<PAGE>   1
                                                                     EXHIBIT 13



                                    GADZOOKS


                                  ANNUAL REPORT



                                   [PICTURE]





                                     98

<PAGE>   2



CHANGES IN BOARD OF DIRECTORS

Alan W. Crites, a member of the Company's Board of Directors since 1992, retired
in November 1998. We want to thank him for his many contributions to the
Company's growth during that time. In seeking Alan's replacement, we were
fortunate that Ron G. Stegall, a career retailer, agreed to serve as a Director.
Ron is Chairman of the Board of electronics retailer InterTAN, Inc., and serves
on the Board of superstore retailer Hastings Entertainment, Inc. He also founded
and served as Chairman and Chief Executive Officer of BizMart, Inc., an office
products superstore chain, and was a retail executive with Tandy Corporation for
many years.




FINANCIAL & OPERATING HIGHLIGHTS

<TABLE>
<CAPTION>
                                                                             Fiscal Year Ended
                                              JANUARY 30,      January 31,        Percent
                                                 1999             1998             Change
                                              -----------      -----------   -----------------
<S>                                            <C>             <C>           <C>
Net sales (in thousands)                       $ 208,203       $ 171,639             21%
Net income (in thousands)                      $     387       $   8,288            (95)%
Net income per share
 Basic                                         $    0.04       $    0.95            (96)%
 Diluted                                       $    0.04       $    0.91            (96)%
Average shares outstanding (in thousands)
 Basic                                             8,852           8,683              2%
 Diluted                                           9,036           9,100             (1)%
Comparable store sales increase (decrease)          (5.6)%           1.8%            --
Average net sales per store                    $ 717,976       $ 794,437            (10)%
Average net sales per square foot              $     306       $     341            (10)%
Capital expenditures (in thousands)            $   9,947       $  12,624            (21)%
Number of stores at year end                         312             250             25%
</TABLE>

*  See Financial Information section for further discussion and analysis.


                                GADZOOKS OFFERS
                             A VARIETY OF PRODUCTS
                                FROM RECOGNIZED
                             TEEN FASHION LEADERS.


<PAGE>   3
GADZOOKS IS COOL A HIGH-ENERGY SPECIALTY RETAILER CATERING TO YOUNG MEN AND
WOMEN PRINCIPALLY BETWEEN 13 AND 19 YEARS OF AGE. ESTABLISHED IN 1983,
DALLAS-BASED GADZOOKS CURRENTLY OPERATES 317 MALL-BASED STORES IN METROPOLITAN
AND MIDDLE MARKETS IN 32 STATES EAST OF THE ROCKY MOUNTAINS.

                             LETTER TO SHAREHOLDERS


                                                                  [PICTURE]
                                                               Jerry Szczepanski
                                                               Chairman and CEO


     GADZOOKS ended fiscal 1997 on a very positive note, so we entered 1998 full
of optimism that the Company would turn in another strong performance for the
year. Unfortunately, that would not be the case. The truism in retailing has
always been that location is everything. But in teen retailing, merchandise
selection and timing have proven to be just as important. There is no better
example of that than Gadzooks' performance in fiscal 1998. We simply were not on
the same merchandise page with our teen customers, so we struggled with
merchandising issues all year. Our sales and profits for fiscal 1998 reflected
that effort.

     For the 12 months of fiscal 1998 ended January 30, 1999, net sales were
$208,203,000, up 21.3 percent from $171,639,000 for fiscal 1997. Net income was
$387,000 or $0.04 per diluted share, compared with $8,288,000 or $0.91 per
diluted share for fiscal 1997. Comparable-store sales, a key measure in
retailing, declined 5.6 percent in fiscal 1998, versus a modest 1.8 percent gain
in fiscal 1997. It was the first year in the Company's history that we did not
record positive comp-store sales gains.


                                                                               1
<PAGE>   4

Working through such a challenging year has provided Gadzooks' management and
employees with a different perspective that should prove quite valuable to the
Company's future success. During this past year, we analyzed virtually every
aspect of our business from as many angles as possible, and reached a number of
significant conclusions.

FIRST, TEENAGERS ARE STILL GREAT CUSTOMERS The teenage market in the United
States is stronger than ever, with over 25 million teens today and growing
rapidly. They have a lot of money to spend, and don't hesitate to do so.
Industry sources estimate that teen expenditures in 1998 totaled approximately
$141 billion, up about 16 percent from the prior year. This type of spending
makes teens a very dynamic market.

WE HAVE AN OUTSTANDING GROUP OF STORES, AND CONTINUE TO DO A GOOD JOB OF OPENING
NEW ONES We have expanded our store base about tenfold during the 1990s, with
very few closings along the way. During 1998, we opened 63 new stores and closed
one, ending the year with 312 mall-based stores in 32 states east of the Rocky
Mountains. We'll be slowing store growth in fiscal 1999 because of our increased
emphasis on merchandising and better utilization of the existing assets in our
current store base.

OUR DISTRIBUTION CENTER HAS SIGNIFICANTLY ENHANCED GADZOOKS' EFFICIENCY We have
been able to achieve significant labor efficiencies in our merchandise
distribution activities since the facility opened in May 1997. With 110,000
square feet of capacity, our distribution center has the capability to
effectively support the merchandising needs of up to 500 stores. That additional
capacity will provide Gadzooks with several years of future growth before the
center will have to be expanded.


                                   [PICTURE]

                         GADZOOKS' ASSOCIATES KNOW WHAT
                             OUR CUSTOMERS WANT...
                        BECAUSE THEY ARE OUR CUSTOMERS.


2


<PAGE>   5

                                    [PICTURE]

         THE TEENAGE MARKET IN THE UNITED STATES IS STRONGER THAN EVER,
          AND GROWING RAPIDLY. GADZOOKS HAS OVER THREE-HUNDRED STORES
                 PROVIDING THE PRODUCTS AND SERVICE THEY WANT.


                     317 STORES IN 32 STATES...AND GROWING

                                                                               3
<PAGE>   6

OUR MERCHANDISE SELECTION LACKED THE NAME-BRAND FOCUS OF PREVIOUS YEARS And our
product assortment lacked cohesiveness. We simply tried to appeal to too many
segments of the teen population. Now we're reemphasizing our core name-brand
strategy to emulate the lifestyle of our target mainstream teen customers. We
are utilizing market research to understand our customers better -- to
continually refine our merchandise to fit our customers' wants and needs. We're
buying in greater depth from a narrower assortment of merchandise to increase
in-stock positions of higher-demand products. We also concluded that our
inventory planning process didn't allow for proper "bottoms-up" assortment plans
at the stores. For 1999, we've instituted a new "average store" planning process
to provide a better balance between the young men's and junior categories, which
should enable us to improve sales and inventory turns.

WE HAVE STRENGTHENED OUR MERCHANDISING MANAGEMENT TEAM We reviewed every aspect
of the Company's merchandising activities in 1998 and took a number of steps to
substantially strengthen our inventory planning and merchandise management
capabilities. In January 1999, we hired Paula Masters, a 14-year veteran of
junior retail merchandising, as Vice President and General Merchandise Manager.
She is responsible for all buying functions and other merchandise management
aspects of our business. At the same time, Jeffrey Krainess was named Vice
President for Planning and Allocation, with responsibility for enhancing our
capabilities to support higher future sales from our fast-growing store base.

GADZOOKS IS STRONG FINANCIALLY, WITH NO BANK DEBT AND SIGNIFICANT CASH AVAILABLE
FOR FUNDING CONTINUED STORE EXPANSION The Company has traditionally satisfied
its cash requirements for store expansion and purchasing inventories mainly from
cash flow from operations. At the



                                   [PICTURE]

                        UPDATED STORE INTERIORS KEEP OUR
                            CUSTOMERS INTERESTED AND
                        ENTERTAINED, ENCOURAGING SALES.

4
<PAGE>   7
                                                          


end of fiscal 1998, we had $16.4 million in cash on the balance sheet, and a
bank credit facility which provides the Company with sufficient liquidity to
achieve its growth objectives.

WE LEARNED SOME IMPORTANT LESSONS IN 1998 THAT ARE REFLECTED IN OUR 1999
DIRECTION 
Going forward, we want to achieve several key objectives:

O    RE-ESTABLISH GADZOOKS' "COOL" IMAGE WITH OUR TEEN CUSTOMERS THROUGH A MORE
     FOCUSED NAME-BRAND STRATEGY;

O    ENSURE THAT OUR EXISTING STORES ARE PERFORMING AT THE TOP OF THEIR
     POTENTIAL;

O    UPGRADE OUR MERCHANDISE PLANNING AND ALLOCATION SYSTEMS;

O    INSTITUTE A TIGHTER STORE-LEVEL MERCHANDISE CONTROL SYSTEM;

O    FURTHER STRENGTHEN OUR COMPANY BY DEVELOPING EXISTING TALENT WHILE
     CONTINUING TO ATTRACT TOP-PERFORMING INDIVIDUALS.


We failed this past year. It was not for lack of effort. In fact, the irony is
that you seem to work harder when things are not clicking. For their hard work
and competitiveness, our employees are to be commended. However, the point is
that we failed, and that is not acceptable. We have made the changes we feel are
necessary to assure that 1998 does not repeat itself. We want to thank our
shareholders for their support, and we will guarantee that every effort will be
made to make 1999 the success it should be. 

Sincerely,

/s/ JERRY SZCZEPANSKI

Jerry Szczepanski,
Chairman of the Board and Chief Executive Officer                 April 27, 1999


                                   [PICTURE]

                     BRAND-NAME MERCHANDISE INCLUDES A RANGE
                      OF CLOTHING, SHOES AND ACCESSORIES.

                                                                               5
<PAGE>   8


                                   FINANCIAL

                                  INFORMATION



                                   [PICTURE]




                                 NASDAQ SYMBOL

                                      GADZ


6
<PAGE>   9

                                                                      GADZOOKS
                                                                      INC.     7
--------------------------------------------------------------------------------
SELECTED FINANCIAL DATA

($ in thousands, except operating data and per share amounts)

<TABLE>
<CAPTION>
                                                                                                             Fiscal Year Ended
                                                  ----------------------------------------------------------------------------
                                                  JANUARY 30,     January 31,    February 1,    January 27,     January 28,
                                                      1999           1998           1997            1996            1995
                                                  -----------     -----------    -----------    -----------     -----------
<S>                                                <C>             <C>            <C>            <C>             <C>      
INCOME STATEMENT DATA:
 Net sales                                         $ 208,203       $ 171,639      $ 128,388      $  84,602       $  56,463
 Cost of goods sold                                  157,729         120,309         87,418         58,015          38,379
                                                   ---------       ---------      ---------      ---------       ---------
 Gross profit                                         50,474          51,330         40,970         26,587          18,084
 Selling, general and administrative
   expenses(1)                                        50,526          38,773         29,212         19,794          14,702
                                                   ---------       ---------      ---------      ---------       ---------
 Operating income (loss)                                 (52)         12,557         11,758          6,793           3,382
 Interest income (expense), net                          536             706            945           (179)           (240)
                                                   ---------       ---------      ---------      ---------       ---------
 Income before income taxes                              484          13,263         12,703          6,614           3,142
 Provision for income taxes                               97           4,975          4,712          2,538           1,201
                                                   ---------       ---------      ---------      ---------       ---------
 Net income                                        $     387       $   8,288      $   7,991      $   4,076       $   1,941
                                                   =========       =========      =========      =========       =========

 Net income per share
   Basic                                           $    0.04       $    0.95      $    0.94      $    0.67       $    0.34
   Diluted                                         $    0.04       $    0.91      $    0.87      $    0.60       $    0.32

 Average shares outstanding
   Basic                                               8,852           8,683          8,525          6,095           5,671
   Diluted                                             9,036           9,100          9,143          6,742           5,976

SELECTED OPERATING DATA:
 Comparable store sales increase (decrease)(2)          (5.6)%           1.8%           6.1%          14.7%            8.4%
 Number of stores at year end                            312             250            183            126              90
 Average net sales per store                       $ 717,976       $ 794,437      $ 814,838      $ 776,807       $ 698,108
 Average net sales per square foot                 $     306       $     341      $     356      $     343       $     306
 Total square footage at end of period               736,214         585,092        421,572        284,953         204,711
 Operating income percentage                            --               7.3%           9.2%           8.0%            6.0%
 Capital expenditures (in 000s)                    $   9,947       $  12,624      $   6,864      $   5,959       $   3,445

BALANCE SHEET DATA:
 Working capital                                   $  31,629       $  34,878      $  34,333      $  20,368       $   4,262
 Total assets                                         86,442          84,321         64,747         45,611          19,836
 Total debt                                             --              --             --              178           3,026
 Redeemable preferred stock and
   cumulative dividends                                 --              --             --             --            10,631
 Shareholders' equity (deficit)                       60,031          58,480         49,063         30,765          (2,204)
                                                   =========       =========      =========      =========       =========
</TABLE>

(1)  A provision for closing outlet stores was combined with January 28, 1995
     selling, general and administrative expenses.
(2)  A store becomes comparable after it has been open for 14 full fiscal
     months.


<PAGE>   10
    GADZOOKS
8       INC.
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations

GENERAL

     Gadzooks is a mall-based specialty retailer of casual apparel and related
accessories for young men and women, principally between the ages of 13 and 19.
The Company opened its first store in 1983, and at fiscal year-end 1998,
operated 312 stores in 32 states east of the Rocky Mountains. The Company has
been on a rapid expansion program, opening 57 new stores in fiscal 1996, 67 new
stores in fiscal 1997, and 63 new stores in fiscal 1998. One store was closed
during fiscal 1998.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                           Fiscal Year
                                                         1998       1997       1996
                                                         ----       ----       ----
<S>                                                      <C>        <C>        <C>   
Net sales                                                100.0%     100.0%     100.0%
Cost of goods sold, including buying, distribution
    and occupancy costs                                   75.8       70.1       68.1
                                                         -----      -----      ----- 
Gross profit                                              24.2       29.9       31.9
Selling, general and administrative expenses              24.2       22.6       22.7
                                                         -----      -----      ----- 
Operating income                                          --          7.3        9.2
Interest income, net                                       0.3        0.4        0.7
                                                         -----      -----      ----- 
Income before income taxes                                 0.3        7.7        9.9
Provision for income taxes                                 0.1        2.9        3.7
                                                         -----      -----      ----- 
Net income                                                 0.2%       4.8%       6.2%
                                                         =====      =====      ===== 
Number of stores open at end of period                     312        250        183
</TABLE>

FISCAL 1998 COMPARED TO FISCAL 1997

   Net sales increased approximately $36.6 million, or 21.3%, to $208.2 million
during fiscal 1998 from $171.6 million in fiscal 1997. Net sales of the 63 new
stores opened during fiscal 1998 and for those stores not yet qualifying as
comparable stores contributed $45.4 million of the increase in sales. Comparable
store sales decreased by $8.8 million, or 5.6%, in fiscal 1998. The decrease in
comparable sales was primarily due a decline in the unisex T-shirt category, and
to a lesser extent declines in the footwear and accessory categories. A store
becomes comparable after it has been open for 14 full fiscal months.

     Gross profit decreased approximately $0.8 million to $50.5 million in
fiscal 1998 from $51.3 million in fiscal 1997. As a percentage of sales, gross
profit decreased to 24.2% in fiscal 1998 from 29.9% in fiscal 1997. The decrease
in gross profit resulted primarily from increased markdowns and promotional
activities to clear out slow-moving inventory during the third and fourth
quarters of fiscal 1998. Gross profit for the fourth quarter of fiscal 1998 was
negatively impacted by a charge of approximately $0.6 million to reduce the cost
of slow-moving inventory down to fair value. Store occupancy costs increased as
a percentage of sales primarily due to the lower average sales per store in
1998.

     Selling, general and administrative expenses increased approximately $11.8
million to $50.5 million during fiscal 1998 from $38.8 million in fiscal 1997
and increased as a percentage of sales to 24.2% in fiscal 1998 from 22.6% in
fiscal 1997. The increase as a percentage of sales was due to the inability to
leverage corporate overhead costs and store payroll costs over lower than
expected sales as well as the addition of several new executives and managers.

     Operating income decreased approximately $12.6 million to about breakeven
during fiscal 1998 from $12.6 million in fiscal 1997. As a percentage of sales,
operating income decreased to about zero percent in fiscal 1998 from 7.3% in
fiscal 1997.

     Net interest income decreased approximately $0.2 million to $0.5 million
during fiscal 1998 from $0.7 million net interest income in fiscal 1997. The
Company's interest income decreased due to the use of a portion of its
short-term cash investments in connection with the Company's fiscal 1998 store
expansion program.

     Income tax expense was $97,188 for fiscal 1998, compared to $5.0 million in
fiscal 1997. The decrease in the Company's effective income tax rate was
primarily attributable to tax-free interest income which accounted for a
significantly larger portion of income before income taxes in fiscal 1998.
<PAGE>   11
                                                                      GADZOOKS
                                                                      INC.     9
--------------------------------------------------------------------------------


FISCAL 1997 COMPARED TO FISCAL 1996

     Net sales increased approximately $43.2 million, or 33.6%, to $171.6
million during fiscal 1997 from $128.4 million in fiscal 1996. Net sales of the
67 new stores opened during fiscal 1997 and for those stores not yet qualifying
as comparable stores contributed $41.1 million of the increase in sales.
Comparable store sales increased 1.8% in fiscal 1997 and contributed $2.1
million to the increase in sales. The increase in comparable sales was primarily
due to strong sales in the young men's category. Fiscal 1996 was a 53 week
period. The fifty-third week contributed $1.9 million to net sales in fiscal
1996.

     Gross profit increased approximately $10.3 million to $51.3 million in
fiscal 1997 from $41.0 million in fiscal 1996. As a percentage of sales, gross
profit decreased to 29.9% in fiscal 1997 from 31.9% in fiscal 1996. The decrease
in gross profit resulted primarily from substantial markdowns taken during the
second quarter of fiscal 1997 in the junior apparel and accessories categories.
Store occupancy costs increased by approximately one half of one percent
primarily as a result of lower sales in the second quarter.

     Selling, general and administrative expenses increased approximately $9.6
million to $38.8 million during fiscal 1997 from $29.2 million in fiscal 1996,
but decreased as a percentage of sales to 22.6% in fiscal 1997 from 22.7% in
fiscal 1996. The slight decrease as a percentage of sales was primarily due to
the leveraging of corporate overhead expenses and lower management bonuses.

     Operating income increased approximately $0.8 million to $12.6 million
during fiscal 1997 from $11.8 million in fiscal 1996. As a percentage of sales,
operating income decreased to 7.3% in fiscal 1997 from 9.2% in fiscal 1996.

     Net interest income decreased approximately $0.2 million to $0.7 million
during fiscal 1997 from $0.9 million in fiscal 1996. The Company's interest
income decreased due to the use of short-term cash investments to fund the
Company's continuing store expansion program.

     Income tax expense was $5.0 million for fiscal 1997, compared to $4.7
million in fiscal 1996. The effective income tax rate in fiscal 1997 was 37.5%,
compared to 37.1% in fiscal 1996. The increase in the Company's effective income
tax rate was primarily attributable to the Company's expansion into states with
higher state income tax rates.


QUARTERLY RESULTS AND SEASONALITY

     The Company's quarterly results of operations may fluctuate materially
depending on, among other things, the timing of new store openings, net sales
contributed by new stores, increases or decreases in comparable store sales and
changes in the Company's merchandise mix.

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

     The following table sets forth certain statement of operations and
operating data for each of the Company's last eight fiscal quarters. The
quarterly data set forth below were derived from unaudited financial statements
of the Company, which in the opinion of management of the Company, contain all
adjustments (consisting only of normal recurring adjustments) necessary for fair
presentation thereof. Results for any quarter are not necessarily indicative of
results that may be achieved for a full fiscal year.


<TABLE>
<CAPTION>

(In thousands, except operating and per share data)                Fiscal 1998                                 Fiscal 1997
                                    --------------------------------------------------------------------------------------
                                     FIRST    SECOND       THIRD       FOURTH      FIRST     SECOND      THIRD      FOURTH
                                    QUARTER   QUARTER     QUARTER     QUARTER     QUARTER    QUARTER    QUARTER    QUARTER
                                    -------   -------     -------     -------     -------    -------    -------    -------
<S>                                <C>        <C>        <C>         <C>         <C>        <C>        <C>        <C>     
Statement of income data:
  Net sales                        $ 45,026   $ 48,202   $ 50,697    $ 64,278    $ 34,070   $ 36,780   $ 41,268   $ 59,521
  Gross profit                       12,702     12,286     11,535      13,951      10,127      9,022     12,639     19,542
  Operating income (loss)             2,082        857     (1,293)     (1,698)      1,893        141      2,869      7,654
  Net income (loss)                   1,417        606       (738)       (898)      1,324        171      1,920      4,873
  Net income (loss) per share
     Basic                         $   0.16   $   0.07   $  (0.08)   $  (0.10)   $   0.15   $   0.02   $   0.22   $   0.56
     Diluted                       $   0.16   $   0.07   $  (0.08)   $  (0.10)   $   0.15   $   0.02   $   0.21   $   0.54
  Average shares outstanding
     Basic                            8,795      8,836      8,886       8,890       8,592      8,669      8,730      8,739
     Diluted                          9,095      9,071      8,886       8,890       9,124      9,110      9,064      9,102
Selected operating data:
  Stores open at end of period          275        304        311         312         197        221        232        250
                                   ========   ========   ========    ========    ========   ========   ========   ========

</TABLE>



<PAGE>   12

    GADZOOKS
10      INC.
--------------------------------------------------------------------------------


Management's Discussion and Analysis, continued



LIQUIDITY AND CAPITAL RESOURCES

GENERAL. During the last three fiscal years, the Company's primary uses of cash
have been to finance new store openings and purchase merchandise inventories.
In fiscal 1997, $3.1 million was spent on a new distribution center and
corporate headquarters for the Company. The Company has satisfied its cash
requirements principally from cash flow from operations and proceeds from the
sale of equity securities.

CASH FLOWS. During fiscal 1998, 1997 and 1996, cash flows from operating
activities were $6.2 million, $7.6 million, and $5.6 million, respectively.
Cash flow from operations before working capital changes decreased to $4.6
million in fiscal 1998 from $11.7 million in the prior year. The decrease was
due primarily to the reduction in net income. The increase in cash flow from
operations before working capital changes from $9.9 million in fiscal 1996 to
$11.7 million in fiscal 1997 was primarily caused by increases in net income
and depreciation expense of $0.3 million and $1.1 million, respectively.

     Working capital components generated $1.6 million of cash flow in fiscal
1998. Cash was generated by a reduction in inventory of $1.4 million and
increases in accounts payable and other liabilities of $1.4 million and $1.3
million, respectively. Offsetting those increases in cash was a decrease in
income taxes payable of $2.5 million. In fiscal 1997, working capital used $4.1
million of cash flow. An inventory increase of $12.6 million offset by an
increase in accounts payable of $9.1 million primarily caused the net use of
working capital. Working capital used $4.2 million of cash flow in fiscal 1996,
primarily the result of a $4.5 million increase in inventory.

     Cash used in investing activities approximated $0.8 million, $9.4 million
and $19.3 million for fiscal 1998, 1997 and 1996, respectively. The Company
spent $9.9 million on capital expenditures during fiscal 1998, of which $8.9
million was used to open new or remodel and refurbish existing stores and $1.0
million was used to upgrade information systems. The Company spent $12.6 million
on capital expenditures during fiscal 1997, of which $8.5 million was used to
open new or remodel existing stores, and $4.1 million was used to build-out and
furnish the new corporate headquarters and distribution center as well as to
upgrade information systems. The Company opened 63, 67, and 57 new stores in
fiscal 1998, 1997 and 1996, respectively.

     Net cash flow provided by financing activities totaled $1.2 million, $1.1
million and $10.3 million for fiscal 1998, 1997 and 1996, respectively. During
fiscal 1998, the Company received $0.6 million from the exercise of employee
stock options as well as $0.7 million of related tax benefit. The Company used
$0.2 million for net purchases of treasury stock. During fiscal 1997, the
Company received $0.4 million from the exercise of employee stock options as
well as $0.7 million of related tax benefit. During fiscal 1996, the Company
received $9.1 million from a public equity offering and $1.2 million as a tax
benefit from the exercise of employee stock options.

CREDIT FACILITY. The Company intends to renew and revise its existing credit
facility with Wells Fargo Bank and has received a commitment letter from the
bank dated April 6, 1999. The revised facility would provide an unsecured
revolving line of credit totaling $10 million. The facility would permit the
Company to borrow the lesser of 150% of trailing twelve-month cash flow (as
defined in the credit agreement) or $10 million. Assuming that the revised
credit facility had been executed prior to year-end, the amount available to
borrow (prior to reduction for outstanding letters of credit) at January 31,
1999 would have been $7.6 million. Amounts borrowed under the revolving line
will continue to bear interest at the lessor of either Prime Rate or 195 basis
points above LIBOR. The renewed revolving line would continue to provide for the
issuance of letters of credit that are generally used in connection with
international merchandise purchases. Outstanding letters of credit issued by the
bank reduce amounts otherwise available for borrowing under the line of credit.
The renewed credit agreement would continue to subject the Company to various
restrictions on the incurrence of additional indebtedness, acquisitions, loans
to officers, and stock repurchases. The revised covenants will continue to
require the Company to maintain a certain minimum tangible net worth, minimum
working capital and other financial covenants. In addition the Company will be
required to pay a commitment fee of 0.50% on the unused portion of the revolving
line. Any amount borrowed under the new revolving line of credit will become
due on June 1, 2000, the date the renewed credit agreement will mature. No
assurance can be given that negotiations will be successfully completed with the
bank regarding the revised facility.

     As of January 30, 1999 the Company was in technical default of the net
income requirement and fixed coverage charge ratio covenants of its current
credit agreement dated June 11, 1998. Wells Fargo has issued waivers on both
covenants through April 30, 1999, by which time the Company expects to have the
new loan agreement in place with revised covenants. As of January 30, 1999, no
borrowings were outstanding under the revolving line, and $0.3 million in
letters of credit were outstanding. As of April 2, 1999, no letters of credit or
borrowings were outstanding under the current revolving line.

CAPITAL EXPENDITURES. The Company anticipates that it will spend approximately
$8.0 million on capital expenditures in fiscal 1999 to open 30 new stores,
remodel eight existing stores and refurbish 50-55 existing stores. During fiscal
1998, the Company had capital expenditures of $9.9 million, of which $8.9
million was used to open 63 new stores, remodel five existing stores and
refurbish approximately 50 stores. The Company's average capital expenditures to
construct a new store during fiscal 1998, including leasehold improvements and
furniture and fixtures, averaged approximately $180,000 (approximately $105,000
net of landlord construction allowances).

     The Company anticipates that its cash requirements for initial inventories
in stores expected to open in fiscal 1999 will be approximately $2.0 million.
The cost of initial inventory for a new store is approximately $100,000;
however, the immediate cash requirement for inventory is partially financed
through the Company's payable terms with its vendors.



<PAGE>   13

                                                                      GADZOOKS
                                                                      INC.    11
--------------------------------------------------------------------------------

     Pre-opening costs range from $9,000 to $13,000 for travel, hiring, training
and other miscellaneous costs associated with the setup of a new store prior to
its opening for business. Pre-opening costs are expensed as incurred. The actual
costs that the Company will incur in opening new stores cannot be predicted with
precision because such costs will vary based upon, among other things,
geographic location, the size of the store, and the extent of the build-out
required at the selected site.

     The Company believes that its existing cash balances, cash generated from
operations, and funds available under its credit facility will be sufficient to
satisfy its cash requirements through fiscal 1999.


IMPACT OF THE YEAR 2000 ISSUE

     The Year 2000 issue is the result of some computer programs having been
written using two digits rather than four to define the applicable year. Any
computer programs that have date sensitive software and use the two digit method
of determining time periods may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions.

     The Company has received formal communications from the third-party
suppliers of its merchandising, financial and store point-of-sale operating
systems which confirm that these core systems are Year 2000 compliant.

     The Company has assessed and compiled a project list of certain software
developed by the Company which require modification or replacement in order to
become Year 2000 compliant. Management presently believes that such
modifications or replacements will be both tested and completed no later than
September 1999. However, if such modifications or replacements are not made, or
are not completed timely, the Year 2000 issue could have an immaterial impact on
the operations of the Company.

     In addition, the Company is initiating formal communications with its
shipping companies and formulating a contingency plan to ensure that the
delivery of merchandise to its distribution center and stores will not be
affected by the Year 2000 issue. No vendor represents more than 10% of the
Company's sales; however the Company will be contacting key vendors prior to the
holiday season for clarification on their Year 2000 plans in order to ensure
merchandise receipts will not be disrupted. There can be no guarantee that the
systems of other companies on which the Company's systems or operations rely
will be timely converted or that a failure to convert by another company will
not have a material adverse effect on the Company.

     The Company will utilize both internal and external resources to modify, or
replace, and test its information systems for Year 2000 compliance. The costs
associated with ensuring Year 2000 compliance will be expensed in accordance
with the guidelines established by the AICPA's Emerging Issues Task Force
Release #96-14 "Accounting for the Costs Associated with Modifying Computer
Software for the Year 2000." The Company expects to spend approximately
$300,000, to be funded from operating cash flows, in order to achieve Year 2000
compliance.

     The costs to ensure the Company's systems are Year 2000 compliant and the
date on which such modifications or replacements will be completed are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans and other factors. There can be no guarantee that
these estimates will be achieved and the actual results could differ materially
from those plans.


INFLATION

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


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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


STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE

     Certain sections of this Annual Report on Form 10-K, including the
preceding "Management's Discussion and Analysis of Financial Condition and
Results of Operations," contain various forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Exchange Act, which represent the Company's expectations or beliefs
concerning future events. These forward-looking statements involve risks and
uncertainties, and the Company cautions that these statements are further
qualified by important factors that could cause actual results to differ
materially from those in the forward-looking statements, including, without
limitation, those set forth in the "Risk Factors" section of the Company's
Annual Report on Form 10-K for the fiscal year ended January 30, 1999.

<PAGE>   14

    GADZOOKS
12      INC.
--------------------------------------------------------------------------------
BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                            JANUARY 30,       January 31,
                                                                               1999              1998
                                                                           ------------      ------------
<S>                                                                        <C>               <C>         
ASSETS

Current assets:
 Cash and cash equivalents                                                 $ 16,353,393      $  9,755,083
 Short-term investments                                                            --           9,157,209
 Accounts receivable                                                          3,001,651         2,815,444
 Inventory                                                                   34,403,807        35,763,833
 Other current assets                                                         1,987,077         1,426,539
                                                                           ------------      ------------
                                                                             55,745,928        58,918,108
                                                                           ------------      ------------
Leaseholds, fixtures and equipment, net                                      30,696,262        25,403,044
                                                                           ------------      ------------
                                                                           $ 86,442,190      $ 84,321,152
                                                                           ============      ============


LIABILITIES AND SHAREHOLDERS' EQUITY


Current liabilities:
 Accounts payable                                                          $ 18,148,736      $ 16,721,808
 Accrued payroll and benefits                                                 2,498,758         2,111,284
 Other current liabilities                                                    3,469,776         2,712,060
 Income taxes payable                                                              --           2,494,855
                                                                           ------------      ------------
                                                                             24,117,270        24,040,007
Accrued rent                                                                  2,294,275         1,800,730

Commitments and contingencies (Notes 7 and 13)

Shareholders' equity:
 Preferred stock, $1.00 par value, 1,000,000 shares
   authorized, none issued                                                         --                --
 Common stock, $.01 par value, 25,000,000 shares authorized,
   8,892,736 and 8,754,577 shares issued and outstanding, respectively           88,927            87,546
 Additional paid-in capital                                                  42,197,629        40,868,605
 Retained earnings                                                           17,855,453        17,524,264
 Treasury stock, at cost, 15,226 and no shares, respectively                   (111,364)             --
                                                                           ------------      ------------
                                                                             60,030,645        58,480,415
                                                                           ------------      ------------
                                                                           $ 86,442,190      $ 84,321,152
                                                                           ============      ============
</TABLE>

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



<PAGE>   15

                                                                      GADZOOKS
                                                                      INC.    13
--------------------------------------------------------------------------------
STATEMENTS OF INCOME



<TABLE>
<CAPTION>
                                                                                          Fiscal Year Ended
                                                        ---------------------------------------------------
                                                          January 30,       January 31,        February 1,
                                                            1999               1998                1997
                                                        -------------      -------------      -------------
<S>                                                       <C>                <C>                 <C>       
Net sales                                               $ 208,202,866      $ 171,639,147      $ 128,388,380

Costs and expenses:
 Cost of goods sold, including buying, distribution
    and occupancy costs                                   157,728,597        120,308,942         87,417,930
 Selling, general and administrative expenses              50,526,730         38,773,576         29,212,565
                                                        -------------      -------------      -------------
                                                          208,255,327        159,082,518        116,630,495
                                                        -------------      -------------      -------------
 Operating income (loss)                                      (52,461)        12,556,629         11,757,885

Interest expense                                              (58,265)           (52,313)           (26,367)
Interest income                                               594,738            758,580            971,382
                                                        -------------      -------------      -------------
 Income before income taxes                                   484,012         13,262,896         12,702,900
Provision for income taxes                                     97,188          4,974,998          4,711,500
                                                        -------------      -------------      -------------
 Net income                                             $     386,824      $   8,287,898      $   7,991,400
                                                        =============      =============      =============

Net income per share
 Basic                                                  $        0.04      $        0.95      $        0.94
                                                        =============      =============      =============
 Diluted                                                $        0.04      $        0.91      $        0.87
                                                        =============      =============      =============

Average shares outstanding
 Basic                                                      8,851,609          8,682,582          8,525,322
                                                        =============      =============      =============
 Diluted                                                    9,035,841          9,100,027          9,142,921
                                                        =============      =============      =============
</TABLE>



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


<PAGE>   16

    GADZOOKS
14      INC.
--------------------------------------------------------------------------------
STATEMENTS OF SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                            Common Stock        Additional       Retained        Treasury Stock                 
                                         Shares     Capital   Paid-In Capital    Earnings       Shares    Capital      Total       
                                         ------     -------   ---------------    --------       ------    -------      -----       
<S>                                     <C>         <C>        <C>             <C>             <C>        <C>         <C>         
BALANCE, JANUARY 27, 1996               5,219,930   $ 52,199   $ 29,467,782    $  1,244,966       --           --     $ 30,764,947 
   Issuance of common stock,                                                                                                       
     net of underwriting                                                                                                           
     commissions and expenses             400,000      4,000      9,012,586            --         --           --        9,016,586 
   Stock issued under option plans        131,284      1,313         80,985            --         --           --           82,298 
   Three-for-two common stock                                                                                                      
     split effected in the form of                                                                                                 
     a 50% stock dividend               2,833,226     28,332        (28,332)           --         --           --             --   
   Tax benefit from exercise                                                                                                       
     of stock options                        --         --        1,208,000            --         --           --        1,208,000 
   Net income                                --         --             --         7,991,400       --           --        7,991,400 
                                       ----------   --------   ------------    ------------     ------   ----------   ------------ 
                                                                                                                                   
BALANCE, FEBRUARY 1, 1997               8,584,440     85,844     39,741,021       9,236,366       --           --       49,063,231 
   Stock issued under option plans        170,137      1,702        407,647            --         --           --          409,349 
   Tax benefit from exercise of                                                                                                    
     stock options                           --         --          719,937            --         --           --          719,937 
   Net income                                --         --             --         8,287,898       --           --        8,287,898 
                                       ----------   --------   ------------    ------------     ------   ----------   ------------ 
                                                                                                                                   
BALANCE, JANUARY 31, 1998               8,754,577     87,546     40,868,605      17,524,264       --           --       58,480,415 
   Stock issued under option plans        138,159      1,381        604,713            --         --           --          606,094 
   Purchase of treasury stock                --         --             --              --       29,500     (312,031)      (312,031)
   Sale of treasury stock                    --         --             --           (55,635)   (14,274)     200,667        145,032 
   Tax benefit from exercise                                                                                                       
     of stock options                        --         --          724,311            --         --           --          724,311 
   Net income                                --         --             --           386,824       --           --          386,824 
                                       ----------   --------   ------------    ------------     ------   ----------   ------------ 
                                                                                                                                   
BALANCE, JANUARY 30, 1999               8,892,736   $ 88,927   $ 42,197,629    $ 17,855,453     15,226   $ (111,364)  $ 60,030,645 
                                       ==========   ========   ============    ============     ======   ==========   ============ 
</TABLE>
                                                                               
The accompanying notes are an integral part of these financial statements.


<PAGE>   17

                                                                      GADZOOKS
                                                                      INC.    15
--------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                          Fiscal Year Ended
                                                              ---------------------------------------------
                                                              JANUARY 30,     January 31,      February 1,
                                                                  1999           1998             1997
                                                              ------------    ------------    ------------
<S>                                                           <C>             <C>             <C>         
Cash flows from operating activities:
  Net income                                                  $    386,824    $  8,287,898    $  7,991,400
  Adjustments to reconcile net income to net cash provided
     by operating activities:
     Depreciation                                                4,653,433       3,376,442       2,227,401
     Deferred income taxes                                        (433,967)          3,587        (347,500)
     Changes in operating assets and liabilities:
        Accounts receivable                                       (186,207)     (1,531,534)       (793,141)
        Inventory                                                1,360,026     (12,552,797)     (4,503,951)
        Other assets                                              (126,571)       (101,092)        179,639
        Accounts payable                                         1,426,928       9,067,685        (840,884)
        Accrued payroll and benefits                               387,474      (1,023,868)      1,267,495
        Income taxes payable                                    (2,494,855)      1,380,193        (206,107)
        Other liabilities                                        1,251,260         732,631         662,595
                                                              ------------    ------------    ------------
           Net cash provided by operating activities             6,224,345       7,639,145       5,636,947
                                                              ------------    ------------    ------------
Cash flows from investing activities:
  Capital expenditures, net                                     (9,946,650)    (12,623,714)     (6,864,184)
  Purchases of short-term investments                           (7,596,979)    (18,177,257)    (14,129,847)
  Proceeds from redemption of short-term investments            16,754,188      21,439,895       1,710,000
                                                              ------------    ------------    ------------
           Net cash used in investing activities                  (789,441)     (9,361,076)    (19,284,031)
                                                              ------------    ------------    ------------
Cash flows from financing activities:
  Principal payments on long-term obligations                         --              --           (44,716)
  Issuance of common stock, net                                    606,094         409,349       9,098,884
  Purchase of treasury stock                                      (312,031)           --              --
  Sale of treasury stock under employee stock purchase plan        145,032            --              --
  Tax benefit from exercise of stock options                       724,311         719,937       1,208,000
                                                              ------------    ------------    ------------
           Net cash provided by financing activities             1,163,406       1,129,286      10,262,168
                                                              ------------    ------------    ------------
Net increase (decrease) in cash and cash equivalents             6,598,310        (592,645)     (3,384,916)
Cash and cash equivalents at beginning of period                 9,755,083      10,347,728      13,732,644
                                                              ------------    ------------    ------------
Cash and cash equivalents at end of period                    $ 16,353,393    $  9,755,083    $ 10,347,728
                                                              ============    ============    ============
Cash paid during the year for:
  Interest                                                    $     63,240    $     50,240    $     20,106
  Income taxes                                                   4,407,154       2,849,664       4,057,107
                                                              ============    ============    ============
</TABLE>

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



<PAGE>   18


    GADZOOKS
16      INC.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS


1    ORGANIZATION AND NATURE OF THE COMPANY


Gadzooks, Inc. (the "Company") is a mall-based, specialty retailer of casual
apparel and related accessories for young men and women principally between the
ages of 13 and 19. At January 30, 1999, the Company had 312 company-owned stores
in metropolitan and middle markets in 32 states east of the Rocky Mountains.

The Company's fiscal year ends on the Saturday nearest January 31. All
references in these financial statements to fiscal years are to the calendar
year in which the fiscal year begins. Fiscal years 1998, 1997, and 1996
represent the 52 or 53 week periods ended January 30, 1999, January 31, 1998 and
February 1, 1997, respectively. Fiscal 1996 was a 53 week period.


2    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


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

SHORT-TERM INVESTMENTS
Short-term investments consist of highly liquid investments with original
maturities between three and twelve months. Management determines the proper
classifications of investments at the time of purchase and reevaluates such
designations as of each balance sheet date. At January 31, 1998, all securities
were classified as held-to-maturity based on the Company's positive intent and
ability to hold the securities to maturity. These securities were carried at
amortized cost, which approximated fair value.

INVENTORY
Inventories are valued at the lower of average cost or market.

LEASEHOLDS, FIXTURES AND EQUIPMENT
Leaseholds, fixtures and equipment are stated at cost. Depreciation of fixtures
and equipment is based upon the estimated useful lives of the assets, generally
from five to ten years, computed on the straight-line method. Amortization of
leasehold improvements is computed on the straight-line method over estimated
useful lives or lease terms, if shorter. The Company reviews its long-lived
assets for impairment whenever events or changes in circumstances indicate the
respective carrying amounts may not be recoverable. An impairment loss will be
recognized if the sum of the expected future cash flows (undiscounted and before
interest) from the use of the assets is less than the net book value of the
assets. The amount of the impairment loss will generally be measured as the
difference between the net book value of the assets and the estimated fair value
of the related assets.

REVENUE RECOGNITION
Retail merchandise sales are recognized at the point of sale less sales returns.

ADVERTISING
Advertising costs are expensed when incurred.

STORE PRE-OPENING COSTS
Costs incurred with the setup of a new store prior to its opening for business
were expensed as incurred in fiscal 1998. In fiscal 1997 and 1996, such costs
were expensed in the month the store opened. This change had an immaterial
impact on the Company's financial statements.

INCOME TAXES
Deferred income taxes are provided on the liability method. Under this method,
deferred tax assets and liabilities are recognized based on differences between
the financial statement and the tax bases of assets and liabilities using
presently enacted tax rates.

EARNINGS PER SHARE AND STOCK SPLITS
Earnings per share are computed by dividing net income by the weighted average
number of shares outstanding during each period after giving effect to (i) a
three-for-two stock split declared by the Board of Directors in May 1996, and
(ii) dilutive potential common shares resulting from stock options. The
three-for-two stock split has been given retroactive effect in the financial
statements.


<PAGE>   19


                                                                      GADZOOKS
                                                                      INC.    17
--------------------------------------------------------------------------------



USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at January 30, 1999 and January
31, 1998 and the reported amounts of revenues and expenses during each of the
three years in the period ended January 30, 1999. Actual results could differ
from these estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS
All financial instruments classified as current are recorded at cost, which
approximates fair value due to the short maturity of these instruments.


3    COMMON STOCK OFFERING

On January 31, 1996, the Company completed a secondary offering of 600,000
shares of its common stock (after giving effect to the three-for-two stock split
described in Note 2). The Company's portion of the net proceeds, after deducting
expenses associated with the offering, totaled $9,016,586.


4    SHORT-TERM INVESTMENTS

The amortized cost and estimated fair value of investments are as follows:

<TABLE>
<CAPTION>
                                                                       January 31, 1998
                                  -----------------------------------------------------
                                                   Gross        Gross
                                   Amortized    Unrealized    Unrealized      Fair
                                     Cost          Gains        Losses        Value
                                  -----------   -----------   -----------   -----------
<S>                               <C>           <C>           <C>           <C>        
Commercial paper                  $ 4,439,188   $       463   $        42   $ 4,439,609
Tax exempt securities backed by
  municipal bonds                  12,868,021           396         3,160    12,865,257
                                  -----------   -----------   -----------   -----------
Less cash equivalents               8,150,000          --            --       8,150,000
                                  -----------   -----------   -----------   -----------
Total investment securities       $ 9,157,209   $       859   $     3,202   $ 9,154,866
                                  ===========   ===========   ===========   ===========
</TABLE>

At January 30, 1999 there were no short-term investment securities. Investments
classified as held-to-maturity at January 31, 1998 had various maturity dates
that did not exceed one year.


5    LEASEHOLDS, FIXTURES AND EQUIPMENT

Leaseholds, fixtures and equipment are summarized as follows:

<TABLE>
<CAPTION>
                                 JANUARY 30,     January 31,
                                    1999            1998
                                ------------    ------------
<S>                             <C>             <C>         
Leasehold improvements          $ 27,715,153    $ 22,233,244
Fixtures and equipment            16,876,857      12,490,384
                                ------------    ------------
                                  44,592,010      34,723,628
Less accumulated depreciation    (13,895,748)     (9,320,584)
                                ------------    ------------
                                $ 30,696,262    $ 25,403,044
                                ============    ============
</TABLE>


<PAGE>   20


    GADZOOKS
18      INC.
--------------------------------------------------------------------------------


Notes to Financial Statements, continued



6    LONG-TERM OBLIGATIONS


On June 11, 1998, the Company renewed its credit agreement with Wells Fargo
Bank, increasing its unsecured revolving line of credit from $10 million to $20
million. The total amount available to borrow pursuant to the credit agreement
is limited to 125% of cash flow (as defined in the credit agreement) for the
trailing 12-month period. Amounts borrowed under the revolving line bear
interest at the lesser of either Prime Rate or 195 basis points above LIBOR. The
Company pays commitment fees of 0.35% on the unused portion of the revolving
line of credit. The credit agreement also provides for the issuance of letters
of credit that are generally used in connection with international merchandise
purchases. Outstanding letters of credit issued by the bank reduce amounts
otherwise available for borrowing under the revolving line of credit. The credit
facility subjects the Company to various restrictions on the incurrence of
additional indebtedness, acquisitions, loans to officers and stock repurchases.
The covenants also require the Company to maintain certain tangible net worth,
working capital, net income and fixed charge coverage minimums as well as
certain other ratios. No borrowings were outstanding under the revolving line,
and letters of credit totaling $343,986 were outstanding at year-end. The
Company was in technical default of the minimum net income and fixed charge
coverage covenants as of January 30, 1999. Wells Fargo Bank has issued waivers
of both covenant violations through April 30, 1999.

The Company intends to renew and revise its existing credit facility with Wells
Fargo Bank and has received a commitment letter from the bank dated March 29,
1999. The revised facility would provide an unsecured revolving line of credit
totaling $10 million. The facility would permit the Company to borrow the lesser
of 150% of trailing twelve-month cash flow (as defined in the credit agreement)
or $10 million. Amounts borrowed under the revolving line will continue to bear
interest at the lessor of either Prime Rate or 195 basis points above LIBOR.
The renewed revolving line would continue to provide for the issuance of
letters of credit. The renewed credit agreement would continue to subject the
Company to various restrictions on the incurrence of additional indebtedness,
acquisitions, loans to officers and stock repurchases. The revised covenants
will continue to require the Company to maintain a certain minimum tangible net
worth, minimum working capital and other financial covenants. In addition the
Company will be required to pay a commitment fee of 0.50% on the unused portion
of the revolving line. Any amount borrowed under the new revolving line of
credit will become due on June 1, 2000, the date the renewed credit agreement
will mature.


7    LEASES


The Company leases store, office, and warehouse space under non-cancelable
leases with terms that generally range from five to ten years. Most of the store
leases provide for additional rentals based on a percentage of store sales and
specify rental increases over the term of the lease. Total rent expense under
these operating leases was $18,717,424, $13,822,868 and $9,602,618, for fiscal
years 1998, 1997, and 1996, respectively. Included in these total rent figures
are $511,000, $566,000 and $775,856 of contingent rent for fiscal years 1998,
1997 and 1996, respectively. Accrued rent of $2,294,275 as of January 30, 1999
and $1,800,730 as of January 31, 1998 has been provided to account for rent
expenses on a straight-line basis. Future minimum lease payments under
non-cancelable operating leases as of January 30, 1999 are as follows:

<TABLE>
<CAPTION>
 Fiscal year
 -----------
<S>                                                           <C>          
 1999                                                         $  19,215,013
 2000                                                            19,192,736
 2001                                                            19,183,566
 2002                                                            18,973,664
 2003                                                            18,319,483
 Thereafter                                                      54,173,794
                                                              -------------
 Total minimum lease payments                                 $ 149,058,256
                                                              =============
</TABLE>




<PAGE>   21

                                                                      GADZOOKS
                                                                      INC.    19
--------------------------------------------------------------------------------


8    INCOME TAXES


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

<TABLE>
<CAPTION>
                                                                Fiscal
                                 ----------------------------------------
                                    1998           1997          1996
                                 -----------    -----------   -----------
<S>                              <C>            <C>           <C>        
Current tax expense              $   531,155    $ 4,971,411   $ 5,037,623
Deferred tax expense (benefit)      (433,967)         3,587      (326,123)
                                 -----------    -----------   -----------
                                 $    97,188    $ 4,974,998   $ 4,711,500
                                 ===========    ===========   ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                      Fiscal
                                                     -----------------------------------------
                                                        1998           1997            1996
                                                     -----------    -----------    -----------
<S>                                                  <C>            <C>            <C>        
Tax provision at the federal corporate rate          $   164,564    $ 4,509,385    $ 4,318,986
State income taxes, net of related federal benefit        31,209        564,420        418,449
Tax exempt interest                                      (69,613)      (182,731)      (175,547)
Other, net                                               (28,972)        83,924        149,612
                                                     -----------    -----------    -----------
Provision for income taxes                           $    97,188    $ 4,974,998    $ 4,711,500
                                                     ===========    ===========    ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                      JANUARY 30,    January 31,
                                         1999           1998
                                      -----------    -----------
<S>                                   <C>            <C>        
Deferred tax assets:
  Accruals not currently deductible   $ 1,305,955    $   825,436
  Depreciation                            100,164        219,383
  Deferred compensation                    98,809           --
                                      -----------    -----------
                                        1,504,928      1,044,819
Deferred tax liabilities                 (282,789)      (256,647)
                                      -----------    -----------
                                      $ 1,222,139    $   788,172
                                      ===========    ===========
</TABLE>

At January 30, 1999, the Company had an income tax receivable of $2.1 million
classified in accounts receivable. The early disposition of certain qualified
stock options and the exercise of certain nonqualified stock options in fiscal
1998, 1997 and 1996 resulted in income tax benefits to the Company of $724,311,
$719,937 and $1,208,000 respectively, which was credited to additional paid-in
capital. The income tax benefit is the tax effect of the difference between the
market price on the date of exercise and the option price.


9    EMPLOYEE BENEFIT PLANS

Effective January 1, 1995, the Company established the Gadzooks, Inc. Employees'
Savings Plan (the "401(k) Plan"). The 401(k) Plan is open to substantially all
employees who have been employed at least one year and who work at least 1,000
hours per year. Under the 401(k) Plan, a participant may contribute up to 15% of
earnings with the Company matching 50% of the employee's first 5% contribution.
Employee and Company contributions are paid to a corporate trustee and invested
in various mutual funds or the Company's common stock at the discretion of the
participant. Company contributions made to participants' accounts become 100%
vested on the fifth anniversary of the employee's initial participation in the
Plan. For the years ended January 30, 1999, January 31, 1998 and February 1,
1997, the Company contributed $117,917, $108,814 and $88,150, respectively, in
matching contributions to the 401(k) Plan.




<PAGE>   22

    GADZOOKS
20      INC.
--------------------------------------------------------------------------------

Notes to Financial Statements, continued

On June 18, 1998, the shareholders approved the Gadzooks, Inc. Employee Stock
Purchase Plan ("ESPP"). The ESPP allows eligible employees the right to purchase
common stock on a monthly basis at 85 percent of the closing market price of the
shares on the last day of the respective calendar month. The aggregate number of
shares that may be offered under the ESPP is 60,000. During fiscal 1998, 14,274
shares of the Company's common stock were sold to employees pursuant to the
plan. The Company may purchase shares of common stock from time-to-time on the
open market to provide shares for sale pursuant to the ESPP.

During fiscal 1998 the Company established a nonqualified deferred compensation
program which permits officers to defer a portion of their compensation, on a
pre-tax basis, until their retirement. Participant deferrals are deposited into
variable life insurance contracts held in a Rabbi Trust. The insurance premiums
in excess of the insurance cost are deemed invested in mutual funds as directed
by the participants. The Company may, at its discretion, make matching
contributions on behalf of the plan participants. No such matching contributions
were made in fiscal 1998.


10   STOCK OPTION PLANS


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

During fiscal 1998, the plans were amended to adjust the maximum aggregate
number of shares that may be optioned and sold under the plans to 1,500,000
shares for the Employee Plan and 100,000 shares for the Nonemployee Director
Plan. The maximum aggregate number of shares that may be optioned and sold under
the Key Employee Plan is 272,651 shares.

On December 15, 1998, options to purchase 517,585 shares of the Company's common
stock at prices ranging from $17.63 to $29.25 were cancelled and replaced with
options to purchase 393,438 shares of common stock at prices of either $9.00 per
share or $11.60 per share. The closing price of the Company's common stock on
December 15, 1998 was $6.75 per share. The newly issued options vest over the
same period as the cancelled options they replaced. For officers of the Company
the replacement options provide the right to purchase from 50% to 67% of the
number of shares subject to purchase under the cancelled options depending on
the exercise price of the options cancelled. For all other employees, the
replacement options provide the right to purchase the same number of shares as
provided by the cancelled options.

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


<TABLE>
<CAPTION>
                                                                                                       Fiscal
                                     --------------------------------------------------------------------------
                                                   1998                         1997                    1996
                                     --------------------------------------------------------------------------
                                                 Weighted                    Weighted                 Weighted             
                                                  Average                     Average                  Average               
                                                 Exercise                    Exercise                 Exercise              
                                      Shares       Price           Shares     Price        Shares       Price    
                                      ------     --------          ------    --------      ------     --------   
<S>                                   <C>        <C>              <C>         <C>          <C>        <C>       
Outstanding at beginning of year      698,360    $  13.00         655,289     $  6.23      675,946    $   2.13  
Granted                               973,595       14.65         275,182       23.46      139,115       19.70  
Exercised                            (138,159)       4.38        (170,137)       2.41     (154,418)       0.53  
Cancelled                            (663,726)      21.54         (61,974)      17.95       (5,354)      10.22  
                                    ---------    --------       ---------     -------    ---------    --------  
Outstanding at end of year            870,070    $   9.71         698,360     $ 13.00      655,289    $   6.23  
                                    ---------    --------       ---------     -------    ---------    --------  
                                                                                                                   
Available for grant at end of year    389,603                      29,472                  242,830
                                    ---------                   ---------                ---------              

</TABLE>

<PAGE>   23

                                                                     GADZOOKS
                                                                     INC.     21
--------------------------------------------------------------------------------


The following table summarizes information about stock options outstanding at
January 30, 1999:

<TABLE>
<CAPTION>
                                                            Options Outstanding            Options Exercisable
                                         ---------------------------------------------------------------------
                                                          Weighted
                                                           Average      Weighted                      Weighted
                                            Number        Remaining      Average       Number          Average
Range of                                 Outstanding     Contractual    Exercise     Exercisable      Exercise
Exercise Prices                           at 1/30/99         Life         Price      at 1/30/99         Price
---------------                          -----------     -----------    --------     -----------      --------
<S>                                       <C>            <C>           <C>            <C>            <C>   
$ 0.21 -  $ 7.06                            189,254        6 years       $ 3.61         93,842         $ 2.71
  7.25 -   10.15                            215,839        9 years         9.37         13,285           9.00
 10.38 -   11.56                            138,000        9 years        11.49            800          10.50
 11.60 -   11.60                            298,838        9 years        11.60         18,165          11.60
 17.50 -   28.13                             28,139        9 Years        24.48         18,523          24.62
----------------                            -------                                    -------               
$ 0.21 -  $28.13                            870,070                                    144,615
</TABLE>

During 1996, the Company adopted the disclosure-only provision of SFAS No. 123,
"Accounting for Stock-Based Compensation," which generally establishes financial
accounting and reporting standards for stock-based employee compensation plans.
As permitted, the Company measures and records compensation expense in
accordance with current practices as prescribed by APB Opinion No. 25,
"Accounting for Stock issued to Employees", and provides disclosure about pro
forma compensation expense. Such adoption did not result in a charge to earnings
in the Company's financial statements. If the Company had elected to recognize
compensation expense based on the fair value of options granted at the grant
date as prescribed by SFAS No. 123, net income and earnings per share would have
been reduced to the pro forma amounts indicated in the following table:

<TABLE>
<CAPTION>
                                                                                             Fiscal 
                                                       ----------------------------------------------
                                                           1998             1997              1996 
                                                       -----------       ----------       -----------    
<S>                                                    <C>               <C>              <C>         
Net income - as reported                               $   386,824       $8,287,898       $ 7,991,4OO 
Net income (loss) - pro forma                           (1,560,440)       7,347,426         7,654,272 
Diluted earnings per share - as reported                      0.04             0.91              0.87 
Diluted earnings (loss) per share - pro forma                (0.18)            0.81              0.84 
</TABLE>



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



<TABLE>
<CAPTION>
                                                              Fiscal    
                                   ----------------------------------
                                      1998         1997        1996      
                                   ---------    ---------   ---------     
<S>                               <C>           <C>         <C>       
 Expected volatility                     87%          79%         70%       
 Risk-free interest rate                5.1%         5.6%        6.4%      
 Expected lives                    3.7 years    4.2 years   3.6 years     
 Dividend yield                           0%           0%          0%        
</TABLE>


The weighted average fair value of options granted is $7.43, $14.14 and $9.52
per share for fiscal 1998, 1997 and 1996 respectively.


<PAGE>   24

    GADZOOKS
22      INC.
--------------------------------------------------------------------------------

Notes to Financial Statements, continued

11   EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                                                              Fiscal
                                                     ---------------------------------
                                                       1998        1997        1996
                                                     ---------   ---------   ---------
<S>                                                  <C>         <C>         <C>      
Weighted average common shares outstanding (basic)   8,851,609   8,682,582   8,525,322
Effect of dilutive options                             184,232     417,445     617,599
                                                     ---------   ---------   ---------
Weighted average common and dilutive
  potential shares outstanding (diluted)             9,035,841   9,100,027   9,142,921
                                                     =========   =========   =========
</TABLE>

The treasury stock method is used to determine dilutive potential common shares
outstanding related to stock options. Options which, based on their exercise
price, would be antidilutive are not considered in the treasury stock method
calculation. Options excluded from the earnings per share calculation due to
their antidilutive nature totaled 22,132, 40,332 and 22,500 in fiscal 1998, 1997
and 1996, respectively.

12   SHAREHOLDER RIGHTS PLAN

On September 3, 1998, the Company declared a dividend of one Preferred Share
Purchase Right ("Right") on each outstanding share of Gadzooks, Inc. common
stock. The dividend distribution was made on September 15, 1998 to shareholders
of record on that date. The Rights become exercisable if a person or group
acquires 20 percent or more of the Company's common stock or announces its
intent to do so. Each Right will entitle shareholders to buy one one-thousandth
of a new series of junior participating preferred stock at an exercise price of
$110. When the Rights become exercisable, the holder of each Right (other than
the acquiring person or members of such group) is entitled (1) to purchase, at
the Right's then current exercise price, a number of the acquiring company's
common shares having a market value of twice such price, (2) to purchase, at the
Right's then current exercise price, a number of the Company's common shares
having a market value of twice such price, or (3) at the option of the Company,
to exchange the Rights (other than Rights owned by such person or group), in
whole or in part, at an exchange ratio of one share of common stock (or
one-thousandth of a share of the new series of junior participating preferred
stock) per Right. The Rights may be redeemed for one cent each by the Company at
any time prior to acquisition by a person (or group) of beneficial ownership of
20 percent or more of the Company's common stock. The Rights will expire on
September 15, 2008.

13   CONTINGENCY

A lawsuit was filed on August 19, 1998 in the United States District Court for
the Northern District of Texas on behalf of purchasers of the publicly traded
securities of the Company within the inclusive period of July 9, 1998 through
July 22, 1998 alleging misleading and incomplete public disclosures regarding
the Company's sales results. The Company believes the lawsuit is without merit
and intends to defend it vigorously. The liability, if any, associated with this
matter is not determinable at this time. While the adverse resolution of this
case could negatively impact earnings in the year of disposition, it is the
opinion of management that the ultimate resolution of the matter will not have a
materially adverse effect on the Company's financial position or results of
operations.


<PAGE>   25

                                                                      GADZOOKS
                                                                      INC.    23
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS



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

In our opinion, the accompanying balance sheets and the related statements of
income, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Gadzooks, Inc. at January 30, 1999
and January 31, 1998, and results of its operations and its cash flows for each
of the three years in the period ended January 30, 1999 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.


/s/ PRICEWATERHOUSECOOPERS LLP


Dallas, Texas
March 8, 1999, except as to the second paragraph of Note 6,
    which is as of April 5, 1999



<PAGE>   26

    GADZOOKS
24      INC.
--------------------------------------------------------------------------------
CORPORATE INFORMATION


<TABLE>
<CAPTION>
    DIRECTORS                             OFFICERS                    
<S>                                 <C>                               
Gerald R. Szczepanski               Gerald R. Szczepanski             
Chairman of the Board               President and                     
Co-Founder of Gadzooks              Chief Executive Officer           
Director since 1983                                                   
                                    Monty R. Standifer                
G. Michael Machens(A,C)             Senior Vice President             
General Partner                     Chief Financial Officer           
Phillips-Smith Specialty            Treasurer and Secretary           
  Retail Group                                                        
Director since 1992                 James F. Wimpress, Jr.            
                                    Senior Vice President             
Robert E.M. Nourse(C)               Store Operations                  
Private Investor                                                      
Former President and                David W. Gruehn                   
Chief Executive Officer             Vice President                    
The Bombay Company, Inc.            Information Systems               
Director since 1993                                                   
                                    William S. Kotch III              
Ron G. Stegall(A)                   Vice President
President                           Real Estate
Arlington Equity Partners, Inc.                                       
Director since 1999                 Jeff P. Krainess                  
                                    Vice President                    
Lawrence H. Titus, Jr.(A)           Planning and Allocation           
Co-Founder of Gadzooks                                                
(retired)                           Paula Y. Masters                  
Director since 1983                 Vice President                    
                                    General Merchandising Manager     
A Audit Committee                                                     
C Compensation Committee            Stephen R. Puterbaugh             
                                    Vice President                    
                                    Human Resources                   
</TABLE>                                                              
                                                                      
                                                                      
SHAREHOLDER INFORMATION                                               
                                                                      
A COPY OF FORM 10-K, EXCLUDING EXHIBITS, AS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION MAY BE OBTAINED WITHOUT CHARGE UPON WRITTEN REQUEST TO
INVESTOR RELATIONS AT THE COMPANY'S HEADQUARTERS. COPIES OF EXHIBITS ARE
AVAILABLE UPON PAYMENT OF A $125.00 FEE TO COVER THE COSTS OF REPRODUCTION.
                                                                      
CORPORATE HEADQUARTERS                                                
                                                                      
4121 International Parkway                                            
Carrollton, Texas 75007                                               
(972) 307-5555                                                        
(972) 662-4290 Fax                                                    
                                                                      
WEBSITE                                                               
www.gadzooks.com                                                      
                                                                      
Gadzooks and the Gadzooks logo are registered trademarks and service marks of
Gadzooks, Inc. Gaditude is a registered service mark of Gadzooks, Inc.


ANNUAL MEETING

The Annual Meeting of Gadzooks, Inc. will be held at 9:30 a.m., on Thursday,
June 17, 1999, at the Company's headquarters.
                                                              
                                                              
TRANSFER AGENT AND REGISTRAR                                  
                                                              
ChaseMellon Shareholder Services, L.L.C.                      
Overpeck Centre                                               
85 Challenger Road                                            
Ridgefield Park, NJ 07660                                     
(800) 635-9270                                                
www.chasemellon.com                                           
                                                              
                                                              
CORPORATE COUNSEL                                             
                                                              
Akin, Gump, Strauss, Hauer & Feld, L.L.P.                     
Dallas, Texas                                                 
                                                              
                                                              
INDEPENDENT ACCOUNTANTS                                       
                                                              
PricewaterhouseCoopers LLP                                    
Dallas, Texas                                                 
                                                              
                                                              






COMMON STOCK                                                  
                                                              
Listed on                                                     
The Nasdaq Stock Market(SM)                                   
                                                              
Symbol: GADZ                                                  
                                                              
                                                              
SHARE PRICE DATA                                              
                                                              
The following table sets forth, for the quarterly periods indicated, the high
and low closing prices per share of the common stock as reported on The Nasdaq
Stock Market:
                                                              
                                                              
<TABLE>
<CAPTION>
                       1998            1997                   
                   ------------     -----------               
Fiscal Quarters    HIGH     LOW     HIGH    LOW               
---------------    ----     ---     ----    ---               
<S>               <C>     <C>      <C>    <C>                 
First Quarter     29.38   20.88    36.25  24.25               
Second Quarter    28.69   10.50    36.00  16.81               
Third Quarter     11.56    6.03    25.75  15.38               
Fourth Quarter     8.94    5.69    30.50  19.31               
</TABLE>
                                                              
On April 1, 1999 the closing sales price on The Nasdaq Stock Market was $7.25.
As of March 31, 1999, the approximate number of common shareholders of record
was 107, although the Company believes that the actual number of beneficial
owners is significantly higher. The Company presently intends to retain earnings
for use in its business and therefore does not anticipate declaring a cash
dividend in the near future.
                                                              
Certain statements contained in this Annual Report (other than historical
information) are forward-looking statements that involve risks and
uncertainties. Reference is made to the "Risk Factors" section of the Company's
most recent annual report on Form 10-K filed with the U.S. Securities and
Exchange Commission for factors that, among others, could cause the actual
results of the Company to differ materially from those contained in the
forward-looking statements.
<PAGE>   27

--------------------------------------------------------------------------------
STORE LOCATIONS

There are currently 317 Gadzooks stores in 32 states.*

ALABAMA
Huntsville
Mobile
Montgomery

ARKANSAS
Fayetteville
Fort Smith
Jonesboro
Little Rock (2)

FLORIDA
Fort Myers
Jacksonville
Orlando (3)
Pensacola
Tallahassee
Tampa (2)

GEORGIA
Athens
Atlanta (7)
Augusta
Macon

ILLINOIS
Bloomington
Carbondale
Champaign
Chicago (13)
Fairview Heights/
  St. Louis
Moline
Peoria
Rockford
Springfield

INDIANA
Elkhart
Evansville
Fort Wayne
Indianapolis
Lafayette
Merrillville
Muncie
South Bend
Terre Haute

IOWA
Cedar Rapids (2)
Council Bluffs
Davenport
Des Moines (3)
Dubuque
Fort Dodge
Iowa City
Sioux City

KANSAS
Hays
Hutchinson
Manhattan
Salina
Topeka
Wichita (2)

KENTUCKY
Ashland
Bowling Green
Elizabethtown
Florence/Cincinnati
Owensboro
Lexington
Louisville (2)
Paducah

LOUISIANA
Alexandria
Baton Rouge (2)
Bossier City
Houma
Lafayette
Lake Charles
Monroe
New Orleans (3)
Shreveport

MARYLAND
Baltimore (2)
Frederick

MASSACHUSETTS
Boston (5)

MICHIGAN
Ann Arbor
Battlecreek
Detroit (4)
Flint
Grand Rapids
Holland
Jackson
Monroe
Port Huron
Portage
Saginaw

MINNESOTA
Mankato
Minneapolis/
  St.Paul (3)
St.Cloud

MISSISSIPPI
Biloxi
Hattiesburg
Jackson
Meridian
Tupelo

MISSOURI
Columbia
Jefferson City
Joplin
Kansas City (3)
Springfield
St. Louis (3)

NEBRASKA
Grand Island
Lincoln
Omaha (2)

NEW HAMPSHIRE
Manchester
Salem

NEW JERSEY
Freehold
Livingston
Mays Landing
Paramus
Deptford/Philadelphia
Rockaway
Wayne

NEW MEXICO
Albuquerque (2)
Las Cruces
Santa Fe

NEW YORK
Albany (2)
Nanuet
Rochester (3)
Staten Island
Syracuse (2)

NORTH CAROLINA
Charlotte (2)
Concord
Fayetteville
Greensboro
Hickory
High Point
Raleigh-Durham (3)
Winston-Salem

OHIO
Cincinnati (2)
Cleveland (4)
Columbus
Dayton (2)
Heath
Lancaster
Lima
Mansfield
New Philadelphia
Niles
St. Clairsville
Sandusky
Toledo
Youngstown
Zanesville

OKLAHOMA
Enid
Lawton
Norman
Oklahoma City (4)
Shawnee
Tulsa (2)

PENNSYLVANIA
Altoona
Erie
Harrisburg
Johnstown
Lancaster
Philadelphia (2)
Scranton
State College

SOUTH CAROLINA
Charleston (2)
Columbia (2)
Greenville
Myrtle Beach
Spartanburg

SOUTH DAKOTA
Sioux Falls

TENNESSEE
Chattanooga
Clarksville
Jackson
Johnson City
Kingsport
Knoxville (2)
Memphis (3)
Nashville (3)

TEXAS
Abilene
Amarillo
Austin (2)
Beaumont
College Station
Corpus Christi
Dallas/Fort Worth (9)
Denton
El Paso (3)
Harlingen
Houston (12)
Killeen
Laredo
Longview
Lubbock
McAllen
Midland
Odessa
Port Arthur
San Angelo
San Antonio (4)
Sherman
Temple
Texarkana
Tyler
Victoria
Waco
Wichita Falls

VIRGINIA
Charlottesville
Chesapeake
Christiansburg
Danville
Dulles/Washington, DC
Fredericksburg
Harrisonburg
Manassas
Newport News
Norfolk
Roanoke
Springfield
Virginia Beach
Winchester

WEST VIRGINIA
Bridgeport
Charleston (2)
Morgantown
Parkersburg

WISCONSIN
Appleton
Eau Claire
Green Bay
Madison (2)
Milwaukee (4)
Wausau


* As of April 22, 1999




<PAGE>   28





[GADZOOKS LOGO]

4121 INTERNATIONAL PARKWAY

CARROLLTON, TEXAS 75007




www.gadzooks.com





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