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

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FORM 10-K

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(MARK ONE)
xANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 3, 2007

OR





FOR THE TRANSITION PERIOD FROM ___________ TO  _____________

Commission file number 1-09100



Gottschalks Inc.



|Delaware                                                       | 77-0159791                             
|-------------------------------------------------------------- | ---------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number)

7 River Park Place EastFresno, California      93720

(559) 434-4800

Securities registered pursuant to Section 12(b) of the Act:



|Title of Each Class
 Common Stock, $.01 Par Value | Name of each exchange on which registered
 New York Stock Exchange
|------------------------------------------------- | ------------------------------------------------------------------

Securities registered pursuant to Section 12(g) of the Act: None


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   
 ̈ YES
       x NO

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   
 ̈ YES
       x NO


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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form10-K or any amendment to this Form 10-K.
   x


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer      ̈ Accelerated filer    x Non-accelerated filer     ̈


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  
 ̈ YES
       x NO


The aggregate market value of the voting stock held by non-affiliates of the Registrant as of
July 29, 2006: Common Stock, $.01 par value: $82,402,148.

On March 30, 2007 the Registrant had outstanding  13,621,368 shares of Common Stock.


DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive proxy
statement with respect to its Annual Stockholders' Meeting scheduled to be held
on June 21, 2007, which will be filed pursuant to Regulation 14A, are
incorporated by reference into Part III of this Form 10-K.






PDF provided as a courtesy

Gottschalks Inc.
2006 ANNUAL REPORT ON FORM 10-K
INDEX

|Part I.                  |                                                                                                                  | Page  
|------------------------ | ---------------------------------------------------------------------------------------------------------------- | ------
|Item 1.Item 1A.
Item 1B. | Business
Risk Factors
Unresolved Staff Comments                                                                  | 3
9
11
|Item 2.                  | Properties                                                                                                       | 11    
|Item 3.                  | Legal Proceedings                                                                                                | 12    
|Item 4.                  | Submission of Matters to a Vote of Security Holders                                                              | 12    
|Part II.                 |                                                                                                                  |       
|Item 5.                  | Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 13    
|Item 6.                  | Selected Financial Data                                                                                          | 15    
|Item 7.                  | Management's Discussion and Analysis of Financial Condition and Results of Operations                            | 19    
|Item 7A.                 | Quantitative and Qualitative Disclosures About Market Risk                                                       | 34    
|Item 8.                  | Financial Statements and Supplementary Data                                                                      | 34    
|Item 9.                  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                             | 34    
|Item 9A.
Item 9B.        | Controls and Procedures
Other Information                                                                        | 34
35 
|Part III.                |                                                                                                                  |       
|Item 10.                 | Directors and Executive Officers of the Registrant                                                               | 36    
|Item 11.                 | Executive Compensation                                                                                           | 36    
|Item 12.                 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                   | 37    
|Item 13.                 | Certain Relationships and Related Transactions                                                                   | 37    
|Item 14.                 | Principal Accountant Fees and Services                                                                           | 37    
|Part IV.                 |                                                                                                                  |       
|Item 15.                 | Exhibits and Financial Statement Schedules                                                                       | 37    
|Signatures               |                                                                                                                  | 64    
|                         |                                                                                                                  |       

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PART I

Item 1. BUSINESS

GENERAL

Gottschalks Inc. (the "Company") is a regional department and specialty store chain based in Fresno, California. As of
February 3, 2007, the Company operated 60 full-line "Gottschalks" department stores located in 6 Western states, with 38 stores located in
California, 8 in Washington, 6 in Alaska, 4 in Oregon, 2 in Nevada and 2 in Idaho. The Company also operates 5 "Village East" and
"Gottschalks" specialty stores which carry a limited selection of merchandise. The Company is incorporated in the State of Delaware.

The Company's department stores typically offer a wide range of better to moderate brand-name and private-label merchandise,
including mens, womens, juniors and childrens apparel; cosmetics, shoes, fine jewelry and accessories; and home furnishings including china,
housewares, domestics, small electric appliances and, in selected locations, furniture and mattresses. The majority of the Company's department stores
range from 40,000 to 150,000 in gross square feet, and are generally anchor tenants of regional shopping malls or strategically located strip centers.

The Company has operated continuously for 102 years since it was founded by Emil Gottschalk in 1904. At the time the Company
initially offered its stock to the public in 1986, the Company operated 10 department stores. Since then, a net total of 50 department stores have been
added, 20 through acquisitions.

OPERATING STRATEGY

Merchandising Strategy

The Company's merchandising strategy is directed at offering and promoting moderate to better priced brand-name merchandise
recognized by its customers for style and value. Brand-name merchandise is complemented with offerings of private-label. Brand-name apparel, shoes,
cosmetics and accessories lines carried by the Company include Estee Lauder, Lancome, Clinique, Chanel, Dooney & Bourke, Nine West, Liz
Claiborne, Calvin Klein, Guess?, Nautica, Karen Kane, Tommy Hilfiger, Ralph Lauren, Columbia, Fossil and Levi Strauss. Brand-name merchandise
carried for the home includes Waterford, Lenox, Lladro, Krups, Kitchenaid, Calphalon  and Samsonite.

The Company has also directed considerable effort towards improving the quality and increasing the penetration of private-label
merchandise in its overall merchandise mix. The Company's most well recognized private-label is "Shaver Lake," currently carried in the
womens, mens and childrens departments, as well as in certain departments in the home division. The "Shaver Lake" brand is exclusively
offered in Gottschalks stores, and provides an opportunity to increase Gottschalks' brand acceptance and promote competitive differentiation. The
Company plans to expand its private label offerings in mens and womens casual clothing in fiscal 2007.

The Company purchases merchandise from numerous suppliers. No single vendor accounted for more than 5.0% of the
Company's net purchases in fiscal 2006. The Company's merchandising activities are conducted centrally from its corporate offices in Fresno,
California.

The Company's merchandise mix as a percentage of total sales (including leased department sales) is reflected in the following
table:

`Fiscal Years
                         -------------------------------------------
                          2006     2005     2004     2003     2002
                         -------  -------  -------  -------  -------
Women's Apparel.........   28.3 %   28.2 %   28.6 %   28.1 %   29.0 %
Cosmetics, Shoes
  & Accessories.........   26.9     25.8     25.3     24.3     23.6
Home....................   17.9     18.7     18.9     20.1     20.4
Men's Apparel...........   12.7     12.8     12.8     13.3     13.0
Junior's and
 Children's Apparel.....   10.8     11.0     10.8     10.6     10.5
Leased Departments......    3.4      3.5      3.6      3.6      3.5
                         -------  -------  -------  -------  -------
  Total Sales...........  100.0 %  100.0 %  100.0 %  100.0 %  100.0 %
                         =======  =======  =======  =======  =======`

Store Locations

The Company's stores are located primarily in diverse, growing, non-major metropolitan or suburban areas in the western United
States where management believes there is strong demand and fewer competitors offering similar better to moderate brand-name merchandise and a
high level of customer service. The Company has historically avoided expansion into the center of major metropolitan areas that are served by the
Company's larger competitors and has instead sought to open new stores in nearby suburban or secondary market areas.

The Company's department stores are generally anchor tenants of regional shopping malls or strategically located strip centers.
Other anchor tenants in the malls or strip centers generally complement the Company's goods with a mixture of competing and non-competing
merchandise and serve to increase customer foot traffic. With new enclosed, regional shopping mall construction on the decline, the Company's strategy
is to open stores in smaller and more diverse locations that may not be served by its larger competitors that adopt a more standardized approach to
expansion and "Lifestyle Centers" that feature a variety of retailers, upscale restaurants and typically a major, multi-screen movie theatre.

The Company opened 1 new store in fiscal 2006.   On August 31, 2006 the Company opened a 120,876 square foot store in
Eugene, Oregon. This represents the fourth store the Company operates in the state of Oregon.  Future new store openings will focus on sites that will
serve to "fill in" geographical areas between existing stores. Management believes this strategy will improve the Company's ability to leverage
advertising, transportation and other operating costs more effectively. In addition to opening individual store locations, the Company may also pursue
additional selective strategic acquisitions as stores may become available as a result of competitor consolidations.

The Company has continued to invest in the renovation and refixturing of its existing store locations in an attempt to maintain and
improve market share in those market areas. Store renovation projects can range from updating décor and improving in-store lighting, fixturing,
wall merchandising and signage, to more extensive remodeling and expansion projects. The Company sometimes receives reimbursement from mall
owners and vendors for certain of its new store construction costs and costs associated with the renovation and refixturing of existing store locations.
Such contributions have enhanced the Company's ability to enter into attractive market areas that are consistent with the Company's long-term expansion
plans.

The Company closed two underperforming stores in the Seattle metro-area in April and September of 2006.  In addition, the
Company closed one store in Danville, California and one store in Moscow, Idaho in August 2006 and January 2007, respectively.  However, the
Company continues to operate stores in these respective market areas.

The following tables present selected data related to the Company's stores for the fiscal years indicated:

`Fiscal Years
                           ---------------------------------------------------
                            2006       2005       2004       2003       2002
                           -------    -------    -------    -------    -------
Stores open at year-end:
--------------------------
Department stores.........     60 (1)     63 (2)     63         63 (3)     69 (3)
Specialty stores (4)......      5          6          6         11         12
                           -------    -------    -------    -------    -------
    Total                      65         69         69         74         81
                           =======    =======    =======    =======    =======

Gross store square
footage(5) (in thousands):
--------------------------
Department stores.........  5,446      5,435      5,406      5,406      5,665
Specialty stores..........     27         30         30         42         54
                           -------    -------    -------    -------    -------
    Total                   5,473      5,465      5,436      5,448      5,719
                           =======    =======    =======    =======    =======`

____________________

(1)  The Company closed 4 stores, 2 of which were underperforming, and opened 1 new store in fiscal 2006.

(2)  The Company closed 3 stores, 2 of which were underperforming, and opened 3 new stores in fiscal 2005.

(3) The Company closed 6 stores in fiscal 2003 and 4 stores in fiscal 2002, all of which were acquired in the Lamonts acquisition
in July 2000.

(4) The Company has continued to close certain free-standing Village East stores as their leases expire and incorporate those
stores as separate departments into nearby Gottschalks department stores.

(5)  Reflects total store square footage, including office space, storage, service and other support space, and selling
space.

Following is a summary of the Company's department store locations by store size:

`# of
                                               stores
                                                open
                                              --------
  Larger than 200,000 gross square feet.....        2
  150,000 - 199,999 gross square feet.......        9
  100,000 - 149,999 gross square feet.......       10
   40,000 -  99,999 gross square feet.......       32
   20,000 -  39,999 gross square feet.......        7
                                              --------
        Total...............................       60
                                              ========`

Marketing Strategy

The Company's marketing strategy is based on a multi-media approach, using newspapers, television, radio, direct mail, internet,
and catalogs to highlight seasonal promotions, selected brand-name merchandise and frequent storewide sales events. Advertising efforts are focused on
communicating the branded merchandise offered by the Company, and the high levels of quality, value and customer service available in the Company's
stores. In its efforts to improve the effectiveness of its advertising expenditures, the Company uses data captured through its private-label credit card to
develop segmented advertising and promotional events targeted at specific customers who have established purchasing patterns for certain brands,
departments or store locations.

The Company's sales promotion strategy also focuses on special events such as fashion shows, bridal shows and wardrobing
seminars in its stores and in the communities in which they are located to convey fashion trends to its customers. The Company receives reimbursement
for certain of its promotional activities from some of its vendors.

The Company offers selected merchandise, a Bridal & Gift Registry service, and other general corporate information on the
World Wide Web at http://www.gottschalks.com, and sells merchandise
through its mail order department. The information on the Company's website is not part of this annual report.

Customer Service

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.

Distribution of Merchandise

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.

Private-Label Credit Card

Sale of Receivables

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.

Credit Card Program

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.

Competition and Seasonality

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".

Employees

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.

ACQUISITIONS

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.

The Harris Acquisition

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 Lamonts Acquisition

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.

Special Strategic Committee

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.

Available Information

Gottschalks' internet address is

Executive Officers of the Registrant

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

FORWARD-LOOKING STATEMENTS

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.

Item 1A.	RISK FACTORS

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 Sources Of Liquidity Are Limited

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.

We are Highly Dependent On Key Relationships With Vendors And Factors

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.

We Face Significant Competition From Other Retailers

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.

Our Business Is Susceptible To Economic Conditions And Other Factors That Affect Our Markets, Some Of Which Are Beyond
Our Control

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.

We May Face Higher Operating Costs



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.

We Depend On Key Personnel

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.

Item 1B. UNRESOLVED STAFF COMMENTS

None

Item 2.	 PROPERTIES

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
                          ========= ===========`

_______________________

(1) Reflects total store square footage, including office space, storage, service and other support space, and selling space.

Item 3. 	LEGAL PROCEEDINGS

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.

Item 4. 	SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

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.

PART II

Item 5. 	MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES

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
                                             ================= =============== =================`

Performance Graph

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.



Item 6.	SELECTED FINANCIAL DATA

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`

__________________________

(1)		Net leased department revenues consist of sales totaling $23.9 million, $24.4 million, $24.3 million, $24.5 million, and
$24.9 million, in fiscal 2006, 2005, 2004, 2003 and 2002, respectively, less cost of sales.

(2)	Depreciation and amortization includes the net amortization (accretion) of leasehold interests totaling $37,200 in each year
presented. Effective the beginning of fiscal 2002, the Company implemented the provisions of SFAS No. 142. As a result, the Company no longer
amortizes goodwill and instead tests it annually for impairment. The Company continues to amortize leasehold interests (see Note 1 to the Financial
Statements).

(3)	Represents the sale of a corporate aircraft for $1,037,000 (net of selling costs) that resulted in a gain of $946,000.

(4)	Represents reserves and increases in the estimated settlement of a class action complaint alleging violation of California
law regarding payment of accrued vacation upon termination of employment.  See Note 14 to the Financial Statements.

(5)	Represents new store pre-opening 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.

(6)	The fiscal 2002 charge consists of non-cash asset impairment charges to write down long-lived assets related to
certain underperforming stores.

(7)	Represents receivable sale transaction costs, net of an interest only strip.  The interest only strip represents the
portion of the initial program fees to be received that is considered a residual interest in the assets sold.  See Note 2 to the Financial Statements

(8)	Represents securitization program prepayment penalties and the write-off of unamortized loan fees.

(9)	The fiscal 2006 amount includes $0.1 million related to a gain on the sale of a building related to a store closure, $0.1
million loss on disposal of assets related to another store closure, and $0.1 million related to both closures consisting of severance and other incremental
costs. The fiscal 2005 amount consists of costs associated with the closure of 3 stores of $0.1 million net of $0.3 million income received from a kick-out
clause executed by the landlord triggering one of the store closures. The fiscal 2004 amount consists of incremental costs associated with the closure of
one store at January 31, 2004. The fiscal 2003 amount represents costs related to the closure of seven stores primarily consisting of lease termination
costs, severance, and other incremental costs associated with the store closings.  The fiscal 2002 amount represents costs associated with the closure of
four stores in fiscal 2002 including lease termination costs, severance, and other incremental costs associated with the store closings, asset impairment
charges related to stores closed in fiscal 2003 and fiscal 2002, and a gain on sale of two store leases and certain fixtures in fiscal 2002.

(10)	The increase in inventory from 2005 to 2006 is primarily related to one additional week's receipts owing to the
53rd week ending February 3, 2007. The increase in inventory from fiscal 2004 to 2005 is related to new store openings net of store
closures and the timing on certain spring receipt flows. The decrease in inventory from fiscal 2003 to 2004 is primarily due to the reduction of inventory
levels to more closely reflect selling trends, and to store closures. The decrease in inventory from fiscal 2002 to 2003 is primarily due to store
closures.

(11)	Total store sales include sales from stores reported in discontinued operations.

(12)	Comparable stores are defined as stores which have been open for at least 12 full months and which remain open as of
the applicable reporting date. However, reflecting the effects of the opening of the River Park store on other Fresno area stores, such stores are excluded
from the comparable store base.

(13)	For comparative purposes, sales growth percentages exclude the effect of 53rd week sales in fiscal
2006.

(14) 	Includes leased department sales in order to facilitate an understanding of the Company's sales relative to its selling
square footage.

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

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.

Overview

The Company is a regional department and specialty store chain completing its 102nd   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
53rd 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.

Critical Accounting Policies

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.

Revenue Recognition Policy

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.

Inventory Valuation

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.

Impairment of Long-Lived Assets

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.

Income Taxes

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.

Results of Operations

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 %
                                     =========  =========  =========`

Fiscal 2006 Compared to Fiscal 2005

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.

Net Credit Revenues

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 Leased Department Revenues

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

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

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

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.

Gain on Sale of Aircraft

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.

VEBA Litigation

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

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

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

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.

Income Taxes

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.

Income From Continuing Operations

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.

Discontinued Operations

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.

Net Income

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.

Fiscal 2005 Compared to Fiscal 2004

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.

Net Credit Revenues

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 Leased Department Revenues

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

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

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

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.

VEBA Litigation

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

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

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

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.

Income Taxes

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.

Income From Continuing Operations

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.

Discontinued Operations

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.

Net Income

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.

Liquidity and Capital Resources

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

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.

Sources of Liquidity

Senior Secured Credit Facility

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.

Transactions With Affiliate

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.

Trade Credit

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.

Other Financings

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.

Uses of Liquidity

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.

Contractual Obligations

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  $          $          $
                                       =========  =========  ==========  =========  =========  =========`

(1)    See Notes 5, 7 and 8 to the accompanying financial statements.

(2)	Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that
specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate
timing of the transaction.  Agreements that are cancelable without penalty have been excluded.  Purchase obligations relate primarily to service and
maintenance agreements and information technology contracts.

(3)	Interest payments in future periods have been reflected based on debt levels  and fixed interest rates as of fiscal year
ended February 3, 2007.  The rate on variable interest debt is reflected at the effective interest rate as of March 3, 2007.

(4)	Represents outstanding borrowings under the Company's senior revolving credit facility as of February 3, 2007.   The table
presents that amount as due at February 2, 2009, the end of the commitment period for the facility.

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.

New Accounting Pronouncements

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.

Inflation

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.

Seasonality

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`

Item 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 					MARKET RISK

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.)

Item 8.  	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

None.

Item 9A.	CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

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.

(b) Management's Report on Internal Control Over Financial Reporting

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 Frameworkissued 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).

(c) Changes in Internal Control Over Financial Reporting

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.

Item 9B.	OTHER INFORMATION

None.

PART III

Item 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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:

|Name               | Age | Position                                                        
|------------------ | --- | ----------------------------------------------------------------
|James R. Famalette | 54  | President and Chief Executive Officer                           
|J. Gregory Ambro   | 54  | Senior Vice President/Chief Administrative and Financial Officer
|Michael J. Schmidt | 65  | Senior Vice President/Director of Stores                        
|Scott G. Manson    | 53  | Senior Vice President/General Merchandise Manager               
|Robert C. Wiser    | 61  | Senior Vice President/General Merchandise Manager               

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

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

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

Scott G. Manson became Senior Vice President, General Merchandise Manager in 2004.  He started with the Company in May
1999 as Vice President, Divisional Merchandise Manager of Ladies Sportswear and Dresses.  Prior to joining the Company, he was Vice President
Divisional Merchandise Manager for Dillard's Department stores from October 1998 to March 1999.  From 1976 to 1998, Scott served in various senior
level management positions for Mercantile Stores, including Vice President, General Merchandise Manager for the Joslins Department store in Denver
and Vice President, General Merchandise Manager for the Jones Store in Kansas City.

Robert C. Wiser became Senior Vice President, General Merchandise Manager in 2006.  From March 2002 to June 2006, he was
Vice President, General Merchandise Manager.  He joined the Company as a Divisional Merchandise Manager in 1988 and held this position until
February 2002.  Prior to joining Gottschalks, he held management positions with Estee Lauder, Liberty House, Federated Department Stores, City Store
and McCurdy and Co.

_______________________

(1)  References to the Company prior to 1986 are more specifically to the Company's predecessor and former subsidiary, E.
Gottschalk and Co., Inc.

Item 11.	EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference from those portions of the Company's 2007 Proxy under the
headings "Executive Compensation" and "Director Compensation for Fiscal Year 2006."

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

The information required by this item is incorporated by reference from the portion of the Company's 2007 Proxy under the
heading "Security Ownership of Certain Beneficial Owners and Management" and Item 5.  Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities in this report on Form 10-K.

Item 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference from the portion of the Company's 2007 Proxy under the
heading "Certain Relationships and Related Transactions."

Item 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this item is incorporated by reference from the portion of the Company's 2007 Proxy under the
heading "Information on Independent Public Accountants".

PART IV

Item 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1)	The following financial statements of Gottschalks Inc. as required by Item 8 are included in this
Part IV, Item 15:

Reports of Independent Registered Public Accounting Firm

Balance Sheets - As of February 3, 2007 and January 28, 2006Statements of Operations - Fiscal years ended February 3, 2007,
January 28, 2006 and January 29, 2005

Statements of Stockholders' Equity - Fiscal years ended February 3, 2007, January 28, 2006 and January 29, 2005

Statements of Cash Flows - Fiscal years ended February 3, 2007, January 28,
2006 and January 29, 2005

Notes to Financial Statements
(a)(2) The following financial statement schedule of Gottschalks Inc. is included in Item 15(d):

Schedule II - Valuation and Qualifying
AccountsAll other schedules for which provision is made in the applicable accounting regulations of the Securities and
Exchange Commission are included in the Financial Statements, are not required under the related instructions or are inapplicable, and therefore have
been omitted.(a)(3) and (b) The following exhibits are required by Item 601 of Regulation S-K and Item 15(c):

---



EXHIBIT INDEX

|ExhibitNumber | Description                                                                                                                                                                                                                                                                                               | Incorporated by Reference From the Following Document                               
|------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------
|3.1           | Certificate of Incorporation of the Registrant                                                                                                                                                                                                                                                            | Registration Statement on Form S-1 (File No. 33-3949)                               
|3.2           | By-Laws of the Registrant                                                                                                                                                                                                                                                                                 | Annual Report on Form 10-K for the year ended February 3, 2001 (File No. 1-09100)   
|10.1          | Gottschalks Inc. Retirement Savings Plan(*)                                                                                                                                                                                                                                                               | Registration Statement on Form S-1 (File No. 33-3949)                               
|10.2          | Participation Agreement dated as of December 1, 1988 among Gottschalks Inc., General Foods Credit Investors No. 2 Corporation
and Manufacturers Hanover Trust Company of California relating to the sale-leaseback of the Stockton and Bakersfield department stores and the
Madera distribution facility | Annual Report on Form 10-K for the year ended January 29, 1994 (File No. 1-09100)   
|10.3          | Lease Agreement dated December 1, 1988 by and between Manufacturers Hanover Trust Company of California and Gottschalks
Inc. relating to the sale-leaseback of department stores in Stockton and Bakersfield, California and the Madera distribution facility                                             | Annual Report on Form 10-K for the year ended January 29, 1994 (File No. 1-09100)   
|10.4          | Ground Lease dated December 1, 1988 by and between Gottschalks Inc. and Manufacturers Hanover Trust Company of California
relating to the sale-leaseback of the Bakersfield department store                                                                                                              | Annual Report on Form 10-K for the year ended January 29, 1994 (File No. 1-09100)   
|10.5          | Memorandum of Lease and Lease Supplement dated July 1, 1989 by and between Manufacturers Hanover Trust Company of
California and Gottschalks Inc. relating to the sale-leaseback of the Stockton department store                                                                                         | Annual Report on Form 10-K for the year ended January 29, 1994 (File No. 1-09100)   
|10.6          | Tax Indemnification Agreement dated as of August 1, 1989 by and between Gottschalks Inc. and General Foods Credit Investors
No. 2 Corporation relating to the sale-leaseback of the Stockton and Bakersfield department stores and the Madera distribution facility                                       | Annual Report on Form 10-K for the year ended January 29, 1994 (File No. 1-09100)   
|10.7          | Ground Lease dated August 17, 1989 by and between Gottschalks Inc. and Manufacturers Hanover Trust Company of California
relating to the sale-leaseback of the Madera distribution facility                                                                                                               | Annual Report on Form 10-K for the year ended January 29, 1994 (File No. 1-09100)   
|10.8          | Lease Supplement dated as of August 17, 1989 by and between Manufacturers Hanover Trust Company of California and
Gottschalks Inc. relating to the sale-leaseback of the Madera distribution facility                                                                                                     | Annual Report on Form 10-K for the year ended January 29, 1994 (File No. 1-09100)   
|10.9          | Agreement of Limited Partnership dated March 16, 1990, by and between River Park Properties I and Gottschalks Inc. relating to the
Company's corporate headquarters                                                                                                                                       | Annual Report on Form 10-K for the year ended February 2, 1991 (File No. 1-09100)   
|10.10         | Lease Agreement dated as of March 16, 1990 by and between Gottschalks Inc. and River Park Properties I relating to the
Company's corporate headquarters                                                                                                                                                   | Annual Report on Form 10-K for the year ended January 29, 1994 (File No. 1-09100)   
|10.11         | Form of Severance Agreement dated March 31, 1995 by and between Gottschalks Inc. and the following senior executives of the
Company: Joseph W. Levy and Michael J. Schmidt (*)                                                                                                                            | Annual Report on Form 10-K for the year ended January 28, 1995 (File No. 1-09100)   
|10.14         | Agreement of Sale dated June 27, 1995, by and between Gottschalks Inc. and Jack Baskin relating to the sale and leaseback of the
Capitola, California property                                                                                                                                            | Quarterly Report on Form 10-Q for the quarter ended July 29, 1995 (File No. 1-09100)
|10.15         | Lease and Agreement dated June 27, 1995, by and between Jack Baskin and Gottschalks Inc. relating to the sale and leaseback of
the Capitola, California property                                                                                                                                          | Quarterly Report on Form 10-Q for the quarter ended July 29, 1995 (File No. 1-09100)
|10.18         | Gottschalks Inc. 1998 Stock Option Plan(*)                                                                                                                                                                                                                                                                | Registration Statement on Form S-8 (File #33-61471)                                 
|10.19         | Gottschalks Inc. 1998 Employee Stock Purchase Plan(*)                                                                                                                                                                                                                                                     | Registration Statement on Form S-8 (File #33-61473)                                 
|10.20         | Asset Purchase Agreement dated as of July 21, 1998 among Gottschalks Inc., The Harris Company and El Corte Ingles, S. A.
together with all Exhibits thereto                                                                                                                                               | Current Report on Form 8-K dated July 21, 1998 (File No. 1-09100)                   
|10.22         | Registration Rights Agreement between The Harris Company and Gottschalks Inc. dated August 20, 1998                                                                                                                                                                                                       | Current Report on Form 8-K dated August 20, 1998 (File No. 1-09100)                 
|10.23         | Tradename License Agreement between The Harris Company and Gottschalks Inc. dated August 20, 1998                                                                                                                                                                                                         | Current Report on Form 8-K dated August 20, 1998 (File No. 1-09100)                 
|10.24         | Stockholders' Agreement among El Corte Ingles, S. A., Gottschalks Inc., Joseph Levy and Bret Levy dated August 20, 1998                                                                                                                                                                                   | Current Report on Form 8-K dated August 20, 1998 (File No. 1-09100)                 
|10.26         | Store Lease Agreement between El Corte Ingles, S. A., and Gottschalks Inc. dated August 20, 1998 re: East Hills Mall, Bakersfield,
California                                                                                                                                                             | Current Report on Form 8-K dated August 20, 1998 (File No. 1-09100)                 
|10.27         | Store Lease Agreement between El Corte Ingles, S. A., and Gottschalks Inc. dated August 20, 1998 re: Moreno Valley Mall at
Towngate, Moreno Valley, California                                                                                                                                            | Current Report on Form 8-K dated August 20, 1998 (File No. 1-09100)                 
|10.28         | Store Lease Agreement between El Corte Ingles, S. A., and Gottschalks Inc. dated August 20, 1998 re: Antelope Valley Mall at
Palmdale, California                                                                                                                                                         | Current Report on Form 8-K dated August 20, 1998 (File No. 1-09100)                 
|10.33         | Employment Agreement dated June 25, 1999 by and between Gottschalks Inc. and James R. Famalette(*).                                                                                                                                                                                                       | Quarterly Report on Form 10-Q for the quarter ended July 31, 1999 (File No. 1-09100)
|10.42         | Amendment to Employment Agreement dated December 3, 2001 by and between Gottschalks Inc. and James R. Famalette (*)                                                                                                                                                                                       | Annual Report on Form 10-K for the year ended February 2, 2002 (File No. 1-09100)   
|10.52         | Purchase and Sale Agreement dated January 30, 2003 by and among Gottschalks Credit Receivables Corporation, Gottschalks Inc.
and Household Bank (SB), N.A.                                                                                                                                                | Current Report on Form 8-K dated January 31, 2003                                   
|10.53         | Interim Servicing Agreement dated January 30, 2003 by and between Gottschalks Inc. and Household Bank (SB),
N.A.                                                                                                                                                                                          | Current Report on Form 8-K dated January 31, 2003                                   
|10.54         | Credit Card Program Agreement dated January 30, 2003 by and between Gottschalks Inc. and Household Bank (SB),
N.A.                                                                                                                                                                                        | Current Report on Form 8-K dated January 31, 2003                                   
|10.55         | Amendment to Amended and Restated Receivables Purchase Agreement dated January 31, 2003 by and between Gottschalks Inc.
and Gottschalks Credit Receivables Corporation                                                                                                                                    | Current Report on Form 8-K dated January 31, 2003                                   
|10.56         | Amended and Restated Credit Agreement dated March 1, 2004, by and among Gottschalks Inc., General Electric Capital
Corporation and CIT Group Business Credit Inc.                                                                                                                                         | Current Report on Form 8-K dated March 1, 2004                                      
|10.57         | Amendment Numbers 1 through 5 of the Credit Agreement by and among Gottschalks Inc., General Electric Capital Corporation
and CIT Group Business Credit Inc.                                                                                                                                              | Annual Report on Form 10-K for the year ended January 28, 2006                      
|10.58         | Form of Severance Agreement dated March 12, 2007 by and between Gottschalks Inc. and the following senior executives of the
Company:  J. Gregory Ambro and Michael J. Schmidt. (*)                                                                                                                        | Annual Report on Form 10-K for the year ended January 28, 2006                      
|10.59         | Amendment to Employment Agreement dated March 12, 2007 by and between Gottschalks Inc. and James R. Famalette. (*)                                                                                                                                                                                        | Current Report on Form 8-K dated March 19, 2007                                     
|23            | Consent of Independent Registered Public Accounting Firm
     PDF furnished as a courtesy                                                                                                                                                                                                                 | Filed electronically herewith                                                       
|31.1          | Rule 13a - 14(a) Certification of Chief Executive Officer
     PDF furnished as a courtesy                                                                                                                                                                                                                | Furnished concurrently herewith                                                     
|31.2          | Rule 13a - 14(a) Certification of Chief Financial Officer
     PDF furnished as a courtesy                                                                                                                                                                                                                | Furnished concurrently herewith                                                     
|32.1          | Certification of President and Chief Executive Officer Pursuant to 18 U.S.C. § 1350, As Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002.
     PDF furnished as a courtesy                                                                                                                     | Furnished concurrently herewith                                                     
|32.2          | Certification of Chief Administrative and Financial Officer Pursuant to 18 U.S.C. § 1350, As Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002.
     PDF furnished as a courtesy                                                                                                                | Furnished concurrently herewith                                                     

(*)	Management contract, compensatory plan or arrangement.

(**)	These loans were retired with proceeds from a mortgage loan completed on March 22, 2002 (See Exhibit
10.46)

---



ANNUAL REPORT ON FORM 10-K



ITEM 8, 15(a)(1) and (2), (c) and (d)



FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



CERTAIN EXHIBITS



FINANCIAL STATEMENT SCHEDULE



YEAR ENDED FEBRUARY 3, 2007



GOTTSCHALKS INC.



FRESNO, CALIFORNIA

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying balance sheets of Gottschalks Inc. (the "Company") as of February 3, 2007 and
January 28, 2006, and the related statements of income, stockholders' equity and cash flows for each of the three fiscal years in the period ended
February 3, 2007. Our audits also included the financial statement schedule listed in the Index at Item 15 (a) (2).  We also have audited management's
assessment, included in the accompanying "Management's Report on Internal Control over Financial Reporting," that the Company
maintained effective internal control over financial reporting as of February 3, 2007, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  The Company's management is responsible for
these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting.  Our responsibility is to express an opinion on these financial statements and financial
statement schedule, an opinion on management's assessment, and an opinion on the effectiveness of the Company's internal control over financial
reporting based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United
States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control
over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and
evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's
principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles.  A company's internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) 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 (3) 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.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.  Also, projections of
any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of
Gottschalks Inc. at February 3, 2007 and January 28, 2006, and the results of its operations and its cash flows for each of the three fiscal years in the
period ended February 3, 2007 in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, such
financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the
information set forth therein. Also, in our opinion, management's assessment that the Company maintained effective internal control over financial
reporting as of February 3, 2007, is fairly stated, in all material respects, based on the criteria established in Internal Control-Integrated Frameworkissued by the Committee of Sponsoring

Organizations of the Treadway Commission.  Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of February 3, 2007, based on the criteria established in Internal Control - Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

As discussed in Note 1 to the financial statements, on January 29, 2006, the Company changed its method of accounting for
share based payment arrangements to conform to Statement of Financial Accounting Standards Board Statement No. 123(R) , Share-Based
Payment.

/s/ Deloitte & Touche LLP

April 12, 2007
   San Francisco, California

---



GOTTSCHALKS INC. 
           BALANCE SHEETS
(In thousands, except share data)

---

`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
                                                        ===========  ===========`

See notes to financial statements.

---



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

---

`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`

See notes to financial statements.

---



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

---

`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
                                   ===========  ======  ==========  =========   =========`

See notes to financial statements.

---



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

---

`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
                                                                        ============  ============  ============`

See notes to financial statements.

---



GOTTSCHALKS INC.
NOTES TO FINANCIAL STATEMENTS

---

1.	NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Gottschalks Inc. (the "Company") is a regional department and specialty store chain based in Fresno, California. As of
February 3, 2007, the Company operated 60 full-line department stores located in six Western states, with 38 stores located in California, 8 in
Washington, 6 in Alaska, 4 in Oregon, 2 in Nevada and 2 in Idaho. The Company also operated 5 specialty stores which carry a limited selection of
merchandise. The Company's department stores typically offer a wide range of better to moderate brand-name and private-label merchandise, including
men's, women's, junior's and children's apparel, cosmetics, shoes and accessories, and also a wide array of home furnishings, including domestics,
china, housewares, small electrics and, in certain locations, furniture and mattresses.

Use of Estimates - The preparation of the financial statements in conformity with accounting principles generally accepted in
the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates and assumptions are subject to
inherent uncertainties which may cause actual results to differ from reported amounts.

Fiscal Year - The Company's fiscal year ends on the Saturday nearest January 31.  Fiscal years 2006, 2005 and 2004 ended
on February 3, 2007, January 28, 2006 and January 29, 2005, respectively. Fiscal 2006 included 53 weeks, and 2005 and 2004 each included 52 weeks.

Revenue Recognition - Net retail sales are recorded at the point-of-sale and include sales of merchandise, net of estimated
returns and exclusive of sales tax. Net retail sales also include all amounts billed to customers for shipping and handling, including customer delivery
charges. Revenues on special order sales are recognized when the merchandise is delivered to the customer and has been paid for in its entirety. The
Company does not sell merchandise on layaway. The Company's policy with respect to gift cards is to record revenue as the gift cards are redeemed for
merchandise.  Prior to their redemption, the gift cards are recorded as a liability.  The Company records an allowance for estimated sales returns in the
period in which the related sale occurs.  These estimates are based primarily on historical sales returns.  If the historical data used to calculate these
estimates does not properly reflect future returns, adjustments to the allowance for estimated sales returns may be necessary.

The Company offers its private label credit card customers a points based rewards program.  The program 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.  As points are earned throughout the year the
Company accrues for the estimated costs of goods to be sold via redemption of the merchandise certificates based on historical redemption rates.

Net leased department revenues consist of rental income from lessees and sub-lessees and are based on a percentage of total
sales generated in such leased departments during respective fiscal periods. Sales generated in such leased departments totaled $23,923,000,
$24,406,000 and $24,295,000 in 2006, 2005 and 2004, respectively.

Net credit revenues consist primarily of a percentage of collected finance charges and late fees billed to cardholders by
Household Bank (SB), N.A. (now "HSBC") during the period and the amortization of the pre-paid program fee. (Note 2)

Receivables -	As of February 3, 2007 and January 28, 2006, receivables consist of vendor claims of $8,278,377, less
allowances of $80,000, and vendor claims of $7,374,000, less allowances of $90,000, respectively.

Merchandise Inventories - Inventories, which consist of merchandise held for resale, are valued by the retail inventory
method and are stated at last-in, first-out (LIFO) cost, which is not in excess of market. Current cost, which approximates replacement cost, under the
first-in, first-out (FIFO) method is equal to the LIFO value of inventories at February 3, 2007 and January 28, 2006. The Company includes in inventory
the capitalization of certain indirect buying, handling and distribution costs to better match these costs with the related sales.

Under the retail inventory method, inventory is segregated into departments of merchandise having similar characteristics, and is
stated at its current retail selling value. Inventory retail values are converted to a cost basis by applying specific average cost factors for each
merchandise department. Cost factors represent the average cost-to-retail ratio for each merchandise department based on beginning inventory and the
fiscal year purchase activity. The retail inventory method inherently requires management judgments and estimates, such as the amount and timing of
permanent markdowns to clear unproductive or slow-moving inventory, which may impact the ending inventory valuation as well as gross margins.

Permanent markdowns designated for clearance activity are recorded when the utility of the inventory has diminished. Factors
considered in the determination of permanent markdowns include current and anticipated demand, customer preferences, age of the merchandise and
fashion trends. When a decision is made to permanently mark down merchandise, the resulting gross margin reduction is recognized in the period the
markdown is recorded.

Shrinkage is estimated as a percentage of sales for the period from the last inventory date to the end of the fiscal period. Such
estimates are based on experience and the most recent physical inventory results. Physical inventories are taken within each merchandise department
annually and inventory records are adjusted accordingly.

The Company receives cash or allowances from merchandise vendors as purchase price adjustments and in connection with
cooperative advertising programs. Purchase price adjustments are credited to cost of sales and cooperative advertising allowances are credited against
advertising expense in accordance with Emerging Issues Task Force ("EITF") Issue No. 02-16, "Accounting by a Customer (Including a
Reseller) for Certain Consideration Received from a Vendor."

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

New Store Opening Costs - New store opening costs are expensed as incurred and may vary significantly from year to year
depending on the number of new stores opened.

Property and Equipment - Depreciation of owned properties is provided primarily on a straight-line basis over the estimated
asset lives, which range from 15 to 40 years for buildings and leasehold improvements and 3 to 15 years for furniture, fixtures and equipment. Buildings
on leased land and leasehold improvements are amortized over the shorter of their economic lives or the lease term, beginning on the date the asset is
put into use.  The lease term, which includes all renewal periods that are considered to be reasonably assured, begins on the date the Company has
access to the leased property. The amortization of buildings and equipment under capital leases is computed by the straight-line method over the term of
the lease or the estimated economic life of the asset, depending on the criteria used to classify the lease, and such amortization is combined with
depreciation in the accompanying statements of income.

Leases - The Company recognizes operating lease minimum rentals on a straight-line basis over the lease term. The
Company receives contributions from landlords to fund buildings and leasehold improvements. Such contributions are primarily recorded as deferred rent
and amortized as reductions to lease expense over the lease term.  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. Executory costs such as real estate taxes and
maintenance, and contingent rentals such as those based on a percentage of sales are recognized as incurred. The lease term, which includes all
renewal periods that are considered to be reasonably assured, begins on the date the Company has access to the leased property.   The excess in rent
expense over actual cash paid is recorded as deferred rent.

Software Development Costs - Costs associated with the acquisition or development of software for internal use that meet
the criteria of AICPA Statement of Position No. 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use" are
capitalized and amortized over the expected useful life of the software, which generally ranges from 3 to 10 years. Software development costs
capitalized under SOP No. 98-1 in fiscal 2006, 2005 and 2004 totaled $191,000, $177,000 and $74,000 respectively.  Amortization of such costs totaled
$425,000, $420,000 and $428,000 in fiscal 2006, 2005 and 2004 respectively.

Goodwill - 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. The Company has performed the required annual impairment review of goodwill for each of the fiscal
years reported and concluded that there was no indication of impairment as of the respective measurement dates.

Investment in Partnership - The Company has a 36% interest in a partnership which is accounted for using the equity
method because the Company has the ability to exercise significant influence over the investee's operating and financial policies.  The partnership owns
the office building in which the Company's headquarters are located.

Leasehold Interests - Leasehold interests associated with acquired leases are amortized on a straight-line basis over the
respective lease terms, including option renewal periods if renewal of the lease is probable, which range from 1 to 20 years.

Cash Management Liability - Under the Company's cash management program, checks issued by the Company and not yet
presented for payment frequently result in overdraft balances for accounting purposes. Such amounts represent interest-free, short-term borrowings by
the Company.

Miscellaneous Income - Miscellaneous income consists of amortization of long-term deferred credits recorded upon receipt of
donated land, income from the Company's investment in a partnership, and miscellaneous non-operating income and expense.  Miscellaneous income
does not include any material offsetting expense items.

Advertising Costs - Advertising costs, net of cooperative advertising allowances, totaling $29,695,000, $28,946,000 and
$29,964,000 in 2006, 2005 and 2004, respectively, are included in selling, general and administrative expenses for financial reporting purposes and are
expensed when the related advertisement first takes place. Cooperative advertising allowances were $12,965,000, $12,097,000 and $11,250,000 in
2006, 2005 and 2004 respectively.

Income Taxes - Deferred tax assets and liabilities are generally recognized for the expected future tax consequences of
events that have been included in the financial statements or tax returns, determined based on the differences between the financial statement and tax
basis of assets and liabilities and net operating loss and tax credit carryforwards, and by using enacted tax rates in effect when the differences are
expected to reverse. A valuation allowance is recorded when it is more likely than not that the carrying amounts of deferred tax assets will not be fully
realized.

Stock-Based Compensation -  At February 3, 2007, the Company has two stock-based employee compensation plans, which
are more fully described in Note 12.  The Company accounts for these plans under SFAS No. 123 (revised 2004), "Share-Based Payment"
("SFAS No. 123R").  The Company adopted SFAS No. 123R in the first quarter of 2006 using the modified prospective approach.  Under the
modified prospective method, compensation expense is recorded for the unvested portion of previously issued awards that remain outstanding at January
29, 2006 using the same estimate of the grant date fair value and the same attribution method used to determine the pro forma disclosure under SFAS
No. 123.  SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options after January 26, 2006, be
recognized in the financial statements as compensation cost based on the fair value on the date of grant.

Prior to the adoption of SFAS No. 123R, the Company accounted for its plans under the recognition and measurement principles
of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
No stock-based employee compensation cost is reflected in net income during 2005 and 2004, as all options granted under those plans had an exercise
price equal to the market value of the underlying common stock on the date of the grant.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS 123R in fiscal 2005 and 2004.   The Company's calculations were made using the Black-Scholes option pricing model,
which is more fully described in Note 12.

`(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`

Long-Lived Assets - The Company periodically evaluates the carrying value of long-lived assets to be held and used,
including intangible assets other than goodwill, when events and circumstances warrant such a review. When the anticipated undiscounted cash flow from
a long-lived asset is less than its carrying value, a loss is recognized based on the amount by which its carrying value exceeds its fair market value. Fair
market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risks involved, and in some cases, the
expected proceeds from the sale or sublease of a particular asset, or independent appraisals. There were no asset impairment charges from continuing
operations recognized in fiscal 2006, 2005 or 2004.

Discontinued Operations - The Company has determined that due to the regional concentration of certain of the stores
closed, and certain other factors, substantially all of the operations and cash flows of certain closed stores have been eliminated from the ongoing
operations of the Company.  Accordingly, as prescribed by SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," results of
operations of these closed stores are excluded from continuing operations and reported separately in discontinued operations for all periods
presented.

Fair Value of Financial Instruments - The carrying value of the Company's cash and cash management liability,
receivables, trade payables and other accrued expenses, and the revolving line of credit  approximate their estimated fair values because of the short
maturities or variable interest rates underlying those instruments. The carrying value of the Subordinated Note approximates its estimated fair value.

The fair values of the Company's mortgage loans and notes payable are estimated using discounted cash flow analysis,
based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Borrowings with aggregate carrying values of
$6,624,000 and $21,748,000 at February 3, 2007 and January 28, 2006, had estimated fair values of $6,596,000 and $24,028,000 at February 3, 2007
and January 28, 2006, respectively.  The estimated fair value of the Company's derivative financial instrument is disclosed in Note 6.

Segment Reporting - The Company operates in one reportable segment.

Comprehensive Income - There were no items of other comprehensive income in 2006, 2005 or 2004, and therefore net
income is equal to comprehensive income for each of those years.

New Accounting Pronouncements - 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 Gottschalks Inc. 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.

Reclassifications - Prepaid property taxes of $180,000 have been reclassified to other current assets and were
previously reported as an offset to property tax liabilities within trade accounts payable and accrued expenses as of January 28, 2006 to conform with
February 3, 2007 presentation.

2.	NET CREDIT REVENUES

In January 2003, the Company entered into a Credit Card Program Agreement (the "CCA") with HSBC.

The CCA sets forth the terms and conditions under which HSBC will issue credit cards to the Company's customers and pay the
Company for sales made on the cards.  Under the terms of the CCA, the Company is required to perform certain duties, including the duties to receive in-
store customer payments on behalf of HSBC and remit such payments to HSBC.  The CCA had an initial term of five (5) years expiring January 31, 2008
and was cancelable earlier by either party under certain circumstances.  The CCA further provides the Company will be paid a percentage of Net
Cardholder Charges and a percentage of Other Revenue (each as defined in the CCA). 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. This amended
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 associated with the Company's private label credit card program currently consists primarily of a percentage
of collected finance charges and late fees billed to cardholders by HSBC during the period and the amortization of the pre-paid program fee ("service
charge revenues") as follows:

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

3. 	PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

`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
                                              ==========  ==========`

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 leasehold improvements under capital leases and $6.0 million in
capital lease obligations associated with landlord reimbursements received.

4.	TRADE ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Trade accounts payable and accrued expenses consist of the following:

`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
                                              ==========  ==========`

5.	DEBT

Senior Revolving Credit Facility

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 in the first quarter of 2006.  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,
currently 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 are 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 restrictive financial covenants applicable to the credit facility.

Long-Term Obligations

Long-term obligations consist of the following:

`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
                                              ==========  ==========`

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 $16.6 million outstanding balance of the 9.39% mortgage loans was paid off in fiscal 2006 on February 1, 2006 utilizing funds
available through the Company's revolving credit facility. The scheduled annual principal maturities of the Company's notes payable excluding such
mortgage loans, but including a new 6.64% $3.0 million note related to a corporate aircraft, are $1,243,000, $1,279,000, $1,315,000, $573,000 and
$537,000 for 2007 through 2011, with $1,677,000 payable thereafter.

Deferred debt issuance costs related to the Company's various financing arrangements are included in other current and long-
term assets and are charged to income as additional interest expense over the life of the related indebtedness. Such costs, net of accumulated
amortization, totaled $1,181,000 at February 3, 2007 and $1,929,000 at January 28, 2006.

Interest paid, net of amounts capitalized, was $9,842,000 in 2006, $8,466,000 in 2005 and $8,075,000 in 2004. The Company
capitalized no interest in 2006 in connection with new store construction as Eugene was an existing structure. In 2005, $114,000 interest was capitalized
and in 2004 no interest was capitalized.  The weighted-average interest rate charged on the Company's revolving line of credit was 7.10% in 2006, 5.98%
in 2005 and 4.56% in 2004.

Substantially all of the Company's assets, including its merchandise inventories, are pledged as collateral under the Company's
various debt agreements. Certain of the Company's long-term debt agreements contain financial and other restrictive covenants, as well as cross default
provisions. Accordingly, the failure to comply with these restrictions and covenants, if not waived, would cause a cross-default under the majority of all of
the Company's debt agreements, including the credit facility. The Company was in compliance with all applicable financial covenants as of February 3,
2007.

6.	INTEREST RATE DERIVATIVE

On December 9, 2005 the Company entered into an interest rate swap agreement, effective December 14, 2005, to change the
fixed/variable interest rate mix of the debt portfolio in order to maintain the percentage of fixed-rate and variable-rate debt within parameters set by
management. The Company currently has an interest rate swap contract outstanding to effectively convert a portion of its variable-rate debt to fixed-rate
debt. This contract entails the exchange of fixed-rate and floating-rate interest payments periodically over the agreement life. The following table indicates
the notional amount as of February 3, 2007 and the range of interest rates paid and received by the Company during the fiscal year then ended:



|Fixed swap (notional amount) | $25,000,000  
|---------------------------- | -------------
|Range of receive rate        | 4.49% - 5.39%
|Pay rate                     | 4.99%        

In accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"), and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," the Company recognizes all derivatives on the balance sheet at fair value. 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.

The $25 million interest rate swap held at February 3,2007 will expire February 2, 2009. The net income or expense from
the exchange of interest rate payments is included in interest expense. The estimated fair value of the interest rate swap agreement, based on dealer
quotes, at February 3, 2007 was a gain of $98,306 and represents the amount the Company would receive if the agreement was terminated as of that
date.  Changes in the fair value of derivatives not designated as qualifying cash flow hedges are reported in interest expense. Accordingly, interest
expense for fiscal 2006 includes gains related to the interest rate swap of $242,115, and as of February 3, 2007 the Company reflected a derivative asset
in other assets of $98,306 to recognize the fair value of the interest rate swap. All credits recorded pursuant to SFAS No. 133 are considered
non-cash items in the statements of cash flows.

7.	SUBORDINATED NOTE PAYABLE TO AFFILIATE

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, 2006, and subsequent to fiscal year end on February 20, 2007 as scheduled.  Additional
principal payments of $2.0 million are scheduled for February 2008 and February 2009, with the balance due at maturity subject to the payment in full of
the revolving credit facility. The Subordinated Note is unsecured, contains no restrictive financial covenants and is subordinate to the payment of all debt,
including trade credit, of the Company.  Interest paid to Harris totaled $1,574,400 in 2006, $1,679,500 in 2005 and $1,774,400 in 2004.

8.	LEASES

The Company leases certain retail department stores, specialty stores, land, furniture and fixtures and equipment under capital
and noncancellable operating leases that expire in various years through 2025. Certain of the 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 have renewal options for one or
more periods ranging from five to twenty years. The Company leases three of its department stores from ECI, an affiliate of the Company. See Note 7.
Rent paid or accrued to ECI totaled $888,000 in 2006, $874,000 in 2005 and $856,000 in 2004.

Future minimum lease payments as of February 3, 2007, by year and in the aggregate, under capital leases and noncancellable
operating leases with initial or remaining terms in excess of one year are as follows:

`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
                                              ==========`

Rental expense associated with operating leases consists of the following:

`(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
                                              ==========  ==========  ==========`

One of the Company's lease agreements contains a restrictive financial covenant pertaining to the debt to tangible net worth ratio
that management believes the Company was in compliance with at February 3, 2007.

9.	DISCONTINUED OPERATIONS

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.  The Company did not close any stores in fiscal 2004.   These stores were determined to be either underperforming
or inconsistent with the Company's long-term operating strategy and due to the Company's exit from the respective market areas are considered
discontinued operations.    The loss from operations of discontinued stores includes only revenues generated from, and expenses directly associated
with, the operation of such stores and consists of the following:

`(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)
                                                          ==========  ==========  ============`

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.

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 from an early termination fee received when the landlord
exercised its right to terminate the lease.  Net costs associated with the closure of stores were minor in fiscal 2004, primarily consisting of incremental
costs associated with the closure of one store at January 31, 2004.

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.

10.	INCOME TAXES

The components of income tax expense from continuing operations are as follows:

`(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
                                              ==========  ==========  ==========`

The principal components of deferred tax assets and liabilities are as follows (in thousands):

`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)
                                =========  ===========  =========  ===========`

Income tax expense varies from the amount computed by applying the statutory federal income tax rate to income from continuing
operations before income taxes.  The reasons for this difference are as follows:

`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 %
                                                  ========   ========   ========`

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 realizability 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.

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. Certain prior valuation allowances were
released in the current year when the related deferred tax asset related to certain capital losses was reduced.

The Company operates in numerous taxing jurisdictions and is, therefore, subject to a variety of income and related taxes.  The
Company has provided for potential tax liabilities due in various jurisdictions which it judges to be probable and reasonably estimable in accordance with
Statement of Financial Accounting Standards No. 5,  "Accounting for Contingencies" and has accrued approximately $606,000 at February 3,
2007 and $360,000 at January 28, 2006, which is included in trade accounts payable and accrued expenses.  Judgment is required in determining the
income tax expense and related tax liabilities.  In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome
is uncertain.  The Company believes it has reasonably estimated its accrued taxes for all jurisdictions for all open tax periods.  The Company periodically
assesses the adequacy of its tax and related accruals on a quarterly basis and adjusts appropriately as events warrant and open tax periods close.  It is
possible that the final tax outcome of these matters will be different from management's estimate reflected in the income tax provisions and accrued
taxes.  Such differences could have a material impact on the Company's income tax provision and operating results in the period in which such
determination is made.

The Company's fiscal 2003 and 2004 U.S. income tax returns are under examination as of February 3, 2007.  Management
cannot yet estimate the impact of any adjustments that might result from this examination, if any, on its financial position, results of operations and cash
flows.  Management believes that adequate provisions have been made for income taxes at February 3, 2007.

At February 3, 2007, the Company has, for federal tax purposes, general business credits of $1,065,000 that expire in the year
2025, and alternative minimum tax credits of $412,000 which may be used for an indefinite period. At February 3, 2007, the Company also has, for state
tax purposes, $2,848,000 of state tax credits which may be used for an indefinite period. These carryforwards are available to offset future taxable
income.

The Company paid income taxes, net of refunds, of $1,830,000 in fiscal 2006 and $12,000 in fiscal 2005 and received income tax
refunds, net of payments, of $44,000 in fiscal 2004.

11.	EARNINGS PER SHARE

Net earnings per common share is computed by dividing net income by the weighted-average number of common shares
outstanding during the year. Stock options represent potential common shares and are included in computing diluted earnings per share when the effect
is dilutive. A reconciliation of the weighted-average shares used in the basic and diluted earnings per share calculation is as follows:

`(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
                                                  ========   ========   ========`

Options with an exercise price greater than the average market price of the Company's common stock during the period are
excluded from the computation of the weighted-average number of shares on a diluted basis as such options are anti-dilutive. Anti-dilutive options
excluded from the calculation were 310,318, 183,463 and 496,775 shares for 2006, 2005 and 2004, respectively.

12. 	STOCK OPTION AND STOCK PURCHASE PLANS

The Company has certain stock option plans and an Employee Stock Purchase Plan, as described below.  All of these plans
have been approved by the Company's stockholders.

Stock Option Plans

The Company has stock option plans for directors, officers and key employees which provide for the grant of non-qualified and
incentive stock options. Under the plans, the option exercise price may not be lower than 100% of the fair market value of such shares at the date of the
grant. Options granted generally vest on a ratable basis over four years and expire ten years from the date of the grant. At February 3, 2007, options for
1,437,500 shares were available for future grants under the plans.

Option activity under the plans is as follows:

`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
                     ==========  ======== ==========  ======== ==========  ========`

The intrinsic value of options exercised during fiscal 2006, 2005 and 2004 was $898,138, $1,558,672, and $490,648,
respectively.

A summary of the status of nonvested shares under the plans as of February 3, 2007, and changes during the year then ended, is
presented below:

`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
                                     ================`

Additional information regarding options outstanding as of February 3, 2007 is as follows:

`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
================= ============ ===========  =========`

Employee Stock Purchase Plan

The Company also has a statutory Employee Stock Purchase Plan, which allows its employees to purchase Company
common stock at a 15% discount. Employees can purchase stock under the Plan through payroll deductions ranging from 1% to 10% of their annual
compensation, up to a maximum of $21,250 per employee per year. A total of 500,000 shares were originally registered under the Plan, with 335,184
shares issued through February 3, 2007.

The 15% discount of the stock price makes the Plan compensatory.  As such, the fair value of the discount, as determined under
the Black-Scholes model, is expensed as compensation under the provisions of SFAS 123R.  Compensation expense related to shares purchased under
the Employee Stock Purchase Plan was $19,000 in fiscal 2006.

Accounting for Stock Based Compensation

As discussed previously, the Company adopted SFAS 123R in the first quarter of 2006.  SFAS 123R requires all share-based
payments to employees, including grants of employee stock options after January 28, 2006, be recognized in the financial statements as compensation
expense based on the fair value on the date of grant.

The Company determines fair value of such awards using the Black-Scholes option-pricing model.  The Company uses historical
data to estimate expected term of the awards and forfeiture rates, stratified into separate groups based on similar exercise and termination patterns.
Expected stock volatility is based upon historical volatility of the Company's stock and other factors.  The risk-free interest rate is based on the yield curve
in effect at the time the options are granted, using U.S. constant maturities over the expected life of the option.  The Company has historically not paid
dividends and does not anticipate paying dividends during the expected term.  Accordingly, the expected dividend yield is zero.  Options to purchase
2,500, 310,000, and 261,500 shares were granted during fiscal years 2006, 2005 and 2004, respectively.  The estimated fair value of these option awards
was calculated using the following weighted average assumptions:

`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`

The weighted average fair values of options on their grant date during fiscal 2006, 2005 and 2004, where the exercise price
equaled the market price on the date of grant, were $3.54, $6.39, and $3.41, respectively.

The Company recognized share-based compensation of approximately $791,000 ($0.03 per diluted share, after related tax
benefit of $312,000) in fiscal 2006 as a component of selling, general, and administrative expense.  As of February 3, 2007, there was $596,000 of
unrecognized compensation cost related to non-vested awards granted under the plans.  That cost is expected to be recognized over a remaining term of
up to 4 years.  The total fair value of shares vested during the years ended February 3, 2007, January 28, 2006, and January 29, 2005, was $693,000,
$344,000, and $411,000, respectively.

13.	RETIREMENT SAVINGS PLAN

The Company has a Retirement Savings Plan ("Plan") which qualifies as an employee retirement plan under Section
401(k) of the Internal Revenue Code. Full-time employees meeting certain requirements are eligible to participate in the Plan and may elect to have up to
20% of their annual eligible compensation, subject to statutory limitations, deferred and deposited with a qualified trustee. Participants in the Plan may
receive an employer matching contribution of up to 4% of the participants' eligible compensation, depending on the Company's quarterly and annual
financial performance. Beginning 2001, the Company amended the Plan to provide for a guaranteed annual match of 3%, including the ability for
participants to earn an additional 1% depending on the Company's annual financial performance. The Company recognized $1,201,000, $1,139,000 and
$1,166,000 in expense related to the Plan in fiscal 2006, 2005 and 2004, respectively.

14.	COMMITMENTS AND CONTINGENCIES

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 seeks 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 interest 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 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.

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.

As of February 3, 2007, the Company had outstanding a total of $1.5 million of standby letters of credit and documentary letters of
credit totaling $0.7 million. As of January 28, 2006, the Company had issued a total of $2.1 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 the likelihood of any draws under the workers' compensation standby letters of credit are 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.

---



SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
GOTTSCHALKS INC.

`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`

(1)	Represents amounts paid in connection with store closures and continuing lease payments related to one store closed in
2001.

(2)	Represents increases to the deferred tax asset valuation allowance.

(3)	Represents changes in estimate for the allowance for vendor claims receivable.

(4)	Represents decreases to the deferred tax asset valuation allowance as a result of a partial release of allowances related to
certain of the Company's state tax credit carry forwards, partially offset by the addition of allowances related to the Company's capital loss carry
forwards.

(5)	Represents changes in estimate for reserve of sales returns.

---



SIGNATURES

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

Dated: April 16, 2007

|                                                                                                                                                                                           | GOTTSCHALKS, Inc.                                                                      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------
|                                                                                                                                                                                           | By: /s/ James R. Famalette                                                             
|                                                                                                                                                                                           | James R. Famalette President and Chief Executive Officer                               
|Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
|Signature                                                                                                                                                                                  | Title                                                                                  
|/s/ Joseph W. Levy
Joseph W. Levy                                                                                                                                                          | Chairman                                                                               
|/s/ James R. Famalette
James R. Famalette                                                                                                                                                  | President, Chief Executive Officer and Director (principal executive officer)          
|/s/ J. Gregory Ambro
J. Gregory Ambro                                                                                                                                                      | Chief Administrative and Financial Officer (principal financial and accounting officer)
|/s/ Joseph J. Penbera
Joseph J. Penbera                                                                                                                                                    | Lead Director                                                                          
|/s/ Sharon Levy
Sharon Levy                                                                                                                                                                | Director                                                                               
|/s/ James L. Czech
James L. Czech                                                                                                                                                          | Director                                                                               
|/s/ O. James Woodward III
O. James Woodward III                                                                                                                                            | Director                                                                               
|/s/ Frederick R. Ruiz
Frederick R. Ruiz                                                                                                                                                    | Director                                                                               
|/s/ Philip S. Schlein
Philip S. Schlein                                                                                                                                                    | Director                                                                               
|/s/ Thomas H. McPeters
Thomas H. McPeters                                                                                                                                                  | Director                                                                               
|/s/ Dale D. Achabal
Dale D. Achabal                                                                                                                                                        | Director                                                                               
|/s/ Jorge Pont Sanchez
Jorge Pont Sanchez                                                                                                                                                  | Director                                                                               

---