        12,919        12,747



                                                                Fiscal Years
                                         ------------- ---------------------------------------------------
                                           2006          2005          2004          2003          2002
                                         ---------     ---------     ---------     ---------     ---------
                                                              (In thousands of dollars)
SELECTED BALANCE SHEET DATA:
Receivables, net....................... $   8,198     $   7,284     $   6,920     $   9,145     $  10,641
Merchandise inventories (10)...........   168,702       159,986       152,753       156,552       164,615
Property and equipment, net............   134,696       133,545       126,509       127,561       138,910
Total assets...........................   350,066       335,022       321,253       326,137       350,728
Working capital........................   117,301        96,930        94,439        58,444        50,241
Long-term obligations,
  less current portion.................    97,354        76,906        71,403        41,302        45,097
Subordinated note
  payable to affiliate.................    19,180        20,180        21,180        22,180        21,989
Stockholders' equity...................   124,592       119,904       112,356       106,368       104,886


                                                                Fiscal Years
                                         ------------- ---------------------------------------------------
                                           2006          2005          2004          2003          2002
                                         ---------     ---------     ---------     ---------     ---------
                                  (In thousands of dollars, except percentages, ratios and per square foot data)
OTHER SELECTED DATA:                                                                                      
Sales growth:
  Total store sales (11)(13)...........     (0.3)%          2.3%        (0.7)%        (3.5)%        (2.7)%
  Comparable store sales (12)(13)......       0.6%          1.2%          0.2%        (0.7)%        (0.8)%

Comparable stores data (12)(14):
  Sales per selling square foot........ $     155     $     149     $     149     $     149     $     148
  Selling square footage...............     4,400         4,499         4,451         4,451         4,654

Capital expenditures................... $  21,100     $  22,227     $  13,745     $   4,363     $   8,279
Current ratio..........................     2.38:1        2.06:1        2.10:1        1.46:1        1.34:1

__________________________

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

Fiscal 2006 results include 53 weeks. Fiscal 2005 and 2004 results include 52 weeks.

The Company is a regional department and specialty store chain completing its 102^nd year of operation. As of February 3, 2007, the Company operated 60 full-line "Gottschalks" department stores located in six Western states, with the majority of those stores located in California. The Company also operates 4 "Village East" and 1 "Gottschalks" specialty store which carry a limited selection of merchandise.

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

In the fourth quarter, 2006, the Company announced that its Board of Directors formed a special strategic committee to identify and evaluate various strategic alternatives to maximize shareholder value, including, a revised business plan, operating partnerships, joint ventures, strategic alliances, share repurchases, a recapitalization, and the sale or merger of the Company. The special strategic committee is comprised of the Board's six independent directors for the alternative review process.

The Company also announced that the Board of Directors' has retained UBS Investment Bank to assist its special strategic committee in exploring various alternatives available to the Company. The Company will also continue to use the financial advisory services of Financo, Inc.

The Company has not set a definitive timetable for completion of its review of strategic alternatives and further advises that there can be no assurances that the evaluation process will result in any transaction. The Company does not intend to disclose developments regarding its evaluation of strategic alternatives unless and until the Board of Directors has approved a specific transaction.

The retail industry is highly competitive. The Company experiences competitive pressures from department stores, specialty stores, mass merchandisers and other retail channels, and from general consumer spending levels, including the impact of employment levels and other economic conditions. Despite these challenges, the Company achieved a moderate comparable store sales growth of 0.6%, excluding the effect of 53^rd week sales, during fiscal 2006 and 1.2% during fiscal 2005.

During fiscal 2006 the Company closed 4 stores, 2 of which were underperforming, and opened 1 store in Eugene, Oregon. The store gross margin dollars lost by these closures were somewhat offset by incremental gross margin dollars generated from a successful new store opening. Rising costs, including incremental opening and operating costs of the new store, and increases in fuel and energy costs during the year, affecting utilities, supplies, and transportation costs were somewhat offset by the successful new store performance.

During fiscal 2005 the Company became subject to a class action complaint alleging violation of California law regarding payment of accrued vacation upon termination of employment. The Company believed settlement of this matter was in its best interests and entered into a memorandum of understanding for class settlement, which received final court approval in September 2006. Accordingly, the Company accrued $1.8 million in the fourth quarter of fiscal 2005 and $60,000 in the fourth quarter of fiscal 2006 for estimated legal fees and settlement costs and disbursed all funds in December 2006. Management does not believe the ultimate resolution will have a material adverse effect on the Company's business, financial condition or results of operations.

The Company's liquidity position remains strong and on January 26, 2006 the Company finalized an amendment to its revolving credit facility increasing the commitment to $181 million, reducing the interest rate charged on outstanding borrowing by 25 basis points, and allowing for the payoff of approximately $16.6 million of outstanding balances on higher interest rate mortgages related to four of the Company's owned properties which payoff occurred subsequent to the end of fiscal 2005. In addition, the amendment provides for an optional additional increase in the commitment of $19.0 million and an optional extension of the credit facility through February 2, 2011. In addition, on December 9, 2005, in an effort to mitigate increasing interest rates, the Company effectively fixed the interest on $25 million of its variable rate debt through the execution of an interest rate swap.

As a result of its stable performance and continued improvement in debt structure, the Company plans to increase its efforts to refresh the presentation of its core store base as well as continue to explore opportunities for controlled new store growth.

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

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

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

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

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

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

The Company's long-lived assets consist primarily of property and equipment, goodwill, leasehold interests and other long-term assets. Long-lived assets including intangible assets other than goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Company performs an evaluation of whether an impairment charge should be recorded whenever a store experiences unfavorable operating performance. A store's assets are evaluated for impairment by comparing its estimated undiscounted cash flows over its estimated remaining lease term to its carrying value. If the cash flows are not sufficient to recover the carrying value, a loss equal to the difference between the carrying value and the estimated fair value of the asset is recognized. Estimates of future cash flows are based on a variety of factors, including historical experience in similar locations, changes in merchandising, promotional or operating strategy that may affect the profitability of a particular location, knowledge of the market area and in some cases, expected sale proceeds or sublease income, and independent appraisals. Goodwill and intangible assets having indefinite lives are not being amortized to earnings, but instead are subject to periodic testing for impairment. Goodwill and other intangible assets of a reporting unit are tested for impairment on an annual basis and more frequently if certain indicators are encountered. Various uncertainties, including but not limited to changes in consumer preferences, increased competition or a general deterioration in economic conditions could adversely impact the expected cash flows to be generated by an asset or group of assets. If actual performance or fair value estimates for store locations are less favorable than management's projections, future asset impairment charges may be necessary. Similar procedures are used when analyzing other corporate assets for impairment.

The carrying value of the Company's net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income to realize the value of these assets. In determining the appropriate valuation allowance, management considers all available evidence for the deferred tax assets, including tax credits, net operating loss and capital loss carryforwards that would likely expire prior to their utilization. The Company has established valuation allowances that relate primarily to certain state tax credit carryforwards whose reliability is uncertain. Although these credits do not expire, the utilization is extremely limited and is available only to the extent the Company generates sufficient taxable income apportionable to the respective location. The Company has historically generated the credits at a substantially more rapid rate than it has been able to utilize them. The resulting utilization period is, therefore, unusually long. Although the Company has had recent profitability, there can be no certainty that the Company will continue to generate sufficient taxable income apportioned to specific locations for an indefinite period of time to fully utilize the state tax credit carryforwards, especially given the cyclical nature of the Company's business. Further, there is no certainty that the Company will operate in these specific locations for an extended period. To the extent that the Company no longer operates within these locations, the tax credits cannot be utilized. The Company considers it appropriate to release this valuation allowance after at least three years of continued operating profits, limited to the projected utilization of the state tax credits based on assumed operation in the specific locations of not more than ten years. In addition, the Company has generated certain capital losses for which there is currently no carryback opportunity available. Based on the Company's current operating strategy it appears more likely than not that there will be no opportunity available during the remaining carryforward period to generate offsetting capital gains. Accordingly the Company considers it appropriate to establish a valuation allowance against such carryforwards. Management believes it is more likely than not that the Company will generate sufficient future taxable income in the appropriate carryforward periods to realize the benefit of its remaining net deferred tax assets. However, if the available evidence were to change in the future, an adjustment to the valuation allowance may be required, resulting in additional income tax expense or benefit.

The following table sets forth for the periods indicated certain items from the Company's Statements of Operations, expressed as a percent of net sales. The Company has reclassified the results of operations of certain stores closed in fiscal 2006 to discontinued operations in fiscal 2005 and fiscal 2004.

                                               Fiscal Years
                                     -------------------------------
                                       2006       2005       2004
                                     ---------  ---------  ---------
Net sales...........................    100.0 %    100.0 %    100.0 %
Net credit revenues.................      0.4        0.5        0.5
Net leased department revenues......      0.5        0.5        0.5
                                     ---------  ---------  ---------
     Total revenues.................    100.9      101.0      101.0

Costs and expenses:
   Cost of sales....................     65.6       65.2       65.3
   Selling, general and
     administrative expenses........     31.2       30.8       30.9
   Depreciation and amortization....      2.2        2.0        2.0
     Gain on sale of aircraft.......     (0.1)
     VEBA litigation................                 0.3
     New store opening costs........                 0.1

                                     ---------  ---------  ---------
     Total costs and expenses.......     98.9       98.4       98.2
                                     ---------  ---------  ---------
Operating income....................      2.0        2.6        2.8

Other (income) expense:
   Interest expense.................      1.5        1.4        1.4
   Miscellaneous income.............     (0.2)      (0.2)      (0.2)
                                     ---------  ---------  ---------
                                          1.3        1.2        1.2
                                     ---------  ---------  ---------
Income before income taxes..........      0.7        1.4        1.6

Income tax expense..................      0.2        0.5        0.6
                                     ---------  ---------  ---------
Income from continuing
 operations.........................      0.5        0.9        1.0

Discontinued operations:
  Loss from operation of
   closed stores....................     (0.2)      (0.2)      (0.3)
  Income tax benefit................      0.1        0.1        0.1
                                     ---------  ---------  ---------
Loss on discontinued operations.....     (0.1)      (0.1)      (0.2)
                                     ---------  ---------  ---------
Net income..........................      0.4 %      0.8 %      0.8 %
                                     =========  =========  =========

Net Sales

Net sales from continuing operations increased by approximately $15.5 million, or 2.3%, to $681.0 million in fiscal 2006 as compared to $665.5 million in fiscal 2005. The fiscal 2006 sales increase is primarily attributable to the opening of the Company's 120,876 square foot store in Eugene, Oregon. Promotional activity helped drive the sales increases through a continuing soft general economic environment and continuing competitive pressures in much of the Company's market areas. The Company also achieved a 0.6% comparable store sales increase in fiscal 2006 driven predominantly by sales increases in the Company's more fashion forward merchandise categories. Comparable store sales includes sales for stores open for the full period in both years. However, reflecting the effects of the opening of the River Park store in fiscal 2005 on other Fresno area stores, such stores have been excluded from the Company's comparable store base. The Company's 2006 fiscal year consisted of 53 weeks as compared to its 2005 fiscal year, which consisted of 52 weeks. Total sales for fiscal 2006 excluding the additional week decreased 0.3% to $675.2 million. Same store sales for the comparable 52-week fiscal year period increased 0.6% from fiscal 2005.

The Company operated 60 department stores and 5 specialty stores as of the end of fiscal 2006 as compared to 63 department stores and 6 specialty stores as of the end of fiscal 2005. As described more fully in Note 9 to the accompanying financial statements, during fiscal 2006 the Company closed 4 stores, 2 of which were underperforming, and opened 1 new store in Eugene, Oregon.

As described more fully in Note 2 to the accompanying financial statements, in January 2003, pursuant to the terms of a Purchase and Sale Agreement between the Company and Household Bank SB (N.A.), which has subsequently been acquired by HSBC Group ("HSBC"), the Company sold its private label credit card accounts and accounts receivable to HSBC. In connection with the sale, the Company entered into a Credit Card Program Agreement (the "CCA"). The CCA provides that the Company will be paid a percentage of Net Cardholder Charges and a percentage of Other Revenue (each as defined in the CCA). All amounts received under the CCA, including amortization of prepaid program revenue, are reflected in net credit revenues. The CCA had an initial term of five (5) years expiring January 31, 2008 and was cancelable earlier by either party under certain circumstances. On February 4, 2007, the Company and HSBC entered into a new Credit Card Program Agreement which has a term of six (6) years and is cancelable by either party under certain circumstances. The new Credit Card Program Agreement provides the Company will be paid a percentage of Net Credit Card Sales and a percentage of Other Revenue (each as defined in the CCA). In addition, the Company is guaranteed a percentage of net credit card sales (as defined in the CCA) will be used by HSBC to fund marketing programs.

Net credit revenues related to the program in fiscal 2006 were essentially even with fiscal 2005 at $3.1 million. As a percent of net sales, net credit revenues were 0.4% of net sales in fiscal 2006 and 0.5% of net sales in fiscal 2005.

Net rental income generated by the Company's various leased departments was $3.4 million in fiscal 2006, compared to $3.5 million in fiscal 2005. Leased department sales are presented net of the related costs for financial reporting purposes. Sales generated in the Company's leased departments, consisting primarily of fine jewelry departments and beauty salons, totaled $23.9 million in fiscal 2006 as compared to $24.4 million in fiscal 2005.

Cost of sales from continuing operations, which includes costs associated with the buying, handling and distribution of merchandise, increased by approximately $12.2 million to $446.6 million in fiscal 2006 as compared to $434.4 million in fiscal 2005, an increase of 2.8%. The increase is primarily due to the increase in sales volume. The Company's gross margin percentage in fiscal 2006 was 34.4% compared to 34.7% in fiscal 2005.

Selling, general and administrative expenses from continuing operations increased approximately $7.4 million, or 3.6%, to $212.4 million in fiscal 2006 as compared to $204.9 million in fiscal 2005. As a percentage of net sales, selling, general and administrative expenses increased 0.4% to 31.2% in fiscal 2006 as compared to 30.8% in fiscal 2005. The increase is primarily attributable to increases in payroll costs and fringe benefits, including a non-recurring $1.1 million increase in the vacation reserve to comply with the VEBA litigation settlement, and $0.8 million in stock-based compensation. The vacation expense increase was offset by decreases in worker's compensation and health insurance expenses. In addition, higher energy costs, increased professional fees and higher freight surcharges contributed to the increase in selling, general and administrative expenses. Gross advertising spending has also increased relative to the increase in net sales. These increases are partially offset by $0.4 million received as a member of a class of a settled lawsuit against VISA U.S.A. Inc. and MasterCard International Incorporated. The Company expects to see a continuation of higher fuel and energy costs for the foreseeable future.

Depreciation and amortization expense, which includes the net amortization (accretion) of intangible assets other than goodwill, increased by approximately $2.0 million or 15.4%, to $15.3 million in fiscal 2006 as compared to $13.2 million in fiscal 2005. As a percent of net sales, depreciation and amortization expense was 2.2% in fiscal 2006 and 2.0% in fiscal 2005. This increase includes $0.2 million related to accelerated depreciation of assets due to the closing of the Danville, California store in August 2006. The dollar increase is also a result of capital additions related to the Company's new store, major remodel projects at certain existing stores and upgrades to the planning and allocation and point of sale systems.

The Company sold a corporate aircraft on June 30, 2006 for $1,037,000 (net of selling costs) that resulted in a gain of $946,000. The gain is reflected in operating income as the aircraft was reported as an operating asset.

The VEBA litigation costs represent a reserve for settlement of a class action complaint alleging violation of California law regarding payment of accrued vacation upon termination of employment. The Company believed settlement of this matter was in its best interests and entered into a memorandum of understanding for class settlement, which was given final court approval in September 2006. The Company accrued $1.8 million in the fourth quarter of fiscal 2005 for estimated legal fees and costs and an additional $60,000 in the fourth quarter of fiscal 2006. All payments were made in December 2006 and final accounting for actual expenses will take place in fiscal 2007. Management does not believe the ultimate resolution will have a material adverse effect on the Company's business, financial condition or results of operations.

New store opening costs, which are expensed as incurred, typically include costs such as payroll and fringe benefits for store associates, store rents, temporary storage, utilities, travel, grand opening advertising, credit solicitation and other costs incurred prior to the opening of a store. The Company recognized new store opening costs totaling $0.4 million in connection with the opening of a new store in Eugene, Oregon, which opened August 31, 2006. In fiscal 2005, the Company recognized $0.7 million in new store opening costs related to the opening of new stores in each of Fresno, California and Albany, Oregon, and the reopening of the Pocatello, Idaho store.

Interest expense, which includes the amortization of deferred financing costs, increased by approximately $0.8 million to $10.1 million in fiscal 2006 compared to $9.2 million in fiscal 2005, an increase of 8.8%. As a percent of net sales, interest expense increased to 1.5% in fiscal 2006 as compared to 1.4% in fiscal 2005. These increases are primarily due to continued increases in interest rates charged on the Company's variable rate debt and include a charge of $0.2 million related to the early termination of the Company's 9.39% mortgages. These increases were partially offset by a $0.2 million favorable fair value adjustment on the Company's $25 million notional amount interest swap. The Company anticipates that its interest rate swap will continue to provide protection against rising interest rates for the near term. The weighted average interest rate applicable to the revolving credit facility was 7.1% in fiscal 2006 (7.3% at February 3, 2007) as compared to 6.0% in fiscal 2005. During the third quarter of fiscal 2005, due to the Company's involvement in the construction of the building at its River Park store and other factors, the Company recorded $10.2 million in buildings and equipment under capital leases and $6.0 million in capital lease obligations associated with landlord reimbursements received. Accordingly, fiscal 2006 also includes interest charges of $0.9 million, compared to $0.4 million in fiscal 2005, related to the accounting for rental payments as repayment of the related construction reimbursements utilizing the effective interest method.

Miscellaneous income, which consists of the amortization of long-term deferred credits recorded upon receipt of donated land, income from the Company's investment in a partnership, and other miscellaneous non-operating income decreased by approximately $0.1 million to $1.4 million in fiscal 2006 as compared to $1.5 million in fiscal 2005. Miscellaneous income does not include any material offsetting expense items. As a percent of net sales, miscellaneous income was 0.2% in fiscal 2006 and in fiscal 2005.

The Company's effective tax rate for continuing operations is 32.2% in fiscal 2006 as compared to 33.6% in fiscal 2005. Including the tax benefit reported in discontinued operations, the Company's effective tax rate is 31.6% in fiscal 2006 as compared to 33.5% in fiscal 2005. In both fiscal 2006 and fiscal 2005, the Company benefited from the release of a portion of its valuation allowance associated with certain tax credit carryforwards that the Company determined were more likely than not to be realized.

As a result of the foregoing, the Company reported income from continuing operations of $3.4 million, or $0.25 per diluted share, in fiscal 2006 as compared to $6.1 million, or $0.45 per diluted share, in fiscal 2005.

The Company closed one underperforming store in the Seattle metro-area during the third quarter of fiscal 2006 and one underperforming store in the Seattle/Tacoma market during the first quarter of fiscal 2006. During fiscal 2005, the Company closed two underperforming stores in the Seattle/Tacoma market. These closures are reported as discontinued operations due to the Company's exit from the respective market areas. The loss from operations of discontinued stores includes only revenues generated from, and expenses directly associated with, the operations of such stores and consists of the following:

(In thousands)                                               2006        2005
--------------------------------------------------------  ----------  ----------
Net sales from closed stores............................ $    2,921  $   11,480

Cost of sales...........................................      2,421       7,442
Selling, general and administrative expenses............      1,533       5,235
Depreciation and amortization...........................         69         412
                                                          ----------  ----------
  Total costs and expenses..............................      4,023      13,089
                                                          ----------  ----------
Loss from operations of closed stores................... $   (1,102) $   (1,609)
                                                          ==========  ==========

The loss on store closures of $98,000 includes a net gain on the sale of the building associated with the store closed during the first quarter of fiscal 2006 of approximately $147,000, offset by a loss on disposal of assets of $139,000 related to the store closed during the third quarter of fiscal 2006, and store closure costs of approximately $106,000 related to both stores closed in fiscal 2006, primarily consisting of severance and other incremental costs associated with the store closings.

In addition, the Company closed one store in Danville, California and one store in Moscow, Idaho during the third quarter and fourth quarter of fiscal 2006. The Company also closed one store in Fresno, California during the first quarter of fiscal 2005. These closures are not reported as discontinued operations due to the shift of revenues to other stores in the respective markets. The Company has a written agreement with the landlord to close the Wasilla, Alaska store in April 2007. This closure is not considered a discontinued operation as the Company has remaining stores in the market area.

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

As a result of the foregoing, the Company reported net income of $2.6 million in fiscal 2006 as compared to $5.2 million in fiscal 2005. On a per diluted share basis net income was $0.19 per share in fiscal 2006 compared to $0.38 per share in and fiscal 2005.

Net Sales

Net sales from continuing operations increased by approximately $15.2 million, or 2.3%, to $665.5 million in fiscal 2005 as compared to $650.3 million in fiscal 2004. The fiscal 2005 sales increase is primarily attributable to the opening of the Company's 100,000 square foot lifestyle center store at River Park in Fresno, California and a 43,260 square foot store in Albany, Oregon. Promotional activity helped drive the sales increases through a continuing soft general economic environment and continuing competitive pressures in much of the Company's market areas. The Company also achieved a 1.2% comparable store sales increase in fiscal 2005 driven predominantly by sales increases in the Company's more fashion forward merchandise categories. Comparable store sales includes sales for stores open for the full period in both years. However, reflecting the effects of the opening of the River Park store on other Fresno area stores, such stores have been excluded from the Company's comparable store base.

The Company operated 63 department stores and 6 specialty stores as of the end of fiscal 2005 as compared to 63 department stores and 6 specialty stores as of the end of fiscal 2004. In addition to the 2 new stores previously mentioned, during 2005 the Company also re-opened a store in Pocatello, Idaho, and closed 1 small department store in its Fresno market and 2 underperforming stores in the Seattle/Tacoma market.

As described more fully in Note 2 to the accompanying financial statements, in January 2003, pursuant to the terms of a Purchase and Sale Agreement between the Company and Household Bank SB (N.A.), which has subsequently been acquired by HSBC Group ("HSBC"), the Company sold its private label credit card accounts and accounts receivable to HSBC. In connection with the sale, the Company entered into a Credit Card Program Agreement (the "CCA"). The CCA provides that the Company will be paid a percentage of Net Cardholder Charges and a percentage of Other Revenue (each as defined in the CCA). All amounts received under the CCA, including amortization of prepaid program revenue, are reflected in net credit revenues.

Net credit revenues related to the program in fiscal 2005 were essentially even with fiscal 2004 at $3.1 million. As a percent of net sales, net credit revenues were 0.5% of net sales in fiscal 2005 and 2004.

Net rental income generated by the Company's various leased departments was $3.5 million in fiscal 2005, essentially equal to fiscal 2004. Leased department sales are presented net of the related costs for financial reporting purposes. Sales generated in the Company's leased departments, consisting primarily of fine jewelry departments and beauty salons, totaled $24.4 million in fiscal 2005 as compared to $24.3 million in fiscal 2004.

Cost of sales from continuing operations, which includes costs associated with the buying, handling and distribution of merchandise, increased by approximately $9.6 million to $434.4 million in fiscal 2005 as compared to $424.8 million in fiscal 2004, an increase of 2.3%. The increase is primarily due to the increase in sales volume. The Company's gross margin percentage in fiscal 2005 remained equal to fiscal 2004 at 34.7%.

Selling, general and administrative expenses from continuing operations increased approximately $3.8 million, or 1.9%, to $204.9 million in fiscal 2005 as compared to $201.1 million in fiscal 2004. As a percentage of net sales, selling, general and administrative expenses decreased 0.1% to 30.8% in fiscal 2005 as compared to 30.9% in fiscal 2004. The dollar increase is primarily attributable to incremental operating costs of the new stores, and increases in fuel and energy costs during the year affecting utilities, supplies, and transportation costs. The Company expects to see a continuation of higher fuel and energy costs for the foreseeable future.

Depreciation and amortization expense, which includes the net amortization (accretion) of intangible assets other than goodwill, increased by approximately $0.4 million or 3.1%, to $13.2 million in fiscal 2005 as compared to $12.8 million in fiscal 2004. As a percent of net sales, depreciation and amortization expense was 2.0% in fiscal 2005 and in fiscal 2004. The dollar increase is primarily the result of capital additions related to the Company's new stores and major remodel projects at certain existing stores.

The VEBA litigation costs represent a reserve for settlement of a class action complaint alleging violation of California law regarding payment of accrued vacation upon termination of employment. The Company believed settlement of this matter was in its best interests and entered into a memorandum of understanding for class settlement, which has court approval. The settlement plan was approved in September 2006 and all disbursements were made in December 2006. The Company accrued $1.8 million during the fourth quarter of fiscal 2005 for estimated legal fees and settlement costs and an additional $60,000 in the fourth quarter of fiscal 2006. Final accounting for this matter will take place in 2007. Management does not believe the ultimate resolution will have a material adverse effect on the Company's business, financial condition or results of operations.

New store opening costs, which are expensed as incurred, typically include costs such as payroll and fringe benefits for store associates, store rents, temporary storage, utilities, travel, grand opening advertising, credit solicitation and other costs incurred prior to the opening of a store. The Company recognized new store opening costs totaling $0.7 million in connection with the opening of new stores in each of Fresno, California and Albany, Oregon, and the reopening of the Pocatello, Idaho store in fiscal 2005. No new store pre-opening costs were incurred in fiscal 2004.

Interest expense, which includes the amortization of deferred financing costs, decreased by approximately $0.3 million to $9.2 million in fiscal 2005 as compared to $9.5 million in fiscal 2004, a decrease of 3.2%. As a percent of net sales, interest expense was 1.4% in 2005 and 2004. The dollar decrease was primarily due to lower average outstanding borrowing on the Company's revolving line of credit during fiscal 2005 as compared to fiscal 2004 and the elimination of certain higher interest debt facilities, resulting from the amendment and extension of the Company's revolving credit facility, partially offset by increasing interest rates on the Company's variable rate debt, and a $0.1 million fair value adjustment to the Company's $25 million notional amount interest rate swap. The weighted average interest rate applicable to the revolving credit facility was 6.0% in fiscal 2005 as compared to 4.6% in fiscal 2004. During the third quarter of fiscal 2005, due to the Company's involvement in the construction of the building at its River Park store and other factors, the Company recorded $10.2 million in building and equipment under capital leases and $6.0 million in capital lease obligations associated with landlord reimbursements received. Accordingly, fiscal 2005 also includes interest charges of $0.4 million related to the accounting for rental payments as repayment of the related construction reimbursement utilizing the effective interest method. Fiscal 2004 included one- time charges of $0.4 million for the early termination of certain debt in connection with the amendment and extension of the Company's revolving credit facility.

Miscellaneous income, which consists of the amortization of long-term deferred credits recorded upon receipt of donated land, income from the Company's investment in a partnership, and other miscellaneous non-operating income decreased by approximately $0.1 million to $1.5 million in fiscal 2005 as compared to $1.6 million in fiscal 2004. Miscellaneous income does not include any material offsetting expense items. As a percent of net sales, miscellaneous income was 0.2% in fiscal 2005 and in fiscal 2004.

The Company's effective tax rate for continuing operations is 33.5% in fiscal 2005 as compared to 36.1% in fiscal 2004. Including the tax benefit reported in discontinued operations, the Company's effective tax rate is 33.5% in fiscal 2005 as compared to 36.3% in fiscal 2004. In fiscal 2005, the Company benefited from the release of a portion of its valuation allowance associated with certain tax credit carryforwards that the Company determined were more likely than not to be realized.

As a result of the foregoing, the Company reported income from continuing operations of $6.1 million, or $0.45 per diluted share, in fiscal 2005 as compared $6.6 million, or $0.49 per diluted share, in fiscal 2004.

During fiscal 2005 the Company closed 2 underperforming store locations in the Seattle/Tacoma market. The closure of the Company's Fig Garden store during the first quarter of fiscal 2005 is not considered a discontinued operation due to the shift in revenues to other stores in the Fresno market, including the Fresno River Park store, which opened during the third quarter of fiscal 2005. The loss from operation of discontinued stores consists of the following:

(In thousands)                                               2005        2004
--------------------------------------------------------  ----------  ----------
Net sales from closed stores............................ $   11,480  $   11,736

Cost of sales...........................................      7,442       7,353
Selling, general and administrative expenses............      5,235       5,823
Depreciation and amortization...........................        412         495
                                                          ----------  ----------
  Total costs and expenses..............................     13,089      13,671
                                                          ----------  ----------
Loss from operations of closed stores................... $   (1,609) $   (1,935)
                                                          ==========  ==========

Net costs associated with the closure of stores in fiscal 2005 were $0.1 million, consisting of severance and other incremental costs associated with the store closings. Such costs were offset by $0.3 million of income received from a "kick-out" clause executed by the landlord triggering one of the store closures. Net costs associated with the closure of stores were minor in fiscal 2004 primarily consisting of incremental costs associated with the closure of one store on January 31, 2004.

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

As a result of the foregoing, the Company reported net income of $5.2 million in fiscal 2005 as compared to $5.3 million in fiscal 2004. On a per diluted share basis net income was $.38 per share in fiscal 2005 compared to $0.40 per share in and fiscal 2004.

The Company's working capital requirements are currently met through a combination of cash provided by operations, borrowings under its senior revolving credit facility, short-term trade and factor credit, and by proceeds from external financings.

In fiscal 2006, the Company generated negative cash flow from operations of $4.8 million as compared to positive cash flow of $19.6 million in fiscal 2005 and $38.4 million in fiscal 2004. The $24.4 million decrease in cash provided by operating activities in fiscal 2006 relative to fiscal 2005 was primarily due to a higher level of vendor claims for settlement, a higher inventory level, and a larger workers' compensation deposit. The decrease in accrued expense was $2.9 million at the end of fiscal 2006, of which the VEBA liability of $1.8 million was paid in December 2006. Taxes, other than income tax, decreased by $8.8 million at the end of 2006, primarily due to the payment in January 2007 of final December 2006 state sales and use tax. Since the fiscal year ended February 3, 2007, the payments were due and paid January 31, 2007; in 2005 these payments were made in February 2006.

The $18.8 million decrease in cash provided by operating activities in fiscal 2005 relative to fiscal 2004 was primarily due to the acquisition of inventory for new stores, the timing of collection of vendor claims, and long-term liabilities related to landlord reimbursements for the River Park store of $6.0 million deemed financing cash flows in 2005 due to the Company's involvement in the construction of the building. The increase in trade payables at the end of fiscal 2005 as compared to fiscal 2004 of approximately $4.6 million is partially offset by a decrease in cash management liability of approximately $3.2 million. Increases in accrued expenses of approximately $3.9 million at the end of fiscal 2005 as compared to the end of fiscal 2004 primarily relate to the timing of payment of certain normal recurring expenses.

Net cash used in investing activities amounted to $16.9 million, $21.9 million, and $13.4 million in fiscal 2006, 2005, and 2004, respectively. The net cash outflow in fiscal 2006 and fiscal 2005 increased from fiscal 2004 due to increased capital expenditures for store remodeling and new store construction (see "Uses of Liquidity"), partially offset in fiscal 2006 by the sale of the Silverdale, Washington store location and the sale of a corporate aircraft.

Net cash provided by financing activities was $22.4 million in fiscal 2006 primarily the result of increased borrowing on the Company's revolving credit facility to fund the acquisition of inventory and capital expenditures. Increase to the revolving line of credit in fiscal 2006 also includes the pay-off of the 9.39% mortgages on four of the Company's owned properties of approximately $16.6 million. Net cash provided by financing activities of $2.1 million in fiscal 2005 was primarily the result of the $6.0 million landlord reimbursement previously mentioned, offset by repayment of long-term obligations. The net cash outflow of $24.7 million in fiscal 2004 was attributable to the payoff of certain high interest debt and continued reductions of outstanding borrowing on the Company's revolving credit facility, partially offset by additional funds provided by a lower fixed interest term loan connected to the amended revolving credit agreement.

On March 1, 2004 the Company amended and restated its senior revolving credit facility (the "credit facility") to provide up to $165.0 million of working capital financing through February 2, 2009. On January 26, 2006 the Company finalized an amendment to the credit facility increasing the commitment to $181 million, reducing the interest rate charged on outstanding borrowing by 25 basis points, and allowing for the payoff of approximately $16.6 million of outstanding balances on higher interest rate mortgages related to four of the Company's owned properties (the "designated properties"), which payoff occurred subsequent to the end of fiscal 2005. In addition, the amendment provides for an optional additional increase in the commitment of $19.0 million and an optional extension of the credit facility through February 2, 2011. The credit facility, as amended, consists of a revolving credit facility of up to $172.0 million (including a $20.0 million letter of credit sub-facility) and a fully funded term loan of $9.0 million. Borrowings under the revolving credit facility, as amended, are limited to the sum of (a) a specified percentage of eligible credit card receivables, (b) the lesser of specified percentages of (i) the cost of eligible inventory and (ii) the net recovery value of the inventory, as determined by periodic valuation performed by an independent appraiser, and (c) the lesser of (i) up to 60% of the fair market value of the designated properties and (ii) $21.6 million. Such borrowings are further limited by a requirement to maintain a minimum of $5.0 million of excess availability at all times, and other reserves that are in effect. As of February 3, 2007, outstanding borrowings under the credit facility totaled $83.8 million, and excess borrowing availability under the facility, after the deduction of the minimum availability requirement and other reserves, totaled $50.4 million.

As of February 3, 2007, interest charged on amounts borrowed under the revolving portion of the credit facility is at the prime rate (8.25% at February 3, 2007), or at the Company's option, at the applicable LIBOR rate plus 1.25% per annum (6.57% at February 3, 2007), and interest charged on the term loan is a fixed rate of 6.6% per annum. In addition, the Company pays an unused commitment fee equal to 0.375% per annum on the average unused daily balance of the revolving portion of the credit facility. The interest rate applicable to the revolving portion of the credit facility is adjusted upwards or downwards on a quarterly basis based on a pricing matrix which is tied to the Company's daily average excess availability for the preceding fiscal quarter (as defined in the agreement). Under the pricing matrix, the applicable interest rate could range from a rate as low as prime, or LIBOR plus 1.25%, to as high as prime plus 0.50%, or LIBOR plus 2.50%.

The credit facility, as amended, contains restrictive financial and operating covenants, including the requirement to maintain a fixed charge coverage ratio of 1:1 (as defined in the agreement) if the Company's excess borrowing availability is below $15.0 million. As of February 3, 2007, management believes the Company was in compliance with all applicable financial covenants.

The Company is exposed to market risk associated with changes in interest rates. To provide some protection against potential rate increases associated with its variable-rate facilities, the Company has entered into a derivative financial transaction in the form of an interest rate swap. This interest rate swap, used to hedge a portion of the underlying credit facility, matures in February 2009.

El Corte Ingles ("ECI") of Spain, and Harris, a wholly owned subsidiary of ECI, became affiliates of the Company in fiscal 1998 when the Company acquired substantially all of the assets and business of Harris. The Company issued a Subordinated Note to Harris, in the principal amount of $22,179,000 as partial consideration for the Harris acquisition (the "Original Note"). The Original Note, discounted to an effective interest rate of 10% at issuance, bore interest at a fixed rate of 8%. On December 7, 2004 a new Subordinated Note due May 30, 2009 superseded the Original Note. The new Subordinated Note bears interest at a fixed rate of 8% payable semi-annually and provides for principal payments of up to $8.0 million prior to its maturity. Such payments are subject to certain liquidity restrictions under the revolving credit facility. The Company made principal payments of $1.0 million each upon execution of the note, on February 20, 2005, February 20, 2006, and subsequent to fiscal year end on February 20, 2007, as scheduled. Principal payments of $2.0 million are scheduled for each of February 2008 and 2009, with the balance due at maturity subject to the payment in full of the revolving credit facility.

The success of the Company's business is dependent in part upon the adequacy of trade credit offered by key factors and vendors, the vendors' ability and willingness to sell it products at favorable prices and terms, and the willingness of vendors to ship merchandise on a timely basis. The Company has been able to purchase adequate levels of merchandise to support its operations and expects the level of trade credit to be sufficient to support its operations in the foreseeable future.

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

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

The Company's primary uses of liquidity are for working capital, debt service requirements, and capital expenditures. Capital expenditures in fiscal 2006, of $21.1 million, were primarily related to the construction and fixturing of the Company's new Eugene store and renovation and refixturing of certain existing locations, to certain information system enhancements and to the purchase of a corporate aircraft. The Company does not currently have any firm commitments for the opening of new stores in fiscal 2007.

As of February 3, 2007, the Company had issued a total of $1.5 million of standby letters of credit and documentary letters of credit totaling $0.7 million. The standby letters of credit were issued to provide collateral for workers' compensation insurance policies. Management believes that the likelihood of any draws under the workers' compensation standby letters of credit is remote. Documentary letters of credit are issued in the ordinary course of business to facilitate the purchase of merchandise from overseas suppliers. The supplier draws against the documentary letter of credit upon delivery of the merchandise.

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

Contractual Obligations:

                                                           Payments due by period (1)
                                                                  (In thousands)
                                       -----------------------------------------------------------------
                                        Fiscal     Fiscal      Fiscal     Fiscal     Fiscal     There-
                                         2007       2008        2009       2010       2011       after
                                       ---------  ---------  ----------  ---------  ---------  ---------
Long-term debt....................... $   1,243  $   1,279  $    1,315  $     573  $     537  $   1,677
Capitalized lease obligations........     1,593      1,376       1,376      1,417      1,476     15,586
Subordinated note
  payable to affiliate...............     1,000      2,000      16,180
Non-cancelable operating leases......    22,865     21,687      19,086     16,056     14,446     57,290
Purchase obligations (2).............     1,273        952         773        468         78        177
Interest (3).........................     9,162      8,921       2,268      1,270      1,184      8,857
                                       ---------  ---------  ----------  ---------  ---------  ---------
Total contractual cash obligations... $  37,136  $  36,215  $   40,998  $  19,784  $  17,721  $  83,587
                                       =========  =========  ==========  =========  =========  =========

                                                  Amount of commitment expiration by period
                                                                (In thousands)
                                       -----------------------------------------------------------------
                                        Fiscal     Fiscal      Fiscal     Fiscal     Fiscal     There-
                                         2007       2008        2009       2010       2011       after
                                       ---------  ---------  ----------  ---------  ---------  ---------
Senior revolving credit facility (4). $          $          $   83,762  $          $          $
Standby letters of credit............     1,486
Documentary letters of credit........       711
                                       ---------  ---------  ----------  ---------  ---------  ---------
                                      $   2,197  $          $   83,762  $          $          $
                                       =========  =========  ==========  =========  =========  =========

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

Cash generated by operations, together with liquidity provided by the credit facility, and other financial resources are expected to adequately finance the Company's planned cash requirements for fiscal 2007.

In June 2006, the Financial Accounting Standards Board (FASB) issued Financial Interpretation No. (FIN) 48, "Accounting for Uncertainty in Income Taxes," which clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, "Accounting for Income Taxes." The interpretation prescribes a "more-likely-than not" recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 applies to all tax positions related to income taxes subject to FAS 109 and creates a single model to address accounting for uncertainty in tax positions. FIN 48 requires that tax positions accounted for under FAS 109 be evaluated for recognition based solely on technical merits and the resulting tax benefits be measured using a cumulative probability assessment and the Company's plan for settlement. The recognition classification and cumulative effect of the FIN 48 liability may be recorded as an adjustment to retained earnings. The Company is required to adopt FIN 48 beginning in fiscal year 2007. The Company does not expect that the adoption of FIN 48 will have a significant impact on the Company's financial position, results of operations and cash flows.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurement. SFAS 157 does not require any new fair value measurement and the Company is currently evaluating the impact, if any, of SFAS 157 on its financial position, results of operations and cash flows. SFAS 157 requires prospective application for fiscal years beginning after November 15, 2007.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," (SFAS 159). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to reduce fluctuation in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Most of the provisions of SFAS 159 apply only to entities that elect the fair value option. However, the amendment to FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities," applies to all entities with available-for-sale and trading securities. SFAS 159 is effective for the Company on February 3, 2008. The Company is currently evaluating the impact, if any, of SFAS 159 on its financial position, results of operations and cash flows.

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

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

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

The following table sets forth unaudited quarterly results of operations for fiscal 2006 and 2005 (in thousands, except per share data). The Company has reclassified the results of operations of certain stores closed in fiscal 2006 to discontinued operations for all periods presented.

                                                                          Fiscal 2006
                                                       ----------------------------------------------
Quarter Ended                                           April 29    July 29    October 28  February 3
-----------------------------------------------------  ----------  ----------  ----------  ----------
Net sales from continuing operations................. $  142,163  $  152,757  $  147,897  $  238,149
Gross profit.........................................     47,440      54,268      53,727      78,912
Income (loss) from continuing operations.............     (3,696)        600      (2,335)      8,872
Loss on discontinued operations, net of tax..........       (265)       (114)       (413)
Net income (loss)....................................     (3,961)        486      (2,748)      8,872

Net income (loss) per common share:
Basic
Income (loss) from continuing operations............. $    (0.28) $     0.04  $    (0.17) $     0.66
Loss on discontinued operations...................... $    (0.02) $     0.00  $    (0.03) $     0.00
Net income (loss).................................... $    (0.30) $     0.04  $    (0.20) $     0.66

Diluted
Income (loss) from continuing operations............. $    (0.28) $     0.04  $    (0.17) $     0.64
Loss on discontinued operations...................... $    (0.02) $     0.00  $    (0.03) $     0.00
Net income (loss).................................... $    (0.30) $     0.04  $    (0.20) $     0.64

Weighted-average number of common
  shares outstanding:
    Basic............................................     13,371      13,399      13,423      13,574
    Diluted..........................................     13,371      13,685      13,423      13,885

                                                                          Fiscal 2005
                                                       ----------------------------------------------
Quarter Ended                                           April 30    July 30    October 29  January 28
-----------------------------------------------------  ----------  ----------  ----------  ----------
Net sales from continuing operations................. $  141,658  $  149,044  $  148,348  $  226,409
Gross profit.........................................     48,008      53,060      53,419      76,587
Income (loss) from continuing operations.............     (1,582)        574      (1,268)      8,421
Income (loss) on discontinued operations, net of tax.       (403)       (315)       (358)        131
Net income (loss)....................................     (1,985)        259      (1,626)      8,552

Net income (loss) per common share
Basic
Income (loss) from continuing operations............. $    (0.12) $     0.04  $    (0.09) $     0.63
Income (loss) on discontinued operations............. $    (0.03) $    (0.02) $    (0.03) $     0.01
Net income (loss).................................... $    (0.15) $     0.02  $    (0.12) $     0.64

Diluted
Income (loss) from continuing operations............. $    (0.12) $     0.04  $    (0.09) $     0.61
Income (loss) on discontinued operations............. $    (0.03) $    (0.02) $    (0.03) $     0.01
Net income (loss).................................... $    (0.15) $     0.02  $    (0.12) $     0.62

Weighted-average number of common
  shares outstanding:
    Basic............................................     13,077      13,255      13,314      13,336
    Diluted..........................................     13,077      13,872      13,314      13,771

The Company is exposed to market risks in the normal course of business due to changes in interest rates on borrowings under its senior revolving credit facility. To provide some protection against potential rate increases associated with its variable-rate facilities, the Company entered into a derivative financial transaction in the form of an interest rate swap. The interest rate swap is used to hedge a portion of the underlying variable-rate facility. The Company currently holds a "variable-to-fixed" rate swap with a notional amount of $25.0 million with one financial institution. The notional amount does not represent amounts exchanged by the parties; rather, it is used as the basis to calculate amounts due and to be received under the rate swap. Although the swap essentially provides for matched terms to its underlying, and effectively mitigates its variability, it currently does not qualify for hedge accounting under SFAS No. 133. Accordingly, changes in fair value of the derivative instrument are recorded in interest expense. During fiscal 2006 and 2005, the Company did not enter into or hold derivative financial instruments for trading purposes, nor does it engage in financial transactions for speculative or trading purposes. All contracts and purchase obligations are denominated in US dollars and accordingly the Company is not subject to foreign exchange rate risk.

As of February 3, 2007, borrowings subject to variable interest rates represented 67% of the Company's total outstanding borrowings. The interest payable on the Company's senior revolving credit facility is based on variable interest rates and is therefore affected by changes in market interest rates. An increase of 70 basis points on existing floating rate borrowings (a 10% change from the Company's weighted-average interest rate as of February 3, 2007) would reduce the Company's pre-tax net income and cash flow by approximately $0.5 million. This 70 basis point increase in interest rates would not materially effect the fair value of the Company's fixed rate financial instruments. (See Note 1 to the accompanying financial statements.)

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

None.

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

The Company's Chief Executive Officer and Chief Financial Officer (its principal executive officer and principal financial officer, respectively), with the participation of the Company's management, have carried out an evaluation of the effectiveness of the Company's disclosure controls and procedures, as of February 3, 2007 and have concluded that such disclosure controls and procedures are effective at the reasonable assurance level.

The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of the Company's financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.

Management assessed the Company's internal control over financial reporting as of February 3, 2007, the end of the Company's fiscal year. Management based its assessment on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management's assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and the Company's overall control environment. Based on its assessment, management has concluded that the Company's internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles. The results of management's assessment were reviewed with the Audit Committee of the Company's Board of Directors.

Deloitte & Touche LLP, the Company's independent registered public accounting firm, has issued a report on management's assessment of the Company's internal control over financial reporting, that is included in Part IV Item 15(a)(1).

During the fourth quarter of fiscal 2006, there were no changes in the Company's internal controls over financial reporting identified during the evaluation referred to above that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

None.

The information required by Item 10 of Form 10-K, other than the following information required by Paragraph (b) of Item 401 of Regulation S-K, is incorporated by reference from those portions of the Company's definitive proxy statement with respect to the Annual Stockholders' Meeting scheduled to be held on June 21, 2007, to be filed pursuant to Regulation 14A (the "2007 Proxy") under the headings "Nominees for Election as Director" and "Section 16(a) Beneficial Ownership Reporting Compliance."

As of March 30, 2007, the name, age and title of the executive officers of the Company are as follows:

                                                        February 3,  January 28,
                                                           2007         2006
                                                        -----------  -----------
ASSETS
CURRENT ASSETS:
  Cash................................................ $     6,051  $     5,368
  Receivables - net...................................       8,198        7,284
  Merchandise inventories.............................     168,702      159,986
  Other...............................................      19,421       15,534
                                                        -----------  -----------
    Total current assets..............................     202,372      188,172

PROPERTY AND EQUIPMENT - net..........................     134,696      133,545

OTHER ASSETS:
  Goodwill - net......................................       7,501        7,501
  Other intangibles - net.............................         487          615
  Other...............................................       5,010        5,189
                                                        -----------  -----------
                                                            12,998       13,305
                                                        -----------  -----------
                                                       $   350,066  $   335,022
                                                        ===========  ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Trade accounts payable and accrued expenses......... $    79,854  $    86,621
  Current portion of long-term debt...................       1,243        1,625
  Current portion of capitalized lease obligations....         433        1,145
  Deferred income taxes...............................       3,541        1,851
                                                        -----------  -----------
    Total current liabilities.........................      85,071       91,242

REVOLVING LINE OF CREDIT..............................      83,762       47,935

LONG-TERM OBLIGATIONS, less current portion...........      13,592       28,971

OTHER LIABILITIES.....................................      12,558       14,077

DEFERRED INCOME TAXES.................................      11,311       12,713

SUBORDINATED NOTE PAYABLE TO AFFILIATE................      19,180       20,180

COMMITMENTS AND CONTINGENCIES (Notes 7 and 14)

STOCKHOLDERS' EQUITY:
  Common stock, par value of $.01 per share;
    30,000,000 shares authorized; 13,569,743
    and 13,361,149 issued.............................         136          134
  Additional paid-in capital..........................      76,527       74,490
  Retained earnings...................................      47,929       45,280
                                                        -----------  -----------
                                                           124,592      119,904
                                                        -----------  -----------
                                                       $   350,066  $   335,022
                                                        ===========  ===========

                                                                Fiscal Years Ended
                                                        ----------------------------------
                                                        February 3, January 28, January 29,
                                                           2007        2006        2005
                                                        ----------  ----------  ----------
Net sales............................................. $  680,966  $  665,460  $  650,256
Net credit revenues...................................      3,087       3,084       3,106
Net leased department revenues........................      3,428       3,506       3,515
                                                        ----------  ----------  ----------
    Total revenues....................................    687,481     672,050     656,877
                                                        ----------  ----------  ----------
Costs and expenses:
  Cost of sales.......................................    446,619     434,387     424,775
  Selling, general and
    administrative expenses...........................    212,355     204,945     201,073
  Depreciation and amortization.......................     15,276      13,242      12,830
  Gain on sale of aircraft............................       (946)
  VEBA litigation.....................................         60       1,811
  New store opening costs.............................        376         688
                                                        ----------  ----------  ----------
     Total costs and expenses.........................    673,740     655,073     638,678
                                                        ----------  ----------  ----------
Operating income .....................................     13,741      16,977      18,199
                                                        ----------  ----------  ----------
Other (income) expense:
  Interest expense....................................     10,058       9,242       9,509
  Miscellaneous income................................     (1,389)     (1,515)     (1,565)
                                                        ----------  ----------  ----------
                                                            8,669       7,727       7,944
                                                        ----------  ----------  ----------
Income from continuing operations
  before income tax ..................................      5,072       9,250      10,255

Income tax expense....................................      1,631       3,107       3,676
                                                        ----------  ----------  ----------

Income from continuing operations.....................      3,441       6,143       6,579

Discontinued operations:
  Loss from operations of closed stores...............     (1,102)     (1,609)     (1,935)
  Gain (loss) on store closures.......................        (98)        180         (31)
  Income tax benefit..................................        408         486         668
                                                        ----------  ----------  ----------
  Loss on discontinued operations.....................       (792)       (943)     (1,298)
                                                        ----------  ----------  ----------
  Net income ......................................... $    2,649  $    5,200  $    5,281
                                                        ==========  ==========  ==========

Net income per common share:
Basic
  Income from continuing operations................... $     0.26  $     0.46  $     0.51
  Loss on discontinued operations .................... $    (0.06) $    (0.07) $    (0.10)
  Net income per common share......................... $     0.20  $     0.39  $     0.41
Diluted
  Income from continuing operations................... $     0.25  $     0.45  $     0.49
  Loss on discontinued operations .................... $    (0.06) $    (0.07) $    (0.09)
  Net income per common share......................... $     0.19  $     0.38  $     0.40
Weighted average number of common shares outstanding
  Basic...............................................     13,428      13,245      12,922
  Diluted.............................................     13,758      13,797      13,352

                                         Common Stock   Additional
                                   -------------------   Paid-in    Retained
                                     Shares     Amount   Capital    Earnings      Total
                                   -----------  ------  ----------  ---------   ---------

BALANCE, JANUARY 31, 2004......... 12,878,802  $  129  $   71,440  $  34,799   $ 106,368
  Net income......................                                     5,281       5,281
  Stock options exercised.........    132,250       1         634                    635
  Shares issued under employee
   stock purchase plan............     19,217                  72                     72
                                   -----------  ------  ----------  ---------   ---------
BALANCE, JANUARY 29, 2005......... 13,030,269     130      72,146     40,080     112,356
  Net income......................                                     5,200       5,200
  Stock options exercised.........    321,650       4       2,276                  2,280
  Shares issued under employee
   stock purchase plan............      9,230                  68                     68
                                   -----------  ------  ----------  ---------   ---------
BALANCE, JANUARY 28, 2006......... 13,361,149     134      74,490     45,280     119,904
  Net income......................                                     2,649       2,649
  Stock options exercised.........    196,100       2         899                    901
  Shares issued under employee
   stock purchase plan............     12,494                  69                     69
  Stock option expense............                            810                    810
  Tax benefit from exercise of
   stock options..................                            248                    248
  Tax effect of terminated
   stock options..................                             11                     11
                                   -----------  ------  ----------  ---------   ---------
BALANCE, FEBRUARY 3, 2007......... 13,569,743  $  136  $   76,527  $  47,929   $ 124,592
                                   ===========  ======  ==========  =========   =========

                                                                                   Fiscal Years Ended
                                                                        ----------------------------------------
                                                                        February 3,   January 28,   January 29,
                                                                            2007          2006          2005
                                                                        ------------  ------------  ------------
Net income............................................................ $      2,649  $      5,200  $      5,281
Adjustments:
  Stock-based compensation............................................          810
  Excess tax benefits from exercise of stock options..................         (248)
  Depreciation and amortization.......................................       15,345        13,654        13,326
  Deferred income taxes...............................................          288           882         1,761
  Amortization of deferred income and
    other deferred items..............................................       (1,375)       (1,955)       (2,336)
  Store closure costs.................................................          142           120            31
  Net (gain) loss from sale of assets.................................         (978)          131            16
  Distributions of earnings from investment in limited partnership....          484
Changes in assets and liabilities:
     Receivables......................................................         (914)         (364)        2,225
     Merchandise inventories..........................................       (7,230)       (5,790)        5,287
     Other current and long-term assets...............................       (4,115)          872        (1,335)
     Trade accounts payable and accrued expenses......................      (11,830)        9,587        10,064
     Other current and long-term liabilities..........................        2,137        (2,721)        4,086
                                                                        ------------  ------------  ------------
         Net cash provided by (used in) operating activities..........       (4,835)       19,616        38,406

INVESTING ACTIVITIES:
Purchases of property and equipment...................................      (21,100)      (22,227)      (13,745)
Proceeds from sale of building and aircraft...........................        4,187                           3
Distributions of earnings from investment in limited partnership......                        365           365
                                                                        ------------  ------------  ------------
        Net cash used in investing activities.........................      (16,913)      (21,862)      (13,377)

FINANCING ACTIVITIES:
Net proceeds (repayments) under revolving credit facility.............       35,826         2,182       (14,256)
Proceeds from long-term obligations...................................        3,000         6,000         9,000
Principal payments on long-term obligations...........................      (20,472)       (4,156)      (17,135)
Changes in cash management liability..................................        2,891        (3,284)       (1,843)
Debt issuance costs...................................................          (41)         (232)       (1,060)
Proceeds from exercise of options.....................................          917         1,566           491
Proceeds from sale of stock under employee
  stock purchase plans................................................           62            68            72
                                                                        ------------  ------------  ------------
Excess tax benefits from exercise of stock options ...................          248
Net cash provided by (used in) financing activities...................       22,431         2,144       (24,731)
                                                                        ------------  ------------  ------------
INCREASE (DECREASE) IN CASH...........................................          683          (102)          298
CASH AT BEGINNING OF YEAR.............................................        5,368         5,470         5,172
                                                                        ------------  ------------  ------------
CASH AT END OF YEAR................................................... $      6,051  $      5,368  $      5,470
                                                                        ============  ============  ============

(In thousands, except per share data)                          2005       2004
-----------------------------------------------              --------   --------
Net income as reported.........................            $   5,200  $   5,281
Deduct: Total stock-based compensation expense
  determined under fair value based method
  for all awards, net of related tax effects...                 (584)      (308)
                                                             --------   --------
Pro forma net income...........................            $   4,616  $   4,973
                                                             ========   ========

Earnings per share:
  As reported:
   Basic.......................................            $    0.39  $    0.41
   Diluted.....................................            $    0.38  $    0.40

  Pro-forma:
   Basic.......................................            $    0.35  $    0.38
   Diluted.....................................            $    0.33  $    0.37

(In thousands)                                   2006        2005        2004
--------------------------------------------  ----------  ----------  ----------
Service charge revenues..................... $    3,087  $    3,084  $    3,106
                                              ==========  ==========  ==========

                                              February 3, January 28,
(In thousands)                                   2007        2006
--------------------------------------------  ----------  ----------
Furniture, fixtures and equipment........... $  127,715  $  111,334
Buildings and leasehold improvements........     96,698      97,113
Land........................................     15,185      15,185
Buildings and equipment under
  capital leases............................     28,936      28,936
Construction in progress....................      1,872       3,167
                                              ----------  ----------
                                                270,406     255,735
Less accumulated depreciation
  and amortization..........................   (135,710)   (122,190)
                                              ----------  ----------
                                             $  134,696  $  133,545
                                              ==========  ==========

                                              February 3, January 28,
(In thousands)                                   2007        2006
--------------------------------------------  ----------  ----------
Trade accounts payable...................... $   27,545  $   29,156
Accrued expenses............................     32,168      33,715
Taxes, other than income taxes..............      3,991      12,663
Accrued payroll and related liabilities.....      9,400       6,074
Cash management liability...................      5,090       2,199
Federal and state income taxes payable......      1,660       2,814
                                              ----------  ----------
                                             $   79,854  $   86,621
                                              ==========  ==========

                                              February 3, January 28,
(In thousands)                                   2007        2006
--------------------------------------------  ----------  ----------
9.39% mortgage loans payable, due 2010......                 16,561
Capital lease obligations...................      8,644       9,993
7.5% note payable due 2010..................      2,442       3,127
Other mortgage loans and notes payable......      4,182       2,060
                                              ----------  ----------
                                             $   15,268  $   31,741
  Less current portion......................     (1,676)     (2,770)
                                              ----------  ----------
                                             $   13,592  $   28,971
                                              ==========  ==========

                                               Capital    Operating
(In thousands)                                  Leases      Leases
--------------------------------------------  ----------  ----------
2007........................................ $    1,593  $   22,865
2008........................................      1,376      21,687
2009........................................      1,376      19,086
2010........................................      1,417      16,056
2011........................................      1,476      14,446
Thereafter..................................     15,586      57,290
                                              ----------  ----------
Total minimum lease payments................     22,824  $  151,430
  Amount representing interest..............    (14,180)  ==========
                                              ----------
Present value of minimum lease payments.....      8,644
  Less current portion......................       (433)
                                              ----------
                                             $    8,211
                                              ==========

(In thousands)                                   2006        2005        2004
--------------------------------------------  ----------  ----------  ----------
Operating leases:
  Buildings:
    Minimum rentals......................... $   23,352  $   23,430  $   23,360
    Contingent rentals......................      3,579       3,175       2,839
  Fixtures and equipment....................      2,039       2,057       1,910
                                              ----------  ----------  ----------
                                             $   28,970  $   28,662  $   28,109
                                              ==========  ==========  ==========

(In thousands)                                               2006        2005         2004
--------------------------------------------------------  ----------  ----------  ------------
Net sales from closed stores............................ $    2,921  $   11,480  $     11,736

Cost of sales...........................................      2,421       7,442         7,353
Selling, general and administrative expenses............      1,533       5,235         5,823
Depreciation and amortization...........................         69         412           495
                                                          ----------  ----------  ------------
  Total costs and expenses..............................      4,023      13,089        13,671
                                                          ----------  ----------  ------------

Loss from operations of closed stores................... $   (1,102) $   (1,609) $     (1,935)
                                                          ==========  ==========  ============

(In thousands)                                   2006        2005        2004
--------------------------------------------  ----------  ----------  ----------
Current:
  Federal................................... $    1,870  $    2,468  $    2,111
  State.....................................       (127)        562         180
                                              ----------  ----------  ----------
                                                  1,743       3,030       2,291
                                              ----------  ----------  ----------
Deferred:
  Federal...................................       (445)        924       1,025
  State.....................................        333        (847)        360
                                              ----------  ----------  ----------
                                                   (112)         77       1,385
                                              ----------  ----------  ----------
                                             $    1,631  $    3,107  $    3,676
                                              ==========  ==========  ==========

                                      February 3,             January 28,
                                         2007                    2006
                                ----------------------  ----------------------
                                Deferred    Deferred    Deferred    Deferred
                                   Tax         Tax         Tax         Tax
                                 Assets    Liabilities   Assets    Liabilities
                                ---------  -----------  ---------  -----------
Current:
  Accrued employee benefits... $   1,469  $            $   1,002  $
  Net operating loss and tax
    credit carryforwards......       289
  State income taxes..........       355                     254
  LIFO inventory reserve......                 (6,630)                 (5,098)
  Workers' compensation.......     3,086                   2,947
  Legal reserve...............       160                     952
  Deferred income.............     1,172                     831
  Valuation allowance.........      (916)                   (912)
  Other items, net............       492       (3,018)       261       (2,088)
                                ---------  -----------  ---------  -----------
                                   6,107       (9,648)     5,335       (7,186)
                                ---------  -----------  ---------  -----------
Long-Term:
  Net operating loss and tax
    credit carryforwards......     4,037                   3,223
  State income taxes..........       226                     402
  Property and equipment......                 (9,468)                (11,036)
  Accounting for leases.......     1,066       (2,089)     1,093       (2,686)
  Leasehold interests.........       192                     175
  Deferred income.............       414       (4,316)       663       (4,066)
  Valuation allowance.........      (772)                   (951)
  Other items, net............       999       (1,600)     1,423         (953)
                                ---------  -----------  ---------  -----------
                                   6,162      (17,473)     6,028      (18,741)
                                ---------  -----------  ---------  -----------
                               $  12,269  $   (27,121) $  11,363  $   (25,927)
                                =========  ===========  =========  ===========

                                                    2006       2005       2004
                                                  --------   --------   --------
Statutory rate.................................      35.0 %     35.0 %     35.0 %
State income taxes, net of
 federal income tax benefit....................       3.5       (2.4)       4.3
General business credits.......................      (5.6)      (2.6)      (2.3)
Valuation allowance............................      (6.1)       4.6
Increase in tax reserve........................       6.4
Other items, net...............................      (1.6)      (1.1)      (0.9)
                                                  --------   --------   --------
Effective rate.................................      31.6 %     33.5 %     36.1 %
                                                  ========   ========   ========

(Shares in thousands)                               2006       2005       2004
-----------------------------------------------   --------   --------   --------
Weighted average number of
  shares - basic...............................    13,428     13,245     12,922
Effect of assumed option exercises.............       330        552        430
                                                  --------   --------   --------
Weighted average number of
  shares - diluted.............................    13,758     13,797     13,352
                                                  ========   ========   ========

                             2006                 2005                 2004
                     -------------------- -------------------- --------------------
                                 Weighted-            Weighted-            Weighted-
                       Number    Average    Number    Average    Number    Average
                         of      Exercise     of      Exercise     of      Exercise
                       Shares     Price     Shares     Price     Shares     Price
                     ----------  -------- ----------  -------- ----------  --------
Options outstanding
  at beginning of
  year.............. 1,400,475  $   6.19  1,547,750  $   4.99  1,688,500  $   5.36
Granted.............     2,500      8.60    310,000     10.37    261,500      6.10
Exercised...........  (196,100)     4.58   (319,400)     4.88   (132,250)     3.71
Cancelled...........   (47,500)     7.10   (137,875)     6.70   (270,000)     9.34
                     ----------  -------- ----------  -------- ----------  --------
Options outstanding
 at end of year..... 1,159,375  $   6.43  1,400,475  $   6.19  1,547,750  $   4.96
                     ==========  ======== ==========  ======== ==========  ========
Options exercisable
 at end of year.....   812,375  $   5.77    777,100  $   5.45    941,375  $   5.69
                     ==========  ======== ==========  ======== ==========  ========

                                          Number       Weighted Average
                                            of            Grant Date
                                          Shares          Fair Value
                                     ----------------  ----------------
Nonvested at January 29, 2006                623,375  $           4.15
Granted                                        2,500              3.54
Vested                                      (230,875)             3.03
Forfeited                                    (48,000)             4.35
                                     ----------------
Nonvested at February 3, 2007                347,000  $           4.85
                                     ================

                                Weighted-
                                 Average    Weighted-
                                Remaining    Average
    Range of         Number    Contractual  Exercise
 Exercise Prices  Outstanding  Life (yrs.)    Price
----------------- ------------ -----------  ---------
$1.13 to $4.25        301,750        5.51  $    2.55
$4.63 to $6.03        342,625        5.02  $    5.51
$6.19 to $10.48       485,000        5.28  $    9.16
$11.75 to $11.75       30,000        8.38      11.75
----------------- ------------ -----------  ---------
$1.13 to $11.75     1,159,375        5.34  $    6.43
================= ============ ===========  =========

                                           2006       2005       2004
                                         ---------  ---------  ---------
Risk-free interest rate................       4.6 %      3.8 %      3.4 %
Expected dividend yield................        --         --         --
Expected volatility....................      42.2 %     56.1 %     55.0 %
Expected option life (years)...........       4.6          5          5

                                                    ADDITIONS
                                             ------------------------
            COL. A                COL. B       COL. C        COL. D         COL. E          COL. F
------------------------------  -----------  ----------     ---------     -----------     -----------
                                                             Charged
                                Balance at   Charged to     to Other                      Balance at
                                 Beginning   Costs and      Accounts      Deductions        End of
Description                      of Period    Expenses      Describe       Describe         Period
------------------------------  -----------  ----------     ---------     -----------     -----------
Year ended February 3, 2007:
  Deferred tax asset
    valuation allowance....... $ 1,864,000  $              $             $  (176,000)(4) $ 1,688,000
  Allowance for vendor
    claims receivable......... $    90,000  $              $             $   (10,000)(3) $    80,000
  Sales return reserve.........$    98,000  $  150,000 (5) $             $               $   248,000

Year ended January 28, 2006:
  Deferred tax asset
    valuation allowance....... $ 2,254,000  $              $             $  (390,000)(4) $ 1,864,000
  Allowance for vendor
    claims receivable......... $    90,000  $              $             $               $    90,000
  Sales return reserve.........$    87,000  $   11,000 (5) $             $               $    98,000

Year ended January 29, 2005:
  Store closure reserve....... $   337,000  $              $             $  (337,000)(1) $
  Deferred tax asset
    valuation allowance....... $ 1,818,000  $  436,000 (2) $             $               $ 2,254,000
  Allowance for vendor
    claims receivable......... $   281,000  $              $             $  (191,000)(3) $    90,000
  Sales return reserve.........$    94,000  $              $             $    (7,000)(5) $    87,000