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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934



For
the fiscal year ended January 28, 2006



Commission
File Number: 000-23574



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PETCO ANIMAL SUPPLIES, INC.

(Exact
Name of Registrant As Specified In Its Charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 20-2148979                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)



9125 Rehco Road,
San Diego, California 92121

(Address, Including Zip Code, of Principal Executive Offices)



(858) 453-7845

Registrants telephone number, including area code:



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



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



Common Stock, $0.001 par value

(Title of Class)



Indicate by check mark whether the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities
Act).    Yes  x    No ̈



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



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



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



Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of accelerate filer and large accelerated filer in Rule 12b-2 of the Exchange Act.



Large accelerated filer  x                    Accelerated filer ̈Non-accelerated filer ̈



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



As of July 30, 2005, the last day of the registrants second fiscal quarter of fiscal 2005, the aggregate market value of the common stock held
by non-affiliates of the registrant was approximately $1.521 billion, based on the last reported sale price on the preceding business day. Shares of common stock held by each executive officer and director and by each person or group who owns 10% or
more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.



As of March 17, 2006, there were outstanding 57,893,803 shares of the
registrants Common Stock, $0.001 par value.



DOCUMENTS
INCORPORATED BY REFERENCE: Portions of the registrants definitive proxy statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the registrants annual meeting of stockholders
expected to be held June 8, 2006 are incorporated by reference in Part III.

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TABLE OF CONTENTS



|                     |  |                                                                                                              |  |     
|-------------------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|                     |  |                                                                                                              |  | Page
|                     |  | PART I                                                                                                       |  |     
|                     |  |                                                                                                             
|Item 1.              |  | Business                                                                                                     |  | 1   
|Item 1A.             |  | Risk Factors                                                                                                 |  | 6   
|Item 2.              |  | Properties                                                                                                   |  | 13  
|Item 3.              |  | Legal Proceedings                                                                                            |  | 14  
|Item 4.              |  | Submission of Matters to a Vote of Security Holders                                                          |  | 16  
|                     |  |                                                                                                             
|                     |  | PART II                                                                                                      |  |     
|                     |  |                                                                                                             
|Item 5.              |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 17  
|Item 6.              |  | Selected Financial Data                                                                                      |  | 18  
|Item 7.              |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 20  
|Item 7A.             |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 29  
|Item 8.              |  | Financial Statements and Supplementary Data                                                                  |  | 30  
|Item 9.              |  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure                         |  | 30  
|Item 9A.             |  | Controls and Procedures                                                                                      |  | 30  
|Item 9B.             |  | Other Information                                                                                            |  | 32  
|                     |  |                                                                                                             
|                     |  | PART III                                                                                                     |  |     
|                     |  |                                                                                                             
|Item 10.             |  | Directors and Executive Officers of the Registrant                                                           |  | 33  
|Item 11.             |  | Executive Compensation                                                                                       |  | 33  
|Item 12.             |  | Security Ownership of Certain Beneficial Owners and Management                                               |  | 33  
|Item 13.             |  | Certain Relationships and Related Transactions                                                               |  | 33  
|Item 14.             |  | Principal Accountant Fees and Services                                                                       |  | 33  
|                     |  |                                                                                                             
|                     |  | PART IV                                                                                                      |  |     
|                     |  |                                                                                                             
|Item 15.             |  | Exhibits and Financial Statement Schedules                                                                   |  | 34  
|Signatures           |  |                                                                                                              |  | 39  
|Financial Statements |  | F-1                                                                                                         
|Exhibit Index        |  |                                                                                                             



PETCO®, P.A.L.S.®, and
PETCO Doggie Day Camp® are trademarks of PETCO Animal Supplies, Inc. All other product and company names are trademarks of their respective owner.



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PART I



ITEM 1. BUSINESS



We are a
national specialty retailer of premium pet food, supplies and services with 779 stores in 49 states and the District of Columbia. Our pet-related products include food, supplies, grooming products, toys, novelty items, vitamins, small pets such as
fish, birds and other small animals (excluding cats and dogs), and veterinary supplies. Our strategy is to offer our customers a complete assortment of pet-related products and services at fair prices, with superior levels of customer service at
convenient locations.



Our stores offer a fun, exciting
shopping experience and generally range in size from 12,000 to 15,000 square feet. Since the middle of 2001, all new stores have been opened in our newer formats, which incorporate a more dramatic presentation of our companion animals and emphasize
higher-margin supplies categories. We have remodeled 53 stores to our newer formats since the prior year, and now have a total of 476 stores in newer formats.



Unless otherwise indicated, all references in this Annual Report to a fiscal year refer to the fiscal year ending on the Saturday closest to
January 31 of the following year. For example, references to fiscal 2005 refer to the fiscal year beginning on January 30, 2005 and ending on January 28, 2006.



In this annual report, PETCO, Company, we, our, and us refer to
PETCO Animal Supplies, Inc. and its subsidiaries, unless the context requires otherwise.



The Pet Food, Supplies and Services Industry



General. We believe the pet food, supplies and services industry is benefiting from a number of favorable demographic trends that are continuing to support a growing pet population. The U.S. pet population has
now reached 378 million companion animals, including 143 million cats and dogs, with an estimated 63% of all U.S. households owning at least one pet, and three quarters of those households owning two or more pets. We believe the trend to
more pets and more pet-owning households will continue, driven by an increasing number of children under 18 and a growing number of empty nesters whose pets have become their new children. We estimate that U.S. retail sales of pet food,
supplies, small animals (excluding cats and dogs) and services increased to approximately $33 billion in 2004. We believe we are well positioned to benefit from several key growth trends within the industry.



Pet Food. Packaged Facts, an independent provider of market research
reports, estimates that dog and cat food sales, which represent the vast majority of all pet food sales, accounted for approximately $13.8 billion in sales for 2004. Sales of premium dog and cat food represented approximately 37.9% of the total dog
and cat food market in 2003 and are expected to increase to approximately 41.2% of the total dog and cat food market by 2008. Sales of dog and cat food accounted for $607 million, or 30%, of our fiscal 2005 net sales, of which $565 million, or 93%,
was generated from premium dog and cat food sales.



Historically, the pet food industry has been dominated by national supermarket brands such as Alpo, Kal Kan and Purina, which are primarily sold through grocery stores, supermarkets, convenience stores and mass merchants. In recent years,
supermarkets share of total pet food sales has steadily decreased as a result of competition from warehouse clubs, mass merchants and specialty pet store chains as well as the growing proportion of premium pet food sales. Premium pet foods,
such as Science Diet, Nutro and Eukanuba, currently are not sold through supermarkets, warehouse clubs or mass merchants due to manufacturers restrictions but are sold primarily through specialty retailers like PETCO®, veterinarians and farm and feed stores.



The growth of the premium pet food market is attributable to both the
marketing of premium brands by vendors and a heightened nutritional awareness among pet owners. In recent years, premium pet food manufacturers have launched numerous new specialty food products, such as all-natural products and products



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for pets with sensitive skin and stomachs, as well as oral care products. Management expects expanded product offerings by premium pet food manufacturers to
continue, and that distribution of these products primarily through specialty retailers will continue to draw customers away from supermarkets and mass merchants.



Pet Supplies and Small Animals.Based on reports from Packaged Facts, sales of pet supplies and small animals
(excluding cats and dogs) accounted for approximately $8.5 billion in sales for 2004 and will grow at a compound annual growth rate of 6.5% over the next few years. Sales of pet supplies and small animals (excluding cats and dogs) accounted for $1.3
billion, or 67.5%, of our fiscal 2005 net sales.



The market
for pet supplies consists of items such as collars and leashes, cages and habitats, toys, treats, aquatic supplies, pet carriers, vitamins and supplements, and grooming and veterinary products. The channels of distribution for pet supplies are
highly fragmented with products sold by many types of retailers, including supermarkets, warehouse clubs and other discounters, mass merchants, specialty pet store chains, direct mail and veterinarians. Specialty retailers such as PETCO, with wide
assortments of pet supplies and higher levels of customer service, represent a growing channel for sales of pet supplies.



The market for small animals (other than cats and dogs) includes sales of fish, birds, reptiles, hamsters, mice and other small pets. Because of the
overpopulation of cats and dogs and the controversial practices of some breeders, we have elected to limit our selection of animals to birds, fish, reptiles and other small animals. We do, however, participate in pet adoption programs for cats, dogs
and other animals, which are administered primarily through local animal welfare programs.



Pet Services.Pet services are estimated to account for the remaining $10.7 billion of the overall $33 billion market projected by management for 2004. The market for pet services includes grooming, obedience
training, day care and overnight boarding, and vaccinations and other veterinary services. We offer obedience training in most of our stores, grooming in the majority of our stores and limited veterinary services, such as routine vaccinations, at a
number of stores. In fiscal 2004, we opened our first PETCO Doggie Day Camp® to service our customers day care needs. Services represented 5.0% of our fiscal 2005 net sales and represent an increasing portion of our net sales. We believe that offering selected pet services better
serves our customers and increases traffic flow to our stores. For fiscal 2005, services sales increased 23% from fiscal 2004.



Distribution Channels.Our industry is highly fragmented, with an estimated 9,000 independent pet supply stores operating in the United States.
PETCO is one of only two national specialty retailers of pet food, supplies and services. Between 1991 and 2004, the last year for which data is available, specialty pet store chains such as PETCO experienced significant market share gains in the
pet food and supplies categories, largely at the expense of supermarkets. We believe that this shift primarily results from (1) the enhanced merchandising effort and product mix offered by specialty pet store chains and (2) the growing
demand for premium pet food as nutritional awareness among the general population extends to pet owners and their pets.



Business Strategy



Our strategy is to strengthen our position as a leading specialty retailer of premium pet food, supplies and services by offering our customers a complete
assortment of pet-related products and services at fair prices with superior levels of customer service at convenient locations. We intend to continue to pursue the following elements of our strategy:



| |  |  | Continue To Increase Sales and Profitability. We have increased our net sales from $1.3 billion in fiscal 2001 to $2.0 billion in fiscal 2005. We also
increased our operating income from $31.8 million in fiscal 2001, which included unusual charges and expenses totaling $58.0 million, to $141.5 million in fiscal 2005. The principal contributors to this improvement in our financial performance since
2001 include: (1) our ability to generate comparable store net sales growth, driven partly by our continuing initiative of remodeling certain stores to our newer store formats; (2) strategic expansion in both existing and new markets;
(3) innovative store formats that offer superior customer service, convenience
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | and a fun and exciting shopping environment; (4) targeted merchandising efforts to drive sales of higher-margin pet accessories, supplies and services,
which have grown to approximately 71% of net sales in fiscal 2005, up from approximately 67% of net sales in fiscal 2001; (5) our expanding store base, which offers economies of scale and purchasing efficiencies; and (6) a broad product
offering of over 10,000 high quality pet-related products, most of which are not found in typical supermarkets or mass merchants.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Capitalize Upon Our Maturing Store Base. We have historically found that the most dramatic growth in a stores net sales and operating income occurs in the first five
years following a stores opening. During this store maturation phase, we have historically experienced an increase in store-level contribution from an approximate average of 6% of net sales in the stores first year to an approximate
average of over 15% of net sales in year five. More than 40% of our stores were opened in the past five years and to date our newly opened stores have been maturing in accordance with historical rates. We believe that our maturing store base
provides us with an opportunity to significantly increase our net sales and store-level operating income with only modest incremental capital expenditures for these stores.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expand Using Our Proven New Store Model. We believe that the highly fragmented pet food, supplies and services market offers compelling opportunities for us to increase our
presence and gain market share. To capitalize on these opportunities and consistent with our existing strategy, we plan to increase our aggregate store square footage by 8% to 10% per year on a long-term basis, both by focusing primarily on
existing markets and by targeting one new geographic market per year. Our year-over-year increase in square footage in fiscal 2005 was 11.8%, and our total store square footage at January 28, 2006 was approximately 11.3 million square
feet. We plan to open approximately 90 new stores in fiscal 2006, or approximately 75 stores net of relocations and closings. We carefully measure each proposed store opening against demographic, economic and competitive factors. In fiscal 2006, we
intend to remodel approximately 35 of our existing stores into our newer formats, and we plan to remodel additional existing stores in the future.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Continue Our Focus on Expanding Our Services Business. We continue to expand our offerings of services to our customers, including grooming, canine education, day care and
vaccinations. These services broaden our relationship with customers and encourage more frequent visits to our stores, which result in additional sales of pet food, supplies and small animals (other than cats and dogs). As such, the growing services
portion of our business complements our overall customer relationship initiatives. For fiscal 2005, services sales increased 23% from fiscal 2004.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Further Enhance Our Logistics Expertise. Our distribution system has over one million square feet of distribution capacity, including an integrated network of three main and
six regional distribution centers. This network enables us to reduce our costs by reducing the delivered cost of merchandise and limiting the need to carry excess inventory in our stores. Our inventory control systems provide for effective
replenishment of inventory and allow us to improve in-stock levels at our stores.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Capitalize Upon Our Brand Awareness and Highly Successful Customer Loyalty Program. The PETCO brand name and our slogan PETCO, where the pets go are
well known by pet owners. We believe that this awareness reinforces the fun and enjoyable shopping experience that we seek to create for our customers and their pets. PETCO P.A.L.S.®, our highly successful customer loyalty program, further enhances and reinforces the
loyalty, brand awareness and satisfaction of our customers. Our P.A.L.S. members account for approximately 75% of our net sales. Our program fosters a long-term, one-on-one relationship with the customer and builds brand loyalty and customer
retention. Our program also provides us with one of the largest databases of customer information in the industry. Information on our customers buying preferences allows us to more precisely deliver targeted marketing efforts and assists us in
more effectively catering to our customers needs.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Continue to Provide Superior, Knowledge-Based Customer Service. We seek to enhance our customers shopping experience by providing knowledgeable and friendly customer
service and creating a fun and exciting shopping environment. We seek to hire store managers and sales associates who themselves are pet owners and enthusiasts and, therefore, are more eager and better able to assist customers with their needs. We
believe it is better to hire animal lovers and train them in retail rather than hire experienced retailers and hope they like animals. We believe that our customer service differentiates us from our competitors, leading to increased sales,
attracting new customers and building customer loyalty.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Purchasing and Distribution



We currently
operate three main and six regional distribution centers. The main distribution centers are located in Mira Loma, California; Monroe, New Jersey; and Joliet, Illinois. Bulk items for all stores are either shipped to regional distribution centers for
redistribution or are sent directly to store locations. Manufacturers ship non-bulk supplies to the main distribution facilities, which we then distribute either to regional centers or directly to store locations. We also provide order fulfillment
services for our Internet customers through our three main distribution centers.



Marketing and Advertising



Our marketing
department creates and implements a wide variety of national, regional and local advertising, direct marketing and sales promotion programs. These television, radio, circular and direct mail programs are designed to increase sales and consumer
awareness of the PETCO brand name.



Our P.A.L.S. database is
integrated with our point of sale (POS) system, allowing us to track the purchasing activity and shopping habits of our P.A.L.S. cardholders. This allows us to effectively target customers with personalized direct mail or e-mail messages, to provide
promotional offers directly related to past purchases and to adjust our products and services mix to more effectively cater to our customers needs. The breadth of understanding of customer behavior we have accumulated and continue to
accumulate has impacted our marketing, our merchandising and our vendor relationships, and allows us to enhance customer retention and heighten customer satisfaction. Our P.A.L.S. strategy is highly integrated and fully complementary with our
high-low pricing strategy, and the integration of these strategies allows us to reward our best customers with competitive retail prices while optimizing our overall operating margins.



Local store marketing activities are conducted on a regular basis in most stores. These marketing activities include store
grand opening events, in-store pet adoptions, informational seminars, school field trips, pet photos, product demonstrations, pet fairs and a variety of other local contests or cross-promotion events.



We are the naming rights sponsor for PETCO Park, a baseball stadium in San
Diego, California, which is the home of the San Diego Padres major league baseball team. As part of this arrangement, we also receive certain other promotional benefits from the San Diego Padres.



Competition



The pet food, supplies and services business is highly competitive. This competition can be categorized into three different
segments: (1) supermarkets, warehouse clubs and mass merchants; (2) specialty pet store chains; and (3) traditional pet stores and independent service providers. Our strategy is to focus our assortment on specialty products and
premium pet foods, which minimizes the potential overlap with supermarkets, warehouse clubs, and mass merchants. We believe that we compete effectively within our various geographic areas. However, some of our competitors are much larger in terms of
sales volume and have access to greater capital and management resources than we do.



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Suppliers and Vendors



We purchase most of our merchandise directly from specialty suppliers and manufacturers of national brands. We purchase the majority of our pet food
products from three vendors: Hills Pet Products, Inc. (which produces Science Diet), Nutro Products, Inc. and The Iams Company. Supplies of products from these vendors accounted for approximately 8%, 8% and 7%, respectively, of our net sales
in fiscal 2005 and fiscal 2004. While we do not maintain long-term supply contracts with any of our vendors, we believe that we enjoy a favorable and stable relationship with each of these vendors.



Many of the premium pet food brands we offer, such as Science Diet, Nutro and
Eukanuba, are not presently available to supermarkets, warehouse clubs or mass merchants due to manufacturers restrictions. One of our pet food vendors, The Iams Company, distributes its Iams brand of pet food to supermarkets, warehouse clubs
and mass merchants across the country. The Eukanuba brand of premium pet food, which is also manufactured by The Iams Company, continues to be sold exclusively by specialty channels such as PETCO.



Information Systems



Our integrated information systems provide our management team with timely information on sales trends, inventory tracking
and operational data at the individual store level. These systems empower regional, district and store managers to increase sales, control inventory and enhance customer satisfaction. Our in-store POS system tracks all sales by stockkeeping unit
(SKU) using bar codes and allows management to compare current performance against historical performance and current years budget on a daily basis. The information gathered by this system supports automatic replenishment of in-store inventory
from our main and regional distribution centers and is integrated into product buying decisions. Store labor planning and visual presentation levels are also supported by sales management information systems. We use Electronic Data Interchange (EDI)
with a majority of suppliers for efficient transmittal of purchase orders, shipping notices and invoices. Management believes that the systems we have developed enable us to continue to improve customer service, operational efficiency and
managements ability to monitor critical performance indicators. We continue to invest in supply chain technologies, human resources management, financial planning tools and continued improvement to the POS systems located in all stores.



Internet Operations



We operate the e-commerce site www.petco.com, which complements our retail
stores, increases brand awareness of our products and provides our customers with pet-related content and community. The information contained or incorporated in our web site is not a part of this Annual Report.



Trademarks and Licenses



We have registered numerous service marks and trademarks with the United States Patent and Trademark Office. We believe the
PETCO trademark has become an important component in our merchandising and marketing strategy. We believe we have all licenses necessary to conduct our business.



Employees



As of January 28, 2006, we employed approximately 17,900 associates, of whom approximately 9,900 were employed full-time. Approximately 92% of our
employees were employed in stores or in direct field supervision, approximately 4% in distribution centers and approximately 4% in our national support center in San Diego. We are not party to any collective bargaining arrangements, and we believe
our labor relations are generally good.



Regulation



The transportation and sale of small animals is governed by various state and
local regulations. To date, these regulations have not had a material effect on our business or operations. Prior to the opening of each store,



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we review the regulations of the relevant state and local governments. We then ensure ongoing compliance by keeping apprised of industry publications and
maintaining contacts with our aquatics and small animal suppliers and the appropriate regulatory agency within each relevant state and local government.



Available Information



Our Internet address is www.petco.com. We make available free of charge through our Internet web site our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the Securities and Exchange Commission.



ITEM 1A. RISK FACTORS



Certain Cautionary
Statements



Market data used throughout this Annual Report,
including information relating to our relative position in the pet food, supplies and services retailing industry, is based on the good faith estimates of management, which estimates are based upon their review of internal surveys, independent
industry publications and other publicly available information, including Packaged Facts reports and information prepared by the American Pet Products Manufacturers Association and Business Communications Company, Inc. Although we believe that these
sources are reliable, we do not guarantee the accuracy or completeness of this information, and we have not independently verified this information.



Some of the statements in this Annual Report, including, but not limited to, Item 7Managements Discussion and Analysis of Financial
Condition and Results of Operations, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. These statements are therefore
entitled to the protection of the safe harbor provisions of these laws. We generally identify forward-looking statements in this Annual Report using words like believe, intend, target, expect,
estimate, may, should, plan, project, contemplate, anticipate, predict or similar expressions. You can also identify forward-looking statements by
discussions of strategy, plans or intentions. These statements involve known and unknown risks, uncertainties and other factors that may cause our or our industrys actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Such risks, uncertainties and other factors include, but are not limited to, those discussed
below.



You are cautioned not to place undue reliance on
forward-looking statements, which reflect managements view only as of the date of this Annual Report. Except as required by applicable law, including the securities laws of the United States, and the rules and regulations of the Securities and
Exchange Commission, we do not plan to publicly update or revise any forward-looking statements after the date of this Annual Report, whether as a result of any new information, future events or otherwise.



If we are unable to profitably open and operate new stores, maintain the profitability of
our existing stores and successfully complete our store remodel program, our business, financial condition and results of operations may be harmed.



One of our strategies is to open new stores by focusing on both existing markets and by targeting new geographic markets. We have opened between 50 and 89
stores per year (not including closures of existing stores) between fiscal 2001 and fiscal 2005. We plan to increase our aggregate store square footage by 8% to 10% per year on a long-term basis, both by focusing on existing markets and by
targeting one new geographic market per year. Our year-over-year increase in square footage in fiscal 2005 was 11.8%, and our total store square footage at January 28, 2006 was approximately 11.3 million square feet. We plan to open
approximately 90 new stores in fiscal 2006, or approximately 75 stores net of relocations and closings.



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There can be no assurance that we will be able to open stores at this rate. The rate of our expansion
will depend on several factors, including general economic and business conditions affecting consumer confidence and spending, the availability of desirable locations, the negotiation of acceptable lease terms, the availability of qualified
personnel and our ability to manage the operational aspects of our growth. The rate of our expansion will also depend on the availability of adequate capital, which in turn will depend in large part on cash flow generated by our business and the
availability of equity and debt capital. There can be no assurance that we will be able to obtain equity or debt capital on acceptable terms or at all. Moreover, our senior credit facility and the indenture governing our senior subordinated notes
contain provisions that restrict the amount of debt we may incur in the future. If we are not successful in obtaining sufficient capital, we may be unable to open additional stores as planned, which may adversely affect our results of operations.



Our continued growth also depends, to a significant degree, on
our ability to increase sales in our new and existing stores. Our comparable store net sales increased by 5.6%, 6.2% and 2.7% for fiscal 2003, 2004 and 2005, respectively. As a result of new store openings in existing markets and because mature
stores will represent an increasing proportion of our store base over time, our comparable store net sales increases in future periods may be lower than historical levels or our comparable store net sales may not increase at all.



There also can be no assurance that our existing stores will maintain their
current levels of sales and profitability or that new stores will generate sales levels necessary to achieve store-level profitability, much less profitability comparable to that of existing stores. New stores that we open in our existing markets
may draw customers from our existing stores and may have lower sales growth relative to stores opened in new markets. New stores also may face greater competition and have lower anticipated sales volumes relative to previously opened stores during
their comparable years of operations. These factors, together with increased pre-opening expenses at our new stores, may reduce our average store contribution and operating margins. In addition, we are opening new stores in, and are remodeling some
of our existing stores into, our newer format, which incorporates our most recent merchandising strategies. There can be no assurance that our newer formats will be as or more profitable than our existing stores, and may be less profitable than
historical levels for our other stores. If we are unable to profitably open and operate new stores and maintain the profitability of our existing stores, our business, financial condition and results of operations may be harmed.



We may be unable to successfully execute our expansion strategy or manage and sustain our
growth and, as a result, our business may be harmed.



Our
ability to open new stores depends on a number of factors, including:



| |  |  | adequate capital resources for leasehold improvements, fixtures, inventory and pre-opening expenses;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | our ability to locate and obtain favorable store sites and negotiate acceptable lease terms;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | our ability to obtain and distribute adequate product supplies to our stores, including by expanding our distribution facilities;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to hire, train and retain skilled managers and personnel; and
| | - |  | -------------------------------------------------------------------------



| |  |  | our ability to continue to upgrade our information and other operating systems to control the anticipated growth and expanded operations.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



Our senior credit facility and the indenture governing our senior
subordinated notes also contain covenants that may restrict or impair our growth plans. We currently expect to finance our store expansion plans from cash flow from operations, lease financing and capacity under our senior credit facility. To the
extent that we are unable to obtain adequate financing for new store growth on acceptable terms, our ability to open new stores will be negatively impacted. As a result, there can be no assurance that we will be able to achieve our current plans for
the opening of new stores. In addition, our failure to expand our distribution facilities or other internal systems or procedures in accordance with our growth plans, or difficulties we may incur in operating our distribution facilities, could
adversely affect our ability to deliver merchandise to our stores in a timely fashion. As a result, our ability to support our planned new store growth may be harmed.



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In addition, we routinely evaluate our strategic alternatives with respect to each of our stores and our
other operating assets and investments. In connection with this evaluation, we may elect to close stores or to sell or otherwise dispose of selected assets or investments. Excluding store relocations, we closed two stores in fiscal 2003, one store
in fiscal 2004 and nine stores in fiscal 2005. There can be no assurance that any future sale or disposition would be achieved on terms favorable to us because we incur closing costs or may lose sales to our competitors as a result.



Our level of debt may limit the cash flow available for our operations and place us at a
competitive disadvantage.



As of January 28, 2006, our
debt consisted primarily of (1) $60.0 million outstanding under our senior revolving credit facility (total available revolving credit of $200.0 million (reduced by the outstanding amount of letters of credit of $30.1 million at
January 28, 2006) with an option to increase the available credit by an additional $125.0 million, subject to certain conditions) and (2) $89.3 million in principal amount of our senior subordinated notes. Our level of indebtedness has
important consequences. For example, our level of indebtedness may:



| |  |  | require us to use a significant portion of our cash flow from operations to pay interest and principal on our debt, which would reduce the funds available to use for working
capital, capital expenditures and other general corporate purposes;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other investments, which may limit our ability to carry out our business
strategy;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | result in higher interest expense if interest rates increase on our floating rate borrowings; or
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | heighten our vulnerability to downturns in our business or in the general economy and restrict us from exploiting business opportunities or making acquisitions.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



The agreements governing our debt impose restrictions on our
business.



The agreement governing our senior credit
facility and the indenture governing our senior subordinated notes contain a number of covenants imposing significant restrictions on our business. These restrictions may affect our ability to operate our business and may limit our ability to take
advantage of potential business opportunities as they arise. These covenants place restrictions on our ability to, among other things:



| |  |  | incur more debt;
| | - |  | ----------------



| |  |  | pay dividends, redeem or repurchase our stock or make other distributions;
| | - |  | --------------------------------------------------------------------------



| |  |  | make acquisitions or investments;
| | - |  | ---------------------------------



| |  |  | enter into transactions with affiliates;
| | - |  | ----------------------------------------



| |  |  | merge or consolidate with others;
| | - |  | ---------------------------------



| |  |  | dispose of assets or use asset sale proceeds;
| | - |  | ---------------------------------------------



| |  |  | create liens on our assets; and
| | - |  | -------------------------------



| |  |  | extend credit.
| | - |  | --------------



If compliance with our debt obligations materially hinders our ability to operate our business and adapt to changing industry conditions, we may lose
market share, our revenue may decline and our operating results may suffer.



Our failure to satisfy covenants in our debt instruments would cause a default under those instruments.



In addition to imposing restrictions on our business and operations, our debt instruments include a number of covenants relating to financial ratios and
tests. Our ability to comply with these covenants may be affected by



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events beyond our control, including prevailing economic, financial and industry conditions. The breach of any of these covenants would result in a default
under these instruments. An event of default would permit our lenders to declare all amounts borrowed from them to be due and payable, together with accrued and unpaid interest. Moreover, the lenders under our senior credit facility would have the
option to terminate any obligation to make further extensions of credit under our senior credit facility. If we are unable to repay debt to our senior lenders, these lenders could proceed directly against our assets.



The loss of any of our three key vendors, or of our exclusive distribution arrangements
with our vendors, would negatively impact our business.



We
purchase significant amounts of products from three key vendors: Hills Pet Products, Inc. (which produces Science Diet), Nutro Products, Inc. and The Iams Company. Supplies of products from these vendors accounted for approximately 8%, 8% and
7%, respectively, of our net sales in fiscal 2005 and fiscal 2004. We do not maintain long-term supply contracts with any of our vendors. While we believe that our vendor relationships are satisfactory, any vendor could discontinue selling to us at
any time. The loss of any of our three key vendors or any other significant vendors of premium pet food or pet supplies offered by us would have a negative impact on our business, financial condition and results of operations.



In addition, a change in how our key products are distributed could have a
material adverse effect on our business. It could materially adversely affect our business if any premium pet food manufacturers were to make premium pet food products widely available in supermarkets or through mass merchants, or if the premium
brands currently available to supermarkets and mass merchants were to increase their market share at the expense of the premium brands sold only through specialty pet food and supplies retailers.



None of the premium pet food brands that we purchase from Hills Pet
Products, Inc. and Nutro Products, Inc. is widely available in supermarkets, warehouse clubs or mass merchants. One of our pet food vendors, The Iams Company, distributes its Iams brand of pet food to supermarkets, warehouse clubs and mass merchants
across the country. The Eukanuba brand of premium pet food, which is also manufactured by The Iams Company, continues to be sold exclusively through specialty channels such as PETCO.



Our principal vendors also currently provide us with certain incentives such as volume purchasing, trade discounts,
cooperative advertising and market development funds. A reduction or discontinuance of these incentives would increase our costs and could reduce our profitability.



We also purchase significant amounts of pet supplies from a number of vendors with limited supply capabilities. There can be
no assurance that our current pet supply vendors will be able to accommodate our anticipated growth and expansion of our stores. We continually seek to expand our base of pet supply vendors and to identify new pet-related products. An inability of
our existing vendors to provide products in a timely or cost-effective manner could impair our business, financial condition and results of operations.



Competition in the markets in which we operate is strong and if we are unable to compete effectively, our ability to generate sales may suffer and our operating income
and net earnings would decline.



The pet food and supplies
retailing industry is highly competitive. We compete with a number of specialty pet store chains and traditional pet stores. We also compete with supermarkets, warehouse clubs and mass merchants. Many of these competitors are larger and have access
to greater capital and management resources than we do.



There
can be no assurance that in the future we will not face greater competition from national, regional and local retailers. In particular, if any of our major competitors seeks to gain or retain market share by reducing prices or by introducing
additional products, we may be required to reduce prices on our key products in order to remain competitive, which may negatively impact our profitability.



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A prolonged economic downturn could result in reduced sales and lower revenues and profitability.



Purchases of pet-related supplies may be affected by prolonged, negative
trends in the general economy that adversely affect consumer spending. Any reduction in consumer confidence or disposable income in general may affect companies in pet-related and other retail industries more significantly than companies in
industries that rely less on discretionary consumer spending. In addition, due to our level of debt we are more susceptible to some of these adverse economic effects than are some of our competitors that have greater financial and other resources
than we do.



Our operating results could be harmed if we are unable to
integrate acquired companies into our operations.



The pet
food and supplies retailing industry is highly fragmented. We may pursue expansion and acquisition opportunities in the future, and we must efficiently integrate and combine operations of acquired companies to realize the anticipated benefits of
acquisitions. To be successful, the integration process requires us to achieve the benefits of combining the companies, including generating operating efficiencies and synergies and eliminating or reducing redundant costs. Since we often have
limited prior knowledge of acquired companies, there can be no assurance that the anticipated benefits of these acquisitions will be fully realized without incurring unanticipated costs or diverting managements attention from our core
operations. Our operating results could be harmed if we are unable to efficiently integrate newly acquired companies into our operations. Any future acquisitions also could result in potentially dilutive issuances of equity securities, or the
incurrence of additional debt or the assumption of contingent liabilities.



We have made investments in the past and may make investments in the future without being able to achieve an adequate return, if any, on our investment.



In the past we have made, and in the future we may make, investments in strategic ventures or other complementary businesses
in an effort to expand internationally or to otherwise grow our business. These investments typically involve many of the same risks posed by acquisitions, particularly those risks associated with the diversion of our resources, the inability of the
new venture to generate sufficient revenues, the management of relationships with third parties and potential expenses. Strategic ventures have the added risk that the other strategic venture partners may have economic, business or legal interests
or objectives that are inconsistent with our interests and objectives. Although we have no present plans to make any such investment, there can be no assurance that any investment we make in the future would achieve an adequate return, if any. In
addition, in the past we have terminated, and in the future we may terminate, our relationship in a strategic venture after we have made substantial investments in that strategic venture.



If we are required to restructure our operations to comply with regulations governing our business, it could have a material effect on
our business and operations.



The transportation and sale
of small animals is governed by various state and local regulations. These laws vary from state to state and are enforced by the courts and by regulatory authorities with broad discretion. While we seek to structure our operations to comply with the
laws and regulations of each state in which we operate, there can be no assurance that, given varying and uncertain interpretations of these laws, we would be found to be in compliance in all states. A determination that we are in violation of
applicable laws in any state in which we operate could require us to restructure our operations to comply with the requirements of that state, which could have a material adverse effect on our business and operations.



Negative publicity arising from claims that we do not properly care for animals we sell
could adversely affect how we are perceived by the public and reduce our revenues and profitability.



From time to time we are subject to claims or complaints that we do not properly care for some of the companion animals we sell, which may include birds,
fish, reptiles and other small animals. Given the large



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number of small animals we sell, deaths or injuries sometimes occur while they are in our care. As a result, we may be subject to claims that our animal care
practices, or the related training of our associates, may not provide the proper level of care. Any such claims or complaints, as well as any related news reports, could cause negative publicity, which in turn could harm our business and have a
material adverse effect on our results of operations.



We depend on key
personnel, and if we lose the services of any of our principal executive officers, including Mr. Devine, our Chairman, Mr. Myers, our Chief Executive Officer, and Mr. Hall, our President and Chief Operating Officer, we may not be able
to run our business effectively.



We are dependent upon the
efforts of our principal executive officers. In particular, we are dependent upon the management and leadership of Brian K. Devine, our Chairman, James M. Myers, our Chief Executive Officer, and Bruce C. Hall, our President and Chief Operating
Officer. The loss of Mr. Devine, Mr. Myers, Mr. Hall or certain of our other principal executive officers could affect our ability to run our business effectively.



Our success will depend on our ability to retain our current management and to attract and retain qualified personnel in the
future. Competition for senior management personnel is intense and there can be no assurance that we can retain our personnel. The loss of a member of senior management requires the remaining executive officers to divert immediate and substantial
attention to seeking a replacement. The inability to fill vacancies in our senior executive positions on a timely basis could adversely affect our ability to implement our business strategy, which would negatively impact our results of operations.



We have been named as a party to several class action and derivative action
lawsuits, and we may be named in additional litigation, all of which could require time and attention from certain members of management and result in significant legal expenses. An unfavorable outcome in one or more of these lawsuits could have a
material adverse effect on our business, financial condition, results of operations and cash flows.



On April 18, 2005, we and our Chief Executive Officer and Chief Financial Officer were named as defendants in a purported class action filed in
United States District Court for the Southern District of California alleging violations of Sections 10 and 20 of the Securities Exchange Act of 1934. The named plaintiff purports to represent a class of purchasers of our stock during the period
November 18, 2004 to April 14, 2005, and alleges that during such period the defendants misrepresented our financial position and that the plaintiff and the purported class of purchasers during that period were damaged by paying
artificially and falsely inflated prices for our stock. Over the next several weeks, three additional purported class actions were filed in the same court alleging essentially the same claims against us and our officers and adding our Chairman as a
defendant. These cases were consolidated, and in October 2005 a consolidated complaint was filed extending the class period from August 18, 2004 to August 25, 2005, adding additional but similar causes of action, and naming additional
defendants, including our President and Chief Operating Officer, several of our Senior Vice Presidents, several former and current members of our Board of Directors, and two of our former stockholders. In January 2006, the defendants filed a motion
to dismiss the consolidated complaint on the ground that it failed to state facts sufficient to state a claim under the securities laws. A hearing on the motion is scheduled for May 22, 2006.



On April 22, 2005, an alleged owner of our stock derivatively sued all
our directors and our Chief Executive Officer and Chief Financial Officer, purportedly on our behalf, alleging that such officers and directors engaged in breaches of fiduciary, abuse of control, gross mismanagement, waste of corporate assets,
unjust enrichment and other violations of California law during the period November 18, 2004 to the present. Also on April 22, 2005, another shareholder derivative action was filed in Superior Court of the State of California for the
County of San Diego on behalf of another alleged owner of our stock against the same defendants and with substantially similar allegations to those described above. These actions have been consolidated. In August 2005, the defendants moved to
dismiss the consolidated complaint on the ground that the stockholders had failed to make a demand on the Companys Board and failed to adequately allege that a demand was excused. The Court granted the motion but gave plaintiffs leave to
amend. The plaintiffs filed an amended complaint which defendants have again moved to dismiss. A hearing on the defendants motion is now scheduled for April 2006.



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While we have tendered these matters to our insurance carriers, the expense of defending such litigation
may be costly and divert attention by certain members of management from the day-to-day operations of our business, which could adversely affect our business, results of operations and cash flows, resulting in a decline in the market price of our
common stock. In addition, though we believe that any damages, if any, would be covered by our insurance, there can be no assurance that an unfavorable outcome in such litigation would not have a material adverse effect on our business, results of
operations and cash flows, resulting in a decline in the market price of our common stock.



Terrorism and the uncertainty of war may have a material adverse effect on our operating results.



Terrorist attacks, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, and other acts of violence or war may
affect the operations of the United States securities markets, the markets in which we operate and our operations and profitability. Further terrorist attacks against the United States or U.S. businesses may occur. The potential near-term and
long-term effect these attacks may have for our customers, the markets for our services and the U.S. economy are uncertain. The consequences of any terrorist attacks, or any armed conflicts which may result, are unpredictable, and we may not be able
to foresee events that could have an adverse effect on our business.



Future
sales of shares of our common stock in the public market may depress our stock price.



If our existing stockholders sell substantial amounts of our common stock in the public market or if there is a perception that these sales may occur, the market price of our common stock could decline. As of
March 17, 2006, we had 57,893,803 shares of common stock outstanding. Substantially all of these shares are freely tradable in the public market without restriction or further registration under the Securities Act, unless the shares are held by
affiliates of ours as such term is defined in Rule 144 of the Securities Act.



We also have 6,142,054 shares of common stock reserved for issuance under our stock option and incentive plans, of which 4,489,800 shares were subject to outstanding options and 360,925 shares were subject to unvested
restricted stock units as of March 17, 2006. In March 2002, we filed a registration statement on Form S-8 to register all of the shares of common stock which could be purchased upon the exercise of stock options outstanding on that date and all
other shares of common stock reserved for future issuance under our stock option and incentive plans. Accordingly, shares issued upon exercise of such options are freely tradable by holders who are not our affiliates and, subject to the volume and
other limitations of Rule 144, by holders who are affiliates.



The price of
our common stock may be volatile.



Since our initial public
offering in February 2002, the price at which our common stock has traded has been subject to significant fluctuation. The market price for our common stock in the future may continue to be volatile. In addition, the stock market periodically
experiences significant price and volume fluctuations that in many instances have been unrelated or disproportionate to the operating performance of specific companies. In the past, following periods of volatility in the market price of a particular
companys securities, securities class-action litigation has often been brought against that company, and we are currently subject to such litigation. The current and any similar litigation instituted against us in the future, could result in
substantial costs and divert managements attention and resources from our core business.



Our stock price may be adversely affected because our results of operations may fluctuate from quarter to quarter.



The timing of new store openings, related pre-opening expenses and the amount of revenue contributed by new and existing stores may cause our quarterly
results of operations to fluctuate. Our business is also subject to seasonal fluctuation. Historically, we have realized a higher portion of our net sales during the month of December than during the other months of the year. If our quarterly
revenue and operating results fall below the expectations of securities analysts and investors, the market price of our common stock could fall substantially.



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Operating results also may vary depending on a number of factors, many of which are outside our control,
including:



| |  |  | changes in our pricing policies or those of our competitors;
| | - |  | ------------------------------------------------------------



| |  |  | the hiring and retention of key personnel;
| | - |  | ------------------------------------------



| |  |  | wage and cost pressures;
| | - |  | ------------------------



| |  |  | changes in fuel prices or electrical rates;
| | - |  | -------------------------------------------



| |  |  | costs related to acquisitions of businesses; and
| | - |  | ------------------------------------------------



| |  |  | seasonal and general economic factors.
| | - |  | --------------------------------------



Takeover defense provisions may adversely affect the market price of our common stock.



Various provisions of the Delaware general corporation law, or the DGCL, and of our corporate governance documents may
inhibit changes in control not approved by our board of directors and may have the effect of depriving our stockholders of an opportunity to receive a premium over the prevailing market price of our common stock in the event of an attempted hostile
takeover. In addition, the existence of these provisions may adversely affect the market price of our common stock. These provisions include:



| |  |  | a classified board of directors;
| | - |  | --------------------------------



| |  |  | a prohibition on stockholder action through written consents;
| | - |  | -------------------------------------------------------------



| |  |  | a requirement that special meetings of stockholders be called only by our board of directors, our chairman or our president;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | advance notice requirements for stockholder proposals and nominations; and
| | - |  | --------------------------------------------------------------------------



| |  |  | availability of blank check preferred stock.
| | - |  | ----------------------------------------------



We incur significant expenses as a result of being a public company.



The Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the SEC and Nasdaq, have required changes in corporate governance
practices of public companies. These new rules and regulations have increased and will continue to increase, our legal and financial compliance costs and make some activities more time-consuming and costly.



ITEM 2. PROPERTIES



We lease
all of our store and distribution center locations. The original lease terms for our stores generally range from ten to fifteen years, with many of these leases containing renewal options. Leases on 119 stores expire within the next three years. Of
these leases, 85 contain renewal options.



Our headquarters,
located in San Diego, California, consists of three owned facilities comprising a total of 156,000 square feet. We also lease three main and six regional distribution centers. Our three main distribution centers collectively occupy approximately
950,000 square feet of space in Monroe, New Jersey; Joliet, Illinois; and Mira Loma, California under leases that expire in May 2018, March 2010 and September 2013, respectively. Our six regional distribution centers collectively occupy
approximately 290,000 square feet of space in Stockton, California; Portland, Oregon; Mansfield, Massachusetts; Garland, Texas; Denver, Colorado; and Orlando Florida under leases that expire in April 2009, February 2007, December
2008, October 2009, July 2015 and February 2016 respectively. Except with respect to the leases for our Monroe, New Jersey; Stockton, California; Portland, Oregon; and Mansfield, Massachusetts facilities, all of our distribution center
leases contain a renewal option.



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Below is a table listing, for our 779 stores at January 28, 2006, the number of stores by state:



Number of PETCO Stores

as of January 28, 2006



|                     |  |                  |  |                |  |                 
|-------------------- |  | ---------------- |  | -------------- |  | ----------------
|State                |  | Number of Stores |  | State          |  | Number of Stores
|Alabama              |  | 8                |  | Montana        |  | 3               
|Alaska               |  | 2                |  | Nebraska       |  | 6               
|Arizona              |  | 23               |  | Nevada         |  | 9               
|Arkansas             |  | 6                |  | New Hampshire  |  | 7               
|California           |  | 147              |  | New Jersey     |  | 18              
|Colorado             |  | 22               |  | New Mexico     |  | 5               
|Connecticut          |  | 16               |  | New York       |  | 40              
|Delaware             |  | 2                |  | North Carolina |  | 5               
|District of Columbia |  | 1                |  | North Dakota   |  | 2               
|Florida              |  | 34               |  | Ohio           |  | 12              
|Georgia              |  | 13               |  | Oklahoma       |  | 5               
|Idaho                |  | 6                |  | Oregon         |  | 15              
|Illinois             |  | 46               |  | Pennsylvania   |  | 34              
|Indiana              |  | 11               |  | Rhode Island   |  | 3               
|Iowa                 |  | 8                |  | South Carolina |  | 1               
|Kansas               |  | 6                |  | South Dakota   |  | 1               
|Kentucky             |  | 1                |  | Tennessee      |  | 13              
|Louisiana            |  | 8                |  | Texas          |  | 63              
|Maine                |  | 3                |  | Utah           |  | 9               
|Maryland             |  | 16               |  | Vermont        |  | 1               
|Massachusetts        |  | 25               |  | Virginia       |  | 15              
|Michigan             |  | 22               |  | Washington     |  | 31              
|Minnesota            |  | 19               |  | West Virginia  |  | 1               
|Mississippi          |  | 1                |  | Wisconsin      |  | 14              
|Missouri             |  | 19               |  | Wyoming        |  | 1               



ITEM 3. LEGAL PROCEEDINGS



On
April 18, 2005, we and our Chief Executive Officer and our Chief Financial Officer were named as defendants in a purported class action filed in United States District Court for the Southern District of California alleging violations of
Sections 10 and 20 of the Securities Exchange Act of 1934. The named plaintiff purports to represent a class of purchasers of our stock during the period November 18, 2004 to April 14, 2005, and alleges that during such period the
defendants misrepresented our financial position and that the plaintiff and the purported class of purchasers during that period were damaged by paying artificially and falsely inflated prices for our stock. The complaint seeks unspecified monetary
damages. Over the next several weeks, three additional purported class actions were filed in the same court alleging essentially the same claims against us and our officers and adding our Chairman as a defendant. These cases were consolidated, and
in October 2005 a consolidated complaint was filed extending the class period from August 18, 2004 to August 25, 2005, adding additional but similar causes of action, and naming additional defendants, including our President and Chief
Operating Officer, several of our Senior Vice Presidents, several former and current members of our Board of Directors, and two former stockholders. In January 2006, the defendants filed a motion to dismiss the consolidated complaint on the ground
that it failed to state facts sufficient to state a claim under the securities laws. A hearing on the motion is scheduled for May 2006. We have tendered these matters to our insurance carriers.



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Although there can be no assurance that unfavorable outcomes in the foregoing matters would not have a
material adverse effect on our financial position or results of operations, management believes the claims are without merit, strong defenses exist, and management intends to vigorously defend against the actions. We have not recorded any accrual
for contingent liability associated with the legal proceedings described above based on managements belief that a liability, while possible, is not probable. Further, any possible range of loss cannot be estimated at this time.



On April 22, 2005, an alleged owner of our stock, derivatively sued all
of our directors and our Chief Executive Officer and Chief Financial Officer, purportedly on our behalf, alleging that such officers and directors engaged in breaches of fiduciary duty, abuse of control, gross mismanagement, waste of corporate
assets, unjust enrichment and other violations of California law during the period November 18, 2004 to the present. The complaint, filed in Superior Court of the State of California for the County of San Diego, seeks to recover on our behalf
alleged unspecified damages sustained by us as a result of such alleged actions, treble damages, disgorgement of profits from the sale of our securities and benefits and compensation obtained by the individual defendants, and extraordinary equitable
and/or injunctive relief as permitted by law. Also on April 22, 2005, another shareholder derivative action was filed in Superior Court of the State of California for the County of San Diego on behalf of another alleged owner of our stock
against the same defendants and with substantially similar allegations to those described above. These actions have been consolidated. In August 2005, the defendants moved to dismiss the consolidated complaint on the ground that the stockholders had
failed to make a demand on the Companys Board and failed to adequately allege that a demand was excused. The Court granted the motion but gave plaintiffs leave to amend. The plaintiffs filed an amended complaint which defendants have again
moved to dismiss. A hearing on the defendants motion is now scheduled for April 2006. We have tendered these matters to our insurance carriers, and do not believe the outcome of these matters will have a material adverse impact on our
consolidated financial position or results of operations in any future period.



On June 27, 2005, we were named as a defendant in a purported class action filed in the Superior Court of the State of California for the County of Los Angeles alleging violations of the California Labor Code.
The named plaintiffs, Wayne Boyd, Anthony Castro, Gilbert Hernandez, and Daniel Lepkosky, purport to represent all current and former hourly, non-exempt employees of our California stores from June 27, 2001 to the present. These plaintiffs
allege that during this period they were not paid all wages, were not paid overtime, were not authorized and permitted to take rest breaks as required by law, were not provided meal breaks as required by law, were not paid reporting time
pay, and were not paid all wages upon separation from employment. The complaint seeks unspecified monetary damages in the form of unpaid wages, penalties and other relief. On March 2, 2006, Plaintiff Gilbert Hernandez requested that his claims
against the Company be dismissed. This request is subject to court approval.



On September 19, 2005, another purported class action alleging Labor Code violations was filed in the Superior Court of the State of California for the County of Los Angeles naming us as the defendant. The named
plaintiff in the September 19 suit, Natalie Wade, purports to represent a class of current and former PETCO employees who she alleges were not paid all wages earned, were not provided meal breaks, were not authorized and permitted to take rest
breaks, and were not provided with itemized wage statements as required by law. This complaint also seeks unspecified monetary damages and other relief. A first amended complaint was filed on or about November 16, 2005. This amendment neither
added nor altered any of the causes of action asserted but appears to have been made in an effort to cure a failure to comply with certain administrative requirements. In February 2006, Plaintiff Natalie Wades lawsuit against the Company was
voluntarily dismissed by Ms. Wade in exchange for the Companys agreement not to seek costs incurred in defending against the lawsuit.



Although there can be no assurance that unfavorable outcomes in the foregoing matters would not have a material adverse effect on our financial position
or results of operations, management believes the claims are without merit, strong defenses exist, and management intends to vigorously defend against these actions. We have not recorded any accrual for contingent liability associated with the legal
proceedings described above based on managements belief that a liability, while possible, is not probable. Further, any possible range of loss cannot be estimated at this time.



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We are involved in other routine litigation arising in the ordinary course of our business. While the
results of such litigation cannot be predicted with certainty, we believe that the final outcome of such matters will not have a material adverse effect on our consolidated financial position or results of operations.



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



No matters were submitted to a vote of our stockholders during the fourth quarter of fiscal 2005.



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PART II



|ITEM5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------ | ------------------------------------------------------------------------------------------------------------



Market Information



Our common stock is listed on The Nasdaq Stock Markets National Market under the symbol PETC. The
following table shows the high and low per share sales prices on our common stock, as reported on the Nasdaq National Market for the periods indicated:



|               |  |      |       |     |   |      
|-------------- |  | ---- | ----- | --- | - | -----
|               |  | High |       | Low
|Fiscal 2004    |  |      |       |     |   |      
|First Quarter  |  | $    | 34.19 |     | $ | 26.70
|Second Quarter |  |      | 33.14 |     |   | 27.20
|Third Quarter  |  |      | 36.96 |     |   | 27.20
|Fourth Quarter |  |      | 39.91 |     |   | 34.74
|Fiscal 2005    |  |      |       |     |   |      
|First Quarter  |  | $    | 38.68 |     | $ | 27.87
|Second Quarter |  |      | 34.37 |     |   | 27.46
|Third Quarter  |  |      | 28.39 |     |   | 18.25
|Fourth Quarter |  |      | 23.40 |     |   | 18.88



On March 17,
2006, the last reported sale price of our common stock on the Nasdaq National Market was $22.31. As of March 17, 2006, there were approximately 71 holders of record of our common stock.



Dividend Policy



We have not paid cash dividends on our common stock. We currently intend to retain all future earnings, if any, for use in
the operation of our business and we do not anticipate paying cash dividends in the foreseeable future. In addition, our senior credit facility and the indenture governing our senior subordinated notes place limitations on our ability to pay
dividends or make other distributions in respect of our common stock. Any future determination as to the payment of dividends on our common stock will be restricted by these limitations, will be at the discretion of our board of directors and will
depend on our results of operations, financial condition, capital requirements and other factors deemed relevant by the board of directors.



Equity Compensation Plan Information



See Item 12 of this Annual Report for reference to the information required by this item with respect to our equity compensation plans.



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ITEM 6. SELECTED FINANCIAL DATA



The following selected historical consolidated financial data as of and for the fiscal years ended February 2, 2002, February 1, 2003, January 31, 2004, January 29, 2005, and January 28, 2006
presented below under the captions Statement of Operations Data and Balance Sheet Data, have been derived from our audited consolidated financial statements as of those dates and for those periods. The selected historical
consolidated financial data and notes should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements.



|                                                                                                            |  |                                                                 |           |   |              |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|----------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------- | --------- | - | ------------ | - | --------- | ------------- |  | - | ------------- | - |  | ------------- | --------- | - |  | - | --------- | -
|                                                                                                            |  | Fiscal Year Ended                                               |          
|                                                                                                            |  | Feb. 2, 2002                                                    |           |   | Feb. 1, 2003 |   |           | Jan. 31, 2004 |  |   | Jan. 29, 2005 |   |  | Jan. 28, 2006 |          
|                                                                                                            |  | (amounts in thousands, except per share amounts and store data) |          
|Statement of Operations Data:                                                                               |  |                                                                 |           |   |              |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|Net sales                                                                                                   |  | $                                                               | 1,300,949 |   |              | $ | 1,476,634 |               |  | $ | 1,610,431     |   |  | $             | 1,812,145 |   |  | $ | 1,996,089 |  
|Cost of sales and occupancy costs                                                                           |  |                                                                 | 909,186   |   |              |   | 1,016,249 |               |  |   | 1,060,942     |   |  |               | 1,181,354 |   |  |   | 1,330,054 |  
|                                                                                                            |  |                                                                 |           |   |              |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|Gross profit                                                                                                |  |                                                                 | 391,763   |   |              |   | 460,385   |               |  |   | 549,489       |   |  |               | 630,791   |   |  |   | 666,035   |  
|Selling, general and administrative expenses                                                                |  |                                                                 | 304,967   |   |              |   | 343,752   |               |  |   | 411,816       |   |  |               | 472,780   |   |  |   | 524,566   |  
|Management fees and termination costs                                                                       |  |                                                                 | 3,120     |   |              |   | 12,760    |               |  |   |              |   |  |               |          |   |  |   |          |  
|Stock-based compensation and other costs                                                                    |  |                                                                 | 14,350    |   |              |   | 8,388     |               |  |   |              |   |  |               |          |   |  |   |          |  
|Litigation settlement                                                                                       |  |                                                                 |          |   |              |   | 3,497     |               |  |   |              |   |  |               |          |   |  |   |          |  
|Write-off of Canadian investment                                                                            |  |                                                                 | 37,035    |   |              |   |          |               |  |   |              |   |  |               |          |   |  |   |          |  
|Merger and non-recurring costs                                                                              |  |                                                                 | 445       |   |              |   |          |               |  |   |              |   |  |               |          |   |  |   |          |  
|                                                                                                            |  |                                                                 |           |   |              |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|Operating income (1)                                                                                        |  |                                                                 | 31,846    |   |              |   | 91,988    |               |  |   | 137,673       |   |  |               | 158,011   |   |  |   | 141,469   |  
|Interest expense, net                                                                                       |  |                                                                 | 40,837    |   |              |   | 32,666    |               |  |   | 26,115        |   |  |               | 19,337    |   |  |   | 14,974    |  
|Debt retirement costs                                                                                       |  |                                                                 | 20,830    |   |              |   | 3,336     |               |  |   | 12,189        |   |  |               | 6,754     |   |  |   | 2,447     |  
|                                                                                                            |  |                                                                 |           |   |              |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|Earnings (loss) before Internet operations and equity in loss of unconsolidated affiliates and income taxes |  |                                                                 | (29,821   | ) |              |   | 55,986    |               |  |   | 99,369        |   |  |               | 131,920   |   |  |   | 124,048   |  
|Internet operations and equity in loss of unconsolidated affiliates                                         |  |                                                                 | (3,083    | ) |              |   |          |               |  |   |              |   |  |               |          |   |  |   |          |  
|                                                                                                            |  |                                                                 |           |   |              |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|Earnings (loss) before income taxes                                                                         |  |                                                                 | (32,904   | ) |              |   | 55,986    |               |  |   | 99,369        |   |  |               | 131,920   |   |  |   | 124,048   |  
|Income taxes (benefit)                                                                                      |  |                                                                 | (10,103   | ) |              |   | 23,845    |               |  |   | 34,656        |   |  |               | 49,547    |   |  |   | 48,878    |  
|                                                                                                            |  |                                                                 |           |   |              |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|Net earnings (loss)                                                                                         |  |                                                                 | (22,801   | ) |              |   | 32,141    |               |  |   | 64,713        |   |  |               | 82,373    |   |  |   | 75,170    |  
|Increase in carrying amount and premium on redemption of redeemable preferred stock                         |  |                                                                 | (27,745   | ) |              |   | (20,487   | )             |  |   |              |   |  |               |          |   |  |   |          |  
|                                                                                                            |  |                                                                 |           |   |              |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|Net earnings (loss)                                                                                         |  | $                                                               | (50,546   | ) |              | $ | 11,654    |               |  | $ | 64,713        |   |  | $             | 82,373    |   |  | $ | 75,170    |  
|                                                                                                            |  |                                                                 |           |   |              |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|Basic earnings (loss) per share                                                                             |  | $                                                               | (1.32     | ) |              | $ | 0.21      |               |  | $ | 1.13          |   |  | $             | 1.43      |   |  | $ | 1.30      |  
|Diluted earnings (loss) per share                                                                           |  | $                                                               | (1.32     | ) |              | $ | 0.20      |               |  | $ | 1.11          |   |  | $             | 1.41      |   |  | $ | 1.28      |  
|Shares used for computing basic earnings (loss) per share                                                   |  |                                                                 | 38,429    |   |              |   | 56,094    |               |  |   | 57,422        |   |  |               | 57,542    |   |  |   | 57,802    |  
|Shares used for computing diluted earnings (loss) per share                                                 |  |                                                                 | 38,429    |   |              |   | 56,906    |               |  |   | 58,299        |   |  |               | 58,511    |   |  |   | 58,543    |  
|Other Financial Data:                                                                                       |  |                                                                 |           |   |              |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|Gross profit margin                                                                                         |  |                                                                 | 30.1      | % |              |   | 31.2      | %             |  |   | 34.1          | % |  |               | 34.8      | % |  |   | 33.4      | %
|Depreciation and amortization                                                                               |  | $                                                               | 49,449    |   |              | $ | 50,092    |               |  | $ | 56,552        |   |  | $             | 63,608    |   |  | $ | 77,845    |  
|Inventory turns (2)                                                                                         |  |                                                                 | 7.4       | x |              |   | 7.7       | x             |  |   | 7.5           | x |  |               | 7.7       | x |  |   | 7.5       | x
|Store Data:                                                                                                 |  |                                                                 |           |   |              |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|Percentage increase in comparable store net sales (3)                                                       |  |                                                                 | 8.6       | % |              |   | 8.0       | %             |  |   | 5.6           | % |  |               | 6.2       | % |  |   | 2.7       | %
|Number of stores at year end                                                                                |  |                                                                 | 561       |   |              |   | 600       |               |  |   | 654           |   |  |               | 716       |   |  |   | 779       |  



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|                                             |  |                                                                 |          |   |              |   |         |               |  |               |         |               |   |         |  |   |        
|-------------------------------------------- |  | --------------------------------------------------------------- | -------- | - | ------------ | - | ------- | ------------- |  | ------------- | ------- | ------------- | - | ------- |  | - | -------
|                                             |  | Fiscal Year Ended                                              
|                                             |  | Feb. 2, 2002                                                    |          |   | Feb. 1, 2003 |   |         | Jan. 31, 2004 |  | Jan. 29, 2005 |         | Jan. 28, 2006
|                                             |  | (amounts in thousands, except per share amounts and store data)
|Balance Sheet Data:                          |  |                                                                 |          |   |              |   |         |               |  |               |         |               |   |         |  |   |        
|Cash and cash equivalents                    |  | $                                                               | 36,215   |   |              | $ | 108,937 |               |  | $             | 62,201  |               | $ | 36,815  |  | $ | 39,524 
|Working capital                              |  |                                                                 | 68,429   |   |              |   | 113,051 |               |  |               | 49,006  |               |   | 26,785  |  |   | 22,608 
|Total assets                                 |  |                                                                 | 473,572  |   |              |   | 554,855 |               |  |               | 551,862 |               |   | 640,453 |  |   | 709,675
|Total debt, including current maturities (4) |  |                                                                 | 401,157  |   |              |   | 365,541 |               |  |               | 263,398 |               |   | 191,091 |  |   | 151,022
|Redeemable preferred stock                   |  |                                                                 | 219,282  |   |              |   |        |               |  |               |        |               |   |        |  |   |       
|Stockholders equity (deficit)               |  |                                                                 | (305,707 | ) |              |   | (11,083 | )             |  |               | 53,133  |               |   | 137,295 |  |   | 216,838



|(1) | Operating income includes the following unusual charges and expenses for the periods indicated:
|--- | -----------------------------------------------------------------------------------------------



|                                          |  |                        |        |              |   |               |  |               |   |               |   |   |  |   |  
|----------------------------------------- |  | ---------------------- | ------ | ------------ | - | ------------- |  | ------------- | - | ------------- | - | - |  | - | -
|                                          |  | Fiscal Year Ended     
|                                          |  | Feb. 2, 2002           |        | Feb. 1, 2003 |   | Jan. 31, 2004 |  | Jan. 29, 2005 |   | Jan. 28, 2006
|                                          |  | (amounts in thousands)
|Merger and non-recurring costs            |  | $                      | 445    |              | $ |              |  | $             |  |               | $ |  |  | $ | 
|Write-off of Canadian investment          |  |                        | 37,035 |              |   |              |  |               |  |               |   |  |  |   | 
|Management fees and termination costs (a) |  |                        | 3,120  |              |   | 12,760        |  |               |  |               |   |  |  |   | 
|IPO financing and legal expenses (b)      |  |                        |       |              |   | 1,197         |  |               |  |               |   |  |  |   | 
|Stock-based compensation (c)              |  |                        | 17,351 |              |   | 8,439         |  |               |  |               |   |  |  |   | 
|Litigation settlement (d)                 |  |                        |       |              |   | 3,497         |  |               |  |               |   |  |  |   | 
|                                          |  |                        |        |              |   |               |  |               |   |               |   |   |  |   |  
|Total                                     |  | $                      | 57,951 |              | $ | 25,893        |  | $             |  |               | $ |  |  | $ | 
|                                          |  |                        |        |              |   |               |  |               |   |               |   |   |  |   |  

| | (a) | Management fees were paid pursuant to our management services agreement, which we entered into in October 2000 in connection with our leveraged recapitalization. We terminated the
management services agreement shortly after our initial public offering for a fee of $12.5 million.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Financing and legal expenses related to our initial public offering in February 2002.
| | --- | -------------------------------------------------------------------------------------

| | (c) | In connection with the increase in fair value related to outstanding stock options as a result of our initial public offering, we recorded non-cash stock-based compensation totaling
$17.4 million in the fiscal year ended February 2, 2002, of which $14.4 million and $3.0 million are recorded in stock-based compensation and other costs and cost of sales and occupancy costs, respectively, and $8.4 million in the fiscal year
ended February 1, 2003, of which $7.0 million and $1.4 million are recorded in stock-based compensation and other costs and cost of sales and occupancy costs, respectively.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) | Related to the settlement of California overtime litigation.
| | --- | ------------------------------------------------------------



|(2) | Calculated by dividing cost of sales and occupancy costs for the most recent four quarters, by average fiscal quarter end inventory for the five most recent quarters. Fiscal 2003,
2004, and 2005 reflect the adoption of Emerging Issues Task Force, or EITF, Issues 02-16 and 03-10, which have the effect of decreasing cost of sales and occupancy costs and decreasing inventory turns as compared to fiscal 2001 and 2002, which do
not reflect the adoption of these consensuses.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | A new store becomes a comparable store on the first day of the fiscal month following 12 full fiscal months of operation. Relocated stores become comparable stores on the first day
of operation. Comparable stores also include expanded stores and exclude closed stores as of the first day of the month of closing.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Beginning in the first quarter of fiscal 2006, we will report our comparable store net sales under a refined methodology, reflecting the impact of non-point-of-sale (non-POS)
revenue transactions. The refined methodology will reflect vendors sales incentives recorded as a reduction of sales. Refining the methodology for calculating our comparable store net sales percentage change will not impact reported net sales,
net earnings or cash flows.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Includes capital leases and other obligations.
|--- | ----------------------------------------------



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|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------



You should read the following discussion of our financial condition and results of operations with our consolidated
financial statements and related notes included elsewhere in this Annual Report. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in Item 1A of
this Annual Report under the heading Risk Factors. Our actual results may differ materially from those contained in any forward-looking statements.



Executive Summary



PETCO is a leading specialty retailer of premium pet food, supplies and services. At January 28, 2006, we operated 779 stores in 49 states and the
District of Columbia. Our strategy is to offer our customers a complete assortment of pet-related products and services at fair prices, with superior levels of customer service at convenient locations. Our stores offer a fun, exciting shopping
experience and generally range in size from 12,000 to 15,000 square feet. Since the middle of 2001, all new stores have been opened in our newer formats, which incorporate a more dramatic presentation of our companion animals and emphasize
higher-margin supplies categories. We have remodeled 53 stores to our newer formats since the prior year, and now have a total of 476 stores in our newer formats.



We increased our net sales from $1.3 billion in fiscal 2001 to $2.0 billion in fiscal 2005. We also increased our operating
income from $31.8 million in fiscal 2001, which includes unusual charges and expenses totaling $58.0 million, to $141.5 million in fiscal 2005. The principal contributors to this improvement in our financial performance since 2001 include:
(1) our ability to generate comparable store net sales growth, driven partly by our continuing initiative of remodeling certain stores to our newer store formats; (2) strategic expansion in both existing and new markets;
(3) innovative store formats that offer superior customer service, convenience and a fun and exciting shopping environment; (4) targeted merchandising efforts to drive sales of higher-margin pet accessories, supplies and services, which
have grown to approximately 71% of net sales in fiscal 2005, up from approximately 67% of net sales in fiscal 2001; (5) our expanding store base, which offers economies of scale and purchasing efficiencies; and (6) a broad product offering
of over 10,000 high quality pet-related products, most of which are not found in typical supermarkets or mass merchants.



We plan to increase our aggregate store square footage by 8% to 10% per year on a long-term basis. Our year-over-year increase in square footage in
fiscal 2005 was 11.8%, and our total store square footage at January 28, 2006 was approximately 11.3 million square feet. We plan to open approximately 90 new stores in fiscal 2006, or approximately 75 stores net of relocations and
closings. In fiscal 2006, we intend to remodel approximately 35 of our existing stores into our newer formats, and we plan to remodel additional existing stores in the future. We also plan to relocate certain existing stores and close certain
under-performing stores. As a result of our store expansion strategy, operating results in any future year may reflect lower average store contribution and operating margins due to increased store pre-opening and remodel expenses and lower
anticipated sales volumes of newer stores.



The pet food,
supplies and services business is highly competitive. This competition can be categorized into three different segments: (1) supermarkets, warehouse clubs and mass merchants; (2) specialty pet store chains; and (3) traditional pet
stores and independent service providers. Our strategy is to focus our assortment on specialty products and premium pet foods, which minimizes the potential overlap with supermarkets, warehouse clubs and mass merchants. We believe that we compete
effectively within our various geographic areas. However, some of our competitors are much larger in terms of sales volume and have access to greater capital and management resources than we do.



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Results of Operations



The following table sets forth selected results of our operations expressed as a percentage of net sales for the periods indicated. As a result of
operational and strategic changes, period-to-period comparisons of financial results may not be meaningful and the results of our operations for historical periods may not be indicative of our future results.



|                                             |  |                   |   |  |              |   |  |              |  
|-------------------------------------------- |  | ----------------- | - |  | ------------ | - |  | ------------ | -
|                                             |  | Fiscal Year Ended |  
|                                             |  | Jan. 31,2004      |   |  | Jan. 29,2005 |   |  | Jan. 28,2006 |  
|Net sales                                    |  | 100.0             | % |  | 100.0        | % |  | 100.0        | %
|Cost of sales and occupancy costs            |  | 65.9              |   |  | 65.2         |   |  | 66.6         |  
|                                             |  |                   |   |  |              |   |  |              |  
|Gross profit                                 |  | 34.1              |   |  | 34.8         |   |  | 33.4         |  
|Selling, general and administrative expenses |  | 25.6              |   |  | 26.1         |   |  | 26.3         |  
|                                             |  |                   |   |  |              |   |  |              |  
|Operating income                             |  | 8.5               |   |  | 8.7          |   |  | 7.1          |  
|Interest expense, net                        |  | 1.6               |   |  | 1.1          |   |  | 0.8          |  
|Debt retirement costs                        |  | 0.8               |   |  | 0.4          |   |  | 0.1          |  
|                                             |  |                   |   |  |              |   |  |              |  
|Earnings before income taxes                 |  | 6.2               |   |  | 7.3          |   |  | 6.2          |  
|Income taxes                                 |  | 2.2               |   |  | 2.7          |   |  | 2.4          |  
|                                             |  |                   |   |  |              |   |  |              |  
|Net earnings                                 |  | 4.0               | % |  | 4.5          | % |  | 3.8          | %
|                                             |  |                   |   |  |              |   |  |              |  



Fiscal Year Ended January 28,
2006 Compared with Fiscal Year Ended January 29, 2005



Net sales increased 10.2% to $2.0 billion for fiscal 2005 from $1.81 billion for fiscal 2004. The increase in net sales resulted primarily from the comparable store net sales increase of 2.7% and the increase in our square footage of 11.8%
in fiscal 2005. We added 89 new stores in fiscal 2005, or 63 stores net of relocations and closings. The increase in comparable store net sales accounted for approximately $52.7 million, or 28.7%, of the net sales increase, while the net increase in
our store base accounted for approximately $131.2 million, or 71.3%, of the net sales increase. The comparable store net sales increase was attributable to an increase in average sales per transaction, price increases in certain product categories
and the contribution of newer stores.



Beginning in the first
quarter of fiscal 2006, we will report our comparable store net sales under a refined methodology, reflecting the impact of non-point-of-sale (non-POS) revenue transactions. The refined methodology will reflect vendors sales incentives
recorded as a reduction of sales. Refining the methodology for calculating our comparable store net sales percentage change will not impact reported net sales, net earnings or cash flows.



Gross profit, defined as net sales less cost of sales and store occupancy costs, increased 5.6% to $666.0 million for fiscal
2005 from $630.8 million for fiscal 2004. Gross profit as a percentage of net sales decreased to 33.4% from 34.8% in the prior year period. A decrease of 0.3% of net sales was caused by higher distribution costs, primarily related to our penetration
into new markets with high initial entry costs and increased fuel costs. A decrease of 0.6% of net sales was due to increased store occupancy costs as a percentage of net sales as a result of slower growth in sales combined with fixed occupancy
costs and a larger number of store openings in fiscal 2005. The remainder of the decrease of 0.5% of net sales was due primarily to slower sales growth in high-margin product categories in the second and third quarters of fiscal 2005 and higher than
expected markdowns of clearance merchandise in the third quarter of fiscal 2005. These decreases were partially offset by continuing improvements in supplies and services margins.



Selling, general and administrative expenses increased 11.0% to $524.6 million for fiscal 2005 from $472.8 million in the
prior year period. As a percentage of net sales, selling, general and administrative expenses



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##### Table of Contents

increased to 26.3% from 26.1% in the prior year period. The overall increase of 0.2% of net sales was due primarily to increased advertising and store
payroll expenses as a percentage of net sales, offset by a decrease in general and administrative payroll expenses as a percentage of net sales.



Operating income was $141.5 million in fiscal 2005, or 7.1% of net sales, compared with operating income of $158.0 million in fiscal 2004, or 8.7% of net
sales.



Net interest expense was $15.0 million in fiscal 2005,
compared with net interest expense of $19.3 million in fiscal 2004. The reduction in interest expense was due mainly to the full repayment of the term loan under our prior senior credit facility (which was partially offset by borrowings on our new
senior credit facility) in fiscal 2004, the repurchase of $16.0 million in principal amount of our senior subordinated notes in fiscal 2004, the repurchase of $14.7 million in principal amount of our senior subordinated notes and net repayments of
$25.0 million under our revolving credit facility during fiscal 2005.



In fiscal 2005, we incurred debt retirement costs totaling $2.4 million, consisting primarily of a purchase premium, related to the repurchase of $14.7 million in principal amount of our 10.75% senior subordinated notes. In fiscal 2004, we
incurred debt retirement costs totaling $4.0 million related to the early repayment and subsequent termination of our prior senior facility. We also incurred debt retirement costs of $2.8 million, consisting primarily of a purchase premium related
to the repurchase of $16.0 million in principal amount of our 10.75% senior subordinated notes in fiscal 2004.



Income taxes were $48.9 million in fiscal 2005, compared with income taxes of $49.5 million in fiscal 2004. Income taxes as a percentage of earnings
before income taxes increased to 39.4% in fiscal 2005 from 37.6% in fiscal 2004. The increase from fiscal 2004 is due primarily to the recognition of certain state deferred tax assets and other benefits related to state franchise taxes in fiscal
2004.



Net earnings in fiscal 2005 decreased 8.7% to $75.2
million, or $1.28 per diluted share, compared with net earnings of $82.4 million, or $1.41 per diluted share, in the prior year period.



Fiscal Year Ended January 29, 2005 Compared with Fiscal Year Ended January 31, 2004



Net sales increased 12.5% to $1.81 billion for fiscal 2004 from $1.61 billion for fiscal 2003. The increase in net sales
resulted primarily from the comparable store net sales increase of 6.2% and the increase in our store square footage of 12.2% in fiscal 2004. We added 81 new stores in fiscal 2004, or 62 stores net of relocations and closings. The increase in
comparable store net sales accounted for approximately $98.6 million, or 48.9%, of the net sales increase. The net increase in our store base accounted for approximately $103.1 million, or 51.1%, of the net sales increase. The comparable store net
sales increase was attributable to improvements in our product mix to higher-price categories, increased customer traffic and price increases in certain product categories.



Gross profit, defined as net sales less cost of sales and store occupancy costs, increased $81.3 million, or 14.8%, to
$630.8 million for fiscal 2004 from $549.5 million for fiscal 2003. Gross profit as a percentage of net sales increased to 34.8% for fiscal 2004 from 34.1% in fiscal 2003. An increase of approximately 1.0% of net sales was due to the continuing
change in our sales mix from lower-margin pet food to higher-margin categories, improvements in pet food margins and, to a lesser extent, a reduction of inventory shrinkage costs. Offsetting these increases was a decrease of approximately 0.5% of
net sales caused by higher fuel prices and overall distribution costs, partly related to our penetration into new markets with high initial entry costs, and a decrease of approximately 0.5% of net sales caused by increased store occupancy costs as a
percentage of net sales associated with delays in new store openings and increased store closing costs. In addition, we recorded an adjustment in fiscal 2004 for unrecorded distribution costs related to prior periods in the amount of $2.7 million,
resulting in a decrease in gross profit of approximately 0.1% of net sales. The remainder of the increase, or approximately 0.8% of net sales, is a result of our adoption of EITF No. 02-16 in the first quarter of fiscal 2003. This accounting
change results in the initial deferral of substantially all of our vendor support as a reduction of



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inventory, which is realized as a reduction of cost of sales and occupancy costs as the related inventory is sold. In periods prior to the first quarter of
fiscal 2003, we recorded certain vendor support, including cooperative advertising reimbursement, as a reduction of selling, general and administrative expenses when earned. EITF 02-16 applied prospectively to vendor arrangements entered into or
modified subsequent to December 31, 2002. Because we follow a practice of continually negotiating new arrangements with suppliers, the effects of this accounting change were phased in over the course of fiscal 2003. As of the beginning of
fiscal 2004, substantially all of our supplier arrangements are accounted for pursuant to EITF 02-16. This is the last period that we reported an EITF Issue 02-16 effect, as fiscal 2005 is fully comparable with fiscal 2004.



Selling, general and administrative expenses increased $61.0 million, or
14.8%, to $472.8 million for fiscal 2004 from $411.8 million for fiscal 2003. As a percentage of net sales, selling, general and administrative expenses increased to 26.1% for fiscal 2004 from 25.6% in fiscal 2003. This increase resulted primarily
from the adoption of EITF No. 02-16, which accounted for an increase in selling, general and administrative expenses of 0.5% of net sales. In addition, an increase in selling, general and administrative expenses of 0.2% of net sales was due to
an increase in store pre-opening expenses, offset by a decrease of 0.2% of net sales related to store and general and administrative operating expenses.



Operating income was $158.0 million in fiscal 2004, or 8.7% of net sales, compared with operating income of $137.7 million in fiscal 2003, or 8.5% of net
sales.



Net interest expense was $19.3 million in fiscal 2004,
compared with net interest expense of $26.1 million in fiscal 2003. The reduction in interest expense was due mainly to the repurchase of $50.0 million in principal amount of our 10.75% senior subordinated notes in January 2004, the early repayment
of $50.0 million on the term loan under our prior senior credit facility in August 2003, and a reduction of interest rates on the term loan under our prior senior credit facility during fiscal 2003 and 2004, including a 0.5% reduction in the
interest rate in connection with an amendment of the prior senior credit facility in August 2003.



In fiscal 2004, we incurred debt retirement costs totaling $4.0 million related to the early repayment and subsequent termination of our prior senior
facility. We also incurred debt retirement costs of $2.8 million, consisting primarily of a purchase premium, related to the repurchase of $16.0 million in principal amount of our 10.75% senior subordinated notes in fiscal 2004. In fiscal 2003, we
incurred debt retirement costs of $10.6 million, consisting primarily of a purchase premium, related to the repurchase of $50.0 million in principal amount of our 10.75% senior subordinated notes in the fourth quarter. We also incurred debt
retirement costs of $1.6 million related to the early repayment of $50.0 million on the term loan under our prior senior credit facility in fiscal 2003.



Income taxes were $49.5 million in fiscal 2004, compared with income taxes of $34.7 million in fiscal 2003. Income taxes as a percentage of earnings
before income taxes increased to 37.6% in fiscal 2004 from 34.9% in fiscal 2003. The increase in fiscal 2004 is due primarily to the favorable resolution of an income tax accrual in fiscal 2003 which resulted in a benefit of $3.4 million, and the
recognition, in fiscal 2003, of additional benefits with respect to certain net operating losses and federal and state credits which had not previously been realized in prior periods. The increase in tax expense for fiscal 2004 was partially offset
by the recognition in fiscal 2004 of certain state deferred tax assets and other benefits related to state franchise taxes in fiscal 2004.



Net earnings in fiscal 2004 increased 27.3% to $82.4 million, or $1.41 per diluted share, compared with net earnings of $64.7 million, or $1.11 per
diluted share, in fiscal 2003.



23



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Quarterly Data



The following tables set forth the unaudited quarterly results of operations for fiscal 2004 and fiscal 2005. This information includes all adjustments
management considers necessary for fair presentation of such data. The results of operations for historical periods are not necessarily indicative of results for any future period. We expect quarterly results of operations to fluctuate depending on
the timing and amount of net sales contributed by new stores.



We believe that our business is moderately seasonal, with net sales and earnings generally higher in the fourth fiscal quarter due to year-end holiday purchases.



|                                                      |  |                                                              |            |   |               |   |            |               |  |   |               |   |  |   |            |  
|----------------------------------------------------- |  | ------------------------------------------------------------ | ---------- | - | ------------- | - | ---------- | ------------- |  | - | ------------- | - |  | - | ---------- | -
|                                                      |  | Fiscal Quarter Ended                                         |           
|Fiscal 2004                                           |  | May 1, 2004                                                  |            |   | July 31, 2004 |   |            | Oct. 30, 2004 |  |   | Jan. 29, 2005 |  
|                                                      |  | (dollars in thousands, except per share data and store data) |           
|Net sales                                             |  | $                                                            | 425,877    |   |               | $ | 438,486    |               |  | $ | 455,469       |   |  | $ | 492,313    |  
|Gross profit                                          |  | $                                                            | 146,005    |   |               | $ | 151,742    |               |  | $ | 161,200       |   |  | $ | 171,844    |  
|Operating income                                      |  | $                                                            | 30,928     |   |               | $ | 36,821     |               |  | $ | 39,542        |   |  | $ | 50,720     |  
|Net earnings (1)                                      |  | $                                                            | 15,757     |   |               | $ | 19,307     |               |  | $ | 21,002        |   |  | $ | 26,307     |  
|Basic earnings per share                              |  | $                                                            | 0.27       |   |               | $ | 0.34       |               |  | $ | 0.36          |   |  | $ | 0.46       |  
|Diluted earnings per share                            |  | $                                                            | 0.27       |   |               | $ | 0.33       |               |  | $ | 0.36          |   |  | $ | 0.45       |  
|Shares used for computing basic earnings per share    |  |                                                              | 57,471     |   |               |   | 57,512     |               |  |   | 57,554        |   |  |   | 57,631     |  
|Shares used for computing diluted earnings per share  |  |                                                              | 58,450     |   |               |   | 58,455     |               |  |   | 58,510        |   |  |   | 58,725     |  
|Number of stores at end of period                     |  |                                                              | 669        |   |               |   | 685        |               |  |   | 705           |   |  |   | 716        |  
|Aggregate gross square footage                        |  |                                                              | 9,232,014  |   |               |   | 9,498,840  |               |  |   | 9,876,617     |   |  |   | 10,065,318 |  
|Percentage increase in comparable store net sales     |  |                                                              | 6.3        | % |               |   | 6.7        | %             |  |   | 7.0           | % |  |   | 5.1        | %
|                                                      | 
|                                                      |  | Fiscal Quarter Ended                                         |           
|Fiscal 2005                                           |  | April 30, 2005                                               |            |   | July 30, 2005 |   |            | Oct. 29, 2005 |  |   | Jan. 28, 2006 |  
|                                                      |  | (dollars in thousands, except per share data and store data) |           
|Net sales                                             |  | $                                                            | 479,594    |   |               | $ | 482,476    |               |  | $ | 492,281       |   |  | $ | 541,468    |  
|Gross profit                                          |  | $                                                            | 162,053    |   |               | $ | 160,002    |               |  | $ | 155,643       |   |  | $ | 188,337    |  
|Operating income                                      |  | $                                                            | 34,622     |   |               | $ | 33,519     |               |  | $ | 25,426        |   |  | $ | 47,902     |  
|Net earnings (2)                                      |  | $                                                            | 17,239     |   |               | $ | 18,030     |               |  | $ | 13,150        |   |  | $ | 26,751     |  
|Basic earnings per share                              |  | $                                                            | 0.30       |   |               | $ | 0.31       |               |  | $ | 0.23          |   |  | $ | 0.46       |  
|Diluted earnings per share                            |  | $                                                            | 0.29       |   |               | $ | 0.31       |               |  | $ | 0.23          |   |  | $ | 0.46       |  
|Shares used for computing basic earnings per share    |  |                                                              | 57,706     |   |               |   | 57,778     |               |  |   | 57,853        |   |  |   | 57,871     |  
|Shares used for computing diluted earnings per share  |  |                                                              | 58,713     |   |               |   | 58,517     |               |  |   | 58,340        |   |  |   | 58,301     |  
|Number of stores at end of period                     |  |                                                              | 741        |   |               |   | 752        |               |  |   | 771           |   |  |   | 779        |  
|Aggregate gross square footage                        |  |                                                              | 10,561,841 |   |               |   | 10,762,001 |               |  |   | 11,102,299    |   |  |   | 11,255,626 |  
|Percentage increase in comparable store net sales (3) |  |                                                              | 5.2        | % |               |   | 2.5        | %             |  |   | 1.5           | % |  |   | 2.0        | %



|(1) | In the fourth quarter of fiscal 2004, we incurred debt retirement costs of $6.8 million related to the repurchase of $16.0 million in principal amount of our senior subordinated
notes and the full repayment of $140.8 million on the term loan under our prior senior credit facility and the subsequent termination of the facility. In addition, we recorded an adjustment in the fourth quarter of fiscal 2004 to correct the
accounting for operating lease tenant improvement allowances, resulting in a $1.3 million increase in cost of sales and occupancy costs, which related to annual and quarterly periods prior to the fourth quarter of fiscal 2004. We also recorded an
adjustment in the fourth quarter of fiscal 2004 to accrue for additional distribution costs related to prior periods, resulting in a $4.4 million increase in cost of sales and occupancy costs.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | In the first quarter of fiscal 2005, we incurred debt retirement costs of $2.4 million related to the repurchase of $14.7 million in principal amount of our senior subordinated
notes.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Beginning in the first quarter of fiscal 2006, we will report our comparable store net sales under a refined methodology, reflecting the impact of non-point-of-sale (non-POS)
revenue transactions. The refined methodology will reflect vendors sales incentives recorded as a reduction of sales. Refining the methodology for calculating our comparable store net sales percentage change will not impact reported net sales,
net earnings or cash flows.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Liquidity and Capital Resources



We finance our operations and store expansion program primarily through cash generated from operating activities. Net cash
provided by operating activities was $156.9 million, $172.6 million and $164.0 million for fiscal 2003, 2004 and 2005, respectively. Our sales are substantially on a cash basis, and therefore provide a significant source of liquidity. We use net
operating cash principally to purchase inventory, to fund our capital expenditures and to make interest payments on our debt. A portion of the inventory we purchase is financed through vendor credit terms.



We use cash in investing activities primarily to construct leasehold
improvements and purchase fixtures and equipment for new stores, to remodel certain existing stores and, to a lesser extent, to purchase distribution center and office fixtures, equipment and computer hardware and software in support of our
distribution and administrative functions. We estimate that our purchases of fixed assets for fiscal 2006 will be between $110 million and $120 million, which includes the opening of approximately 90 new stores and the estimated cost of remodeling
approximately 35 existing stores to our newer formats. Cash used in investing activities was $98.7 million, $124.4 million and $124.2 million for fiscal 2003, 2004 and 2005, respectively, and consisted primarily of capital expenditures. We opened
63, 81 and 89 new stores during fiscal 2003, 2004 and 2005, respectively.



Net cash used in financing activities was $105.0 million, $73.6 million and $37.1 million in fiscal 2003, 2004 and 2005, respectively, and consisted primarily of debt repayments net of borrowings. During fiscal 2005,
we reduced our overall level of debt by $40.1 million, primarily through the repurchase of $14.7 million of our senior subordinated notes, and net repayments under our revolving credit facility of $25.0 million. During fiscal 2004, we reduced our
overall level of debt by $72.3 million, primarily through the full repayment of the term loan under our prior senior credit facility and the repurchase of $16.0 million of our senior subordinated notes, which was partially offset by borrowings on
our new senior credit facility.



Borrowings under our $200
million senior secured revolving credit facility are secured by substantially all of our personal property assets, and as of January 28, 2006, bore interest at our option, at the agent banks base rate plus a margin of up to 0.75%, or
LIBOR plus a margin of up to 1.875%, in each case based on our leverage ratio at the time. In addition, we have pledged all of the capital stock of our domestic subsidiaries to secure our obligations under the revolving credit facility. At
January 28, 2006, the revolving credit facility was scheduled to expire on January 31, 2010, although we had the option to extend the expiration of the revolving credit facility for an additional one-year period, subject to the
satisfaction of certain conditions. At January 28, 2006, we also had the option to increase the amount of credit available under the revolving credit facility, subject to the satisfaction of certain conditions, by an additional $125 million
through April 30, 2007 reduced to an additional $50 million after April 30, 2007. At January 28, 2006, we incurred a fee of up to 2.1% on letters of credit issued under the revolving credit facility and a fee of up to 0.3% on the
unused commitment under the revolving credit facility, reduced for any letters of credit. The credit agreement contains certain affirmative and negative covenants related to, among other things, indebtedness, capital expenditures, fixed charges
coverage and total leverage. The revolving credit facility specifies a number of events of default (some of which are subject to applicable cure periods), including, among others, the failure to make payments when due, defaults under other
agreements or instruments of indebtedness and noncompliance with covenants. Upon the occurrence of an event of default, the lenders may terminate the facility and declare all amounts outstanding under the revolving credit facility to be immediately
due and payable.



At January 28, 2006, we were in
compliance with all of the covenants under our revolving credit facility, and the outstanding balance of our revolving credit facility was $60.0 million. The interest rate at January 28, 2006 on the borrowings under our revolving credit
facility was 5.7%. At January 28, 2006, we had outstanding $30.1 million in letters of credit used for general business purposes, which reduce the availability under our revolving credit facility.



On March 17, 2006, we entered into an amendment of our senior credit
facility (the amended senior credit facility). The amendment increases the maximum borrowing under the senior credit facility from $200 million



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to $350 million and extends the maturity date from January 31, 2010 to March 31, 2011, although we have the option to extend the expiration of the
revolving credit facility for an additional one-year period, subject to the satisfaction of certain conditions. We also have the option to increase the amount of credit available under the revolving credit facility, subject to the satisfaction of
certain conditions, by an additional $100 million. Borrowings under the amended senior credit facility bear interest at our option, at the agent banks base rate plus a margin of up to 0.50%, or LIBOR plus a margin of up to 1.625%, in each case
based on our leverage ratio at the time. In addition, under the amended senior credit facility, we will incur a fee of up to 1.8% on letters of credit issued under the revolving credit facility and a fee of up to 0.25% on the unused commitment under
the revolving credit facility, which is reduced for any letters of credit.



In fiscal 2005, we repurchased through privately negotiated transactions $14.7 million in aggregate principal amount of our 10.75% senior subordinated notes, leaving $89.3 million in aggregate principal amount of our
senior subordinated notes outstanding at January 28, 2006. The senior subordinated notes mature on November 1, 2011, and interest on the senior subordinated notes accrues at a rate of 10.75% per annum and is payable semi-annually in
arrears. The indenture governing the senior subordinated notes specifies a number of events of default (many of which are subject to applicable cure periods), including, among others, the failure to make payments when due, defaults under other
agreements or instruments of indebtedness and noncompliance with covenants. Upon the occurrence of an event of default, the holders of the senior subordinated notes may declare all amounts outstanding to be immediately due and payable. We may redeem
the senior subordinated notes at our option at any time on or after November 1, 2006, in whole or in part, based upon an agreed upon schedule of redemption prices. The redemption prices begin at 105.375% of the principal amount at November 1,
2006 and decline thereafter through November 1, 2009. We may from time to time pursue additional repurchases of some or all of our senior subordinated notes in open market purchases, negotiated transactions or otherwise. The scope of such
repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. Such repurchases may have a material effect on our liquidity, financial condition and results of operations.



In March 2006, our Board of Directors authorized the
repurchase of up to $100 million of our common stock. The number of shares to be purchased and the timing of purchases will be based on several factors, including the price of our stock, general business and market conditions, and other investment
opportunities. The repurchase program may be suspended or discontinued at any time. As of the close of market on March 27, 2006, the Company had repurchased approximately 830,000 shares under the repurchase program for a total price of
approximately $19.2 million.



Contractual Obligations and Off-Balance Sheet
Arrangements



Contractual Obligations



The following summarizes our contractual obligations at January 28,
2006, and the effect such obligations could have on our liquidity and cash flow in future periods:



|                                   |  |                        |         |              |   |              |  |            |         |       |   |         |  |   |          
|---------------------------------- |  | ---------------------- | ------- | ------------ | - | ------------ |  | ---------- | ------- | ----- | - | ------- |  | - | ---------
|                                   |  | Payments Due          
|                                   |  | Less Than1 Year        |         | Years 2 to 3 |   | Years 4 to 5 |  | Thereafter |         | Total
|                                   |  | (dollars in thousands)
|Long-term debt                     |  | $                      |        |              | $ |             |  | $          | 60,000  |       | $ | 89,267  |  | $ | 149,267  
|Mortgage obligations               |  |                        | 1,755   |              |   |             |  |            |        |       |   |        |  |   | 1,755    
|Operating leases                   |  |                        | 200,087 |              |   | 391,925      |  |            | 337,259 |       |   | 582,132 |  |   | 1,511,403
|Purchase obligations (1)           |  |                        | 41,100  |              |   | 43,501       |  |            | 29,049  |       |   | 52,342  |  |   | 165,992  
|Other long-term liabilities (2)    |  |                        |        |              |   |             |  |            |        |       |   |        |  |   |         
|                                   |  |                        |         |              |   |              |  |            |         |       |   |         |  |   |          
|Total contractual cash obligations |  | $                      | 242,942 |              | $ | 435,426      |  | $          | 426,308 |       | $ | 723,741 |  | $ | 1,828,417
|                                   |  |                        |         |              |   |              |  |            |         |       |   |         |  |   |          



|(1) | Purchase obligations are defined as an agreement to purchase goods or services that is enforceable and legally binding on us and that specifies all significant
terms including (a) fixed or minimum quantities to be
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | purchased, (b) fixed, minimum or variable price provisions, and (c) the approximate timing of the transaction. Aggregate purchase obligations in
the above table include noncancelable obligations under our advertising and marketing agreements, noncancelable purchase orders, future interest payments (assuming the existing long-term debt remains outstanding and, for our revolving credit
facility, based on the interest rate in effect at January 28, 2006), commitment and other fees associated with our revolving credit facility, employment contracts, and noncancelable maintenance and service contracts.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | No amounts have been included for this category because most of the balance consists of deferred rent and other liabilities related to operating leases, and future operating lease
obligations have been included in a different category. The remaining future obligations related to other long-term liabilities are not material, and we are not currently able to estimate the timing of such obligations.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Off-Balance Sheet Arrangements



At January 28, 2006, we had outstanding $30.1 million in letters of
credit used for general business purposes, which reduce the availability under our revolving credit facility.



At January 29, 2005 and January 28, 2006, we did not have any relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance, variable interest or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In
addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.



Critical Accounting Policies and Estimates



The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and
liabilities. On an ongoing basis, we evaluate these estimates and judgments, including those related to inventories, asset impairment, accruals for self-insured workers compensation and general liability costs, allowance for doubtful accounts
and accounting for income taxes. We state these accounting policies in the notes to our consolidated financial statements and at relevant sections in this discussion and analysis. These estimates are based on information that is currently available
and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions.



We believe the following critical accounting policies affect our more significant judgments and estimates used in the
preparation of our consolidated financial statements.



We
maintain an allowance for doubtful accounts for estimated losses resulting from the inability to collect receivables, most of which are due from vendors. We determine the adequacy of this allowance by continually evaluating individual receivables,
the vendors financial condition, and current economic conditions. If the financial conditions of our vendors were to deteriorate, resulting in their inability to make payments, additional allowances may be required. Our actual receivable
write-offs have not varied significantly from our estimates.



We assess our inventory for estimated obsolescence or unmarketable inventory and write down the difference between the cost of inventory and the estimated market value based upon historical write-downs and assumptions about future sales and
supply on-hand. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. We also record an accrual for estimated losses related to inventory shrink between physical
inventories. This accrual is based on actual historical shrink results and current trends in the business. Changes in actual shrink results from completed



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physical inventories could result in revisions to our previously estimated shrink accruals. We believe we have sufficient current and historical knowledge to
record reasonable estimates for both inventory valuation and inventory shrink.



We assess the impairment of long-lived assets, primarily fixed assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could
trigger an impairment review include the following:



| |  |  | significant underperformance of a store relative to expected historical or projected future operating results;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | significant changes in the manner of our use of assets or the strategy for our overall business;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | significant negative industry or economic trends; or
| | - |  | ----------------------------------------------------



| |  |  | planned store closings.
| | - |  | -----------------------



When we determine that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of
impairment, we recognize an impairment loss when the undiscounted estimated future net cash flows expected to be generated by an asset (or group of assets) is less than its carrying value. We measure impairment losses as the amount by which the
assets carrying value exceeds its fair value. To the extent actual future cash flows are less than anticipated, additional impairment charges may result. We also review the estimated useful lives of the assets and reduce such lives if
necessary. Impairment losses on fixed assets were $0.7 million, $1.7 million and $1.4 million during fiscal 2003, 2004 and 2005, respectively. These write-downs related to fixed assets of closed and underperforming stores.



We have recorded significant amounts of goodwill resulting from the
acquisitions we have completed. In accordance with Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets, goodwill is not amortized. We perform our annual impairment test during the
second quarter of each year, and perform additional impairment tests whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable at the store level. We record impairment charges for any store with
allocated goodwill in excess of its fair value, which is calculated based on the present value of the estimated future net cash flows expected to be generated by the store. To the extent actual cash flows for certain stores are less than
anticipated, additional impairment charges may result. Impairment charges on goodwill were not significant in fiscal 2003, 2004 or 2005.



We maintain accruals for self-insured workers compensation and general liability costs. We determine these accruals, with the assistance of
insurance actuaries, based on historical experience and trends related to claims and payments, information provided to us by our insurance broker, and industry experience and trends. Accruals for estimates of future claim costs for workers
compensation and general liability are recorded on an undiscounted basis. All estimates of ultimate loss and loss adjustment expense, and resulting reserves, are subject to inherent variability caused by the nature of the insurance process. The
potentially long period of time between the occurrence of an incident and the final resolution of a claim and the possible effects of changes in the legal, social and economic environments contribute to this variability. Actual results should be
expected to vary from estimated results and such variation could be substantial.



We estimate our income taxes in each of the jurisdictions in which we operate. This involves estimating our actual current taxes and assessing temporary differences resulting from differing treatment of items for tax
and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. We also assess the likelihood that our deferred tax assets will be recovered from future taxable income,
and to the extent we believe that recovery is not more likely than not, we establish a valuation allowance. The valuation allowance is based on our estimates of taxable income in the jurisdictions in which we operate and the period over which our
deferred tax assets will be recoverable. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in



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making this assessment. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities
and any valuation allowance recorded against our net deferred tax assets, and changes in estimates of current taxes and valuation allowances could be significant.



New Accounting Standards



In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), Share-Based Payment(SFAS
No. 123(R)). SFAS No. 123(R) supersedes APB No. 25 and SFAS No. 123, Accounting for Stock-Based Compensation(SFAS No. 123), and requires companies to expense the fair value of employee stock options and other
forms of employee stock-based compensation. SFAS No. 123 allowed companies to disclose the pro forma effects of expensing the fair value of employee stock-based compensation in the footnotes to the financial statements. SFAS No. 123(R)
applies to all stock-based compensation transactions with employees in which a company acquires services by issuing its stock or other equity instruments, except through arrangements resulting from employee stock-ownership plans, or by incurring
liabilities that are based on the companys stock price. In March 2005, the Securities and Exchange Commission (SEC) released SEC Staff Accounting Bulletin No. 107, Share-Based Payment (SAB No. 107). SAB
No. 107 provides the SEC staffs position regarding the application of SFAS No 123(R) and certain SEC rules and regulations, and also provides the staffs views regarding the valuation of share-based payment arrangements for public
companies. In April 2005, the SEC approved an amendment to Rule 4-01(a) of Regulation S-X to amend the date for compliance with SFAS No. 123(R). In accordance with this amendment, the accounting provisions of SFAS No. 123(R) are effective
for annual periods beginning after June 15, 2005. We adopted SFAS No. 123(R) in the first quarter of fiscal 2006 using the modified-prospective approach. We are evaluating the effects of adopting SFAS No. 123(R) and SAB No. 107
and currently anticipate stock-based compensation expense, net of tax, of approximately $9 million (unaudited) in fiscal 2006. Actual fiscal 2006 stock-based compensation expense could vary significantly from this estimate.



In March 2005, the FASB issued Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations (FIN 47), which is an interpretation of SFAS No. 143, Accounting for Asset Retirement Obligations(SFAS No. 143). FIN 47 clarifies terminology within SFAS
No. 143 and requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liabilitys fair value can be reasonably estimated. FIN 47 is effective for fiscal years ending
after December 15, 2005. We adopted FIN 47 for the year ended January 28, 2006, which did not have a material impact on our consolidated results of operation, financial condition or cash flows.



Inflation



Although we cannot accurately anticipate the effect of inflation on our operations, we do not believe that inflation has
had, or is likely in the foreseeable future to have, a material impact on our net sales or results of operations.



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



Market risks relating to our operations result primarily from changes in short-term London Interbank Offered Rates, or LIBOR, as our revolving credit
facility utilizes a portfolio of short-term LIBOR contracts. These LIBOR contracts are fixed rate instruments for a period of between one and six months, at our discretion. Our portfolio of LIBOR contracts vary in length and interest rate, such that
adverse changes in short-term interest rates could affect our overall borrowing rate when contracts are renewed. We periodically evaluate alternative hedging strategies, although currently we have no hedges outstanding. We do not enter into
derivative financial instruments for trading or speculative purposes.



All of the $60.0 million in debt under our revolving credit facility as of January 28, 2006 was subject to variable interest rate fluctuations. Based on this debt level, a hypothetical 10% increase in variable rates from the



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applicable rates at January 28, 2006 would increase net interest expense by approximately $0.3 million on an annual basis, and would decrease both net
earnings and cash flows for that annual period by a corresponding amount. We cannot predict market fluctuations in interest rates and their impact on debt, nor can there be any assurance that long-term fixed-rate debt will be available at favorable
rates, if at all. Consequently, future results may differ materially from estimated results due to adverse changes in interest rates or debt availability.



We did not have any significant foreign exchange or other market risk at January 28, 2006.



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



The Consolidated Financial Statements required by this Item are set forth at the pages indicated in Item 15(a) of this Annual Report.



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



None.



|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------



1. Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures



We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the
reports we file pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management
necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.



We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective at the reasonable assurance level.



2. Managements Report on Internal Control Over Financial Reporting



Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934. Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our board of
directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting
principles, and includes those policies and procedures that:



| | (1) | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



30



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##### Table of Contents

| | (3) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the
financial statements.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management used the
criteria included in the framework set forth in the report entitled Internal ControlIntegrated Frameworkpublished by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO, to evaluate the effectiveness of
the Companys internal control over financial reporting as of January 28, 2006.



Based on managements assessment and on the criteria in Internal ControlIntegrated Framework, management has concluded that our internal control over financial reporting was effective as of
January 28, 2006.



Our independent registered public
accounting firm, KPMG, LLP, has issued an audit report on managements assessment of the effectiveness of our internal control over financial reporting. That report appears below.



3. Changes in Internal Control Over Financial Reporting



There has been no change in our internal control over financial reporting during the fourth fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



4. Inherent Limitation on the Effectiveness of Internal Control



Because of its inherent limitations, internal control over financial reporting cannot provide absolute assurance of achieving financial reporting
objectives and may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become ineffective because of changes in conditions or that the degree of
compliance with established policies or procedures may deteriorate.



5.
Independent Registered Public Accounting Firm Report



REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders

PETCO Animal Supplies, Inc.:



We have audited managements assessment, included in the accompanying
Managements Report on Internal Control Over Financial Reporting (Item 9A.2),that PETCO Animal Supplies, Inc. and subsidiaries (the Company) maintained effective internal control over financial reporting as of
January 28, 2006, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).The Companys management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on
the effectiveness of the Companys internal control over financial reporting based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.



31



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##### Table of Contents

A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements.



Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.



In our opinion, managements assessment that the Company maintained effective internal control over financial reporting as of January 28, 2006, is fairly stated, in all material respects, based on criteria
established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of January 28, 2006, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).



We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of PETCO Animal Supplies, Inc. and subsidiaries as of January 28, 2006 and January 29, 2005, and the related consolidated statements of operations,
stockholders equity (deficit), and cash flows for each of the years in the three-year period ended January 28, 2006, and our report dated March 27, 2006, expressed an unqualified opinion on those consolidated financial statements.



/s/ KPMG LLP



San Diego, California

March 27, 2006



|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------



None.



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##### Table of Contents

PART III



|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
|-------- | --------------------------------------------------



The information required by Item 10 is incorporated by reference to our Proxy Statement relating to the 2006 Annual Meeting of Stockholders, to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A and in accordance with General Instruction G(3) to Form 10-K.



|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------



The information required by Item 11 is incorporated by reference to our Proxy Statement relating to the 2006 Annual Meeting of Stockholders, to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A and in accordance with General Instruction G(3) to Form 10-K.



|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|-------- | --------------------------------------------------------------



The information required by Item 12 is incorporated by reference to our Proxy Statement relating to the 2006 Annual Meeting of Stockholders, to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A and in accordance with General Instruction G(3) to Form 10-K.



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- | ----------------------------------------------



The information required by Item 13 is incorporated by reference to our Proxy Statement relating to the 2006 Annual Meeting of Stockholders, to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A and in accordance with General Instruction G(3) to Form 10-K.



|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------



The information required by Item 14 is incorporated by reference to our Proxy Statement relating to the 2006 Annual Meeting of Stockholders, to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A and in accordance with General Instruction G(3) to Form 10-K.



33



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##### Table of Contents

PART IV



|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|-------- | ------------------------------------------



(a) Documents filed as a part of this report:



1. Financial statements



The Consolidated Financial Statements required by this Item are submitted in a separate section beginning on page F-1 of this Annual Report on Form 10-K.



2. Financial Statement Schedules



None.



3. Exhibits



34



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##### Table of Contents

Exhibit Index



|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|2.1            |  | Agreement and Plan of Reorganization, dated as of January 13, 2005, by and among the PETCO Animal Supplies, Inc., PETCO Animal Supplies Stores, Inc. (formerly PETCO Animal Supplies,
Inc.) and PETCO Merger Co. (incorporated by reference to Current Report on Form 8-K filed on January 14, 2005 (with respect to the holding company reorganization of PETCO)).                                                                                                                       
|               | 
|3.1            |  | Certificate of Incorporation of PETCO Animal Supplies, Inc. as filed with the office of the Secretary of State of the State of Delaware on January 10, 2005, as amended by the Certificate
of Amendment of Certificate of Incorporation as filed with the office of the Secretary of State of the State of Delaware on January 13, 2005 (incorporated by reference to Current Report on Form 8-K filed on January 14, 2005 (with respect
to the holding company reorganization of PETCO)).
|               | 
|3.2            |  | Bylaws of PETCO Animal Supplies, Inc. (incorporated by reference to Current Report on Form 8-K filed on January 14, 2005 (with respect to the holding company reorganization of
PETCO)).                                                                                                                                                                                                                                                                                                  
|               | 
|4.1            |  | Indenture, dated as of October 26, 2001, by and among PETCO Animal Supplies Stores, Inc., certain subsidiaries of PETCO Animal Supplies Stores, Inc. and U.S. Bank N.A., as trustee
(incorporated by reference to Registration Statement on Form S-1, as amended (File No. 333-75830)).                                                                                                                                                                                                   
|               | 
|4.2            |  | Supplemental Indenture, dated as of January 14, 2005, by and among PETCO Animal Supplies, Inc., E-Pet Services, E-Pet Services, LLC and U.S. Bank National Association, as trustee
(incorporated by reference to Current Report on Form 8-K filed on January 14, 2005 (with respect to the holding company reorganization of PETCO)).                                                                                                                                                     
|               | 
|4.3            |  | Form of Specimen Common Stock Certificate (incorporated by reference to Annual Report on Form 10-K for the fiscal year ended February 2, 2002, as amended).                                                                                                                                                                                                                                                                                                                               
|               | 
|4.4            |  | Form of Amended and Restated Stockholders Agreement, dated as of February 19, 2002, by and among PETCO Animal Supplies, Inc. and certain stockholders of PETCO Animal Supplies, Inc.
(incorporated by reference to Registration Statement on Form S-1, as amended (File No. 333-75830)).                                                                                                                                                                                                  
|               | 
|10.1#          |  | Amended and Restated Employment Agreement, dated as of October 2, 2000, by and between PETCO Animal Supplies Stores, Inc. and Brian K. Devine (incorporated by reference to Registration
Statement on Form S-1, as amended (File No. 333-75830)).                                                                                                                                                                                                                                         
|               | 
|10.2#          |  | First Amendment, dated June 27, 2005, to Employment Agreement, dated as of October 2, 2000, by and between PETCO Animal Supplies, Inc. and Brian K. Devine (incorporated by reference
to Annual Report on Form 10-K for the fiscal year ended January 29, 2005).                                                                                                                                                                                                                          
|               | 
|10.3#          |  | Employment Agreement, dated as of October 2, 2000, by and between PETCO Animal Supplies Stores, Inc. and Bruce C. Hall (incorporated by reference to Registration Statement on Form S-1,
as amended (File No. 333-75830)).                                                                                                                                                                                                                                                                
|               | 
|10.4#          |  | First Amendment, dated June 27, 2005, to Employment Agreement, dated as of October 2, 2000, by and between PETCO Animal Supplies, Inc. and Bruce C. Hall (incorporated by reference
to Annual Report on Form 10-K for the fiscal year ended January 29, 2005).                                                                                                                                                                                                                            
|               | 
|10.5#          |  | Employment Agreement, dated as of October 2, 2000, by and between PETCO Animal Supplies Stores, Inc. and James M. Myers (incorporated by reference to Registration Statement on Form S-1,
as amended (File No. 333-75830)).                                                                                                                                                                                                                                                               
|               | 
|10.6#          |  | First Amendment, dated June 27, 2005, to Employment Agreement, dated as of October 2, 2000, by and between PETCO Animal Supplies, Inc. and James M. Myers (incorporated by reference
to Annual Report on Form 10-K for the fiscal year ended January 29, 2005).                                                                                                                                                                                                                           



35



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|               |  |                                                                                                                                                                                                                                                                     
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                         
|10.7#          |  | Form of Indemnification Agreement between PETCO and certain officers and directors (incorporated by reference to Registration Statement on Form S-1, as amended (File No.
333-75830)).                                                                              
|               | 
|10.8#          |  | Form of Retention Agreement for executive officers (incorporated by reference to Registration Statement on Form S-1, as amended (File No. 333-75830)).                                                                                                              
|               | 
|10.9#          |  | Form of Retention Agreement for non-executive officers (incorporated by reference to Registration Statement on Form S-1, as amended (File No. 333-75830)).                                                                                                          
|               | 
|10.10#         |  | Form of Second Amendment to Retention Agreement for executive and non-executive officers (incorporated by reference to Annual Report on Form 10-K for the fiscal year ended January 29,
2005).                                                                      
|               | 
|10.11#         |  | PETCO Animal Supplies 401(k) plan (incorporated by reference to Registration Statement on Form S-8 (File No. 333-100397)).                                                                                                                                          
|               | 
|10.12#         |  | PETCO Flexible Benefit Plan, amended and restated effective July 1, 1998 (incorporated by reference to Registration Statement on Form S-1, as amended (File No.
333-75830)).                                                                                        
|               | 
|10.13#         |  | The 1994 Stock Option and Restricted Stock Plan for Executive and Key Employees of PETCO Animal Supplies, Inc., as amended and restated as of October 2, 2000 (incorporated by reference
to Registration Statement on Form S-1, as amended (File No. 333-75830)).   
|               | 
|10.14#         |  | Form of PETCO Animal Supplies, Inc. Non-qualified Stock Option Agreement (1994 Stock Option and Restricted Stock Plan for Executive and Key Employees) (incorporated by reference to
Registration Statement on Form S-1, as amended (File No. 333-75830)).          
|               | 
|10.15#         |  | Form of PETCO Animal Supplies, Inc. Incentive Stock Option Agreement (1994 Stock Option and Restricted Stock Plan for Executive and Key Employees) (incorporated by reference to Registration
Statement on Form S-1, as amended (File No. 333-75830)).              
|               | 
|10.16          |  | Agreement and Plan of Merger, dated as of May 17, 2000, by and between PETCO Animal Supplies Stores, Inc. and BD Recapitalization Corp. (incorporated by reference to Registration
Statement on Form S-1, as amended (File No. 333-75830)).                         
|               | 
|10.17          |  | First Amendment to Agreement and Plan of Merger, dated as of September 14, 2000, by and between PETCO Animal Supplies Stores, Inc. and BD Recapitalization Corp. (incorporated by
reference to Registration Statement on Form S-1, as amended (File No. 333-75830)).
|               | 
|10.18#        |  | Form of Restricted Stock Unit Agreement for units granted pursuant to the 2002 Incentive Award Plan of PETCO Animal Supplies, Inc.                                                                                                                                  
|               | 
|10.19#         |  | PETCO Animal Supplies, Inc. Deferred Compensation Plan (incorporated by reference to Registration Statement on Form S-1, as amended (File No. 333-75830)).                                                                                                          
|               | 
|10.20#         |  | First Amendment to PETCO Animal Supplies, Inc. Deferred Compensation Plan (incorporated by reference to Annual Report on Form 10-K for the fiscal year ended January 29,
2005).                                                                                     
|               | 
|10.21#         |  | 2002 Incentive Award Plan of PETCO Animal Supplies, Inc. (incorporated by reference to Registration Statement on Form S-1, as amended (File No. 333-75830)).                                                                                                        
|               | 
|10.22#        |  | Form of PETCO Animal Supplies, Inc. Stock Option Agreement (2002 Incentive Award Plan).                                                                                                                                                                             
|               | 
|10.23#         |  | Consulting Agreement, dated as of November 29, 2001, by and between PETCO Animal Supplies Stores, Inc. and Brian K. Devine (incorporated by reference to Annual Report on Form 10-K for
the fiscal year ended February 2, 2002, as amended).                        



36



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|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.24#         |  | First Amendment, dated June 27, 2005, to Consulting Agreement, dated as of November 29, 2001, by and between PETCO Animal Supplies Stores, Inc. and Brian K. Devine (incorporated by
reference to Annual Report on Form 10-K for the fiscal year ended January 29, 2005).                                                                                                                                                                                                                                                                                                                          
|               | 
|10.25#         |  | Supplemental Executive Retirement Program, dated as of November 29, 2001, by and between PETCO Animal Supplies Stores, Inc. and Brian K. Devine (incorporated by reference to Annual
Report on Form 10-K for the fiscal year ended February 2, 2002, as amended).                                                                                                                                                                                                                                                                                                                                  
|               | 
|10.26#         |  | PETCO Animal Supplies, Inc. Amended and Restated Executive Incentive Bonus Plan (incorporated by reference to Annual Report on Form 10-K for the fiscal year ended January 29,
2005).                                                                                                                                                                                                                                                                                                                                                                                                              
|               | 
|10.27          |  | Credit Agreement, dated as of January 13, 2005, by and among PETCO Animal Supplies, Inc., PETCO Animal Supplies Stores, Inc., the financial institutions party thereto as lenders, Wells
Fargo Bank, National Association, as sole lead arranger, book runner and administrative agent for the lenders, Bank of America, N.A., as syndication agent, and U.S. Bank National Association and Union Bank of California, N.A., as co-documentation
agents (incorporated by reference to Current Report on Form 8-K filed on January 14, 2005 (with respect to the execution of the Credit Agreement)).
|               | 
|10.28          |  | Form of Revolving Note executed in connection with the Credit Agreement referenced as Exhibit 10.27 (incorporated by reference to Current Report on Form 8-K filed on January 14, 2005
(with respect to the execution of the Credit Agreement)).                                                                                                                                                                                                                                                                                                                                                   
|               | 
|10.29          |  | First Amendment, dated as of March 10, 2005, to Credit Agreement, dated as of January 13, 2005, by and among PETCO Animal Supplies, Inc., PETCO Animal Supplies Stores, Inc., the
financial institutions party thereto as lenders, and Wells Fargo Bank, National Association, as administrative agent for the lenders (incorporated by reference to Annual Report on Form 10-K for the fiscal year ended January 29,
2005).                                                                                                                                                                       
|               | 
|10.30          |  | Second Amendment, dated as of April 29, 2005, to Credit Agreement, dated as of January 13, 2005, by and among PETCO Animal Supplies, Inc., PETCO Animal Supplies Stores, Inc., the
financial institutions party thereto as lenders, and Wells Fargo Bank, National Association, as administrative agent for the lenders (incorporated by reference to Current Report on Form 8-K filed on April 29, 2005).                                                                                                                                                                                         
|               | 
|10.31          |  | Third Amendment, dated as of May 31, 2005, to Credit Agreement, dated as of January 13, 2005, by and among PETCO Animal Supplies, Inc. PETCO Animal Supplies Stores, Inc., the
financial institutions party thereto as lenders, and Wells Fargo Bank, National Association, as administrative agent for the lenders (incorporated by reference to Current Report on Form 8-K filed on June 3, 2005).                                                                                                                                                                                               
|               | 
|10.32          |  | Fourth Amendment, dated as of March 17, 2006, to Credit Agreement, dated as of January 13, 2005, as amended, by and among PETCO Animal Supplies, Inc., PETCO Animal Supplies Stores,
Inc., the financial institutions party thereto as Lenders and Wells Fargo Bank, National Association, as administrative agent for the Lenders (incorporated by reference to Current Report on Form 8-K filed on March 23,
2006).                                                                                                                                                                            
|               | 
|10.33          |  | Assignment and Assumption Agreement, dated as of January 13, 2005, by and between PETCO Animal Supplies, Inc. and PETCO Animal Supplies Stores, Inc. (incorporated by reference to Current
Report on Form 8-K filed on January 14, 2005 (with respect to the holding company reorganization of PETCO)).                                                                                                                                                                                                                                                                                            
|               | 
|10.34#        |  | Form of Waiver and Amendment of Retention Agreement, dated as of January 13, 2005, for executive and non-executive officers, and Form of Waiver and Amendment to Employment Agreement,
dated as of January 13, 2005, for certain executive officers.                                                                                                                                                                                                                                                                                                                                               



37



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|               |  |                                                                                                                                                                                              
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                  
|10.35#         |  | Employment Agreement, dated January 23, 2006, by and between PETCO Animal Supplies, Inc. and David Bolen (incorporated by reference to Current Report on Form 8-K filed on
January 23, 2006).
|               | 
|21.1          |  | List of subsidiaries of PETCO Animal Supplies, Inc.                                                                                                                                          
|               | 
|23.1          |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                    
|               | 
|31.1          |  | Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934.                                                          
|               | 
|31.2          |  | Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934.                                                          
|               | 
|32.1*         |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.                       



| | Filed herewith.
|- | ---------------



|# | Indicates a management contract or compensatory plan or arrangement.
|- | --------------------------------------------------------------------



|* | These certifications are being furnished solely to accompany this annual report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of
the Exchange Act and are not to be incorporated by reference into any filing of PETCO Animal Supplies, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



38



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##### Table of Contents

SIGNATURES



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



PETCO ANIMAL SUPPLIES, INC.By:

/s/ JAMES M. MYERSJames M. Myers Chief Executive OfficerBy:

/s/ RODNEY CARTERRodney Carter Senior Vice President and Chief Financial Officer




Date: March 31, 2006



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



|                                   |  |                                                                                                |  |               
|---------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | --------------
|Signature                          |  | Title                                                                                          |  | Date          
|                                   |  |                                                                                               
|/S/ BRIAN K. DEVINEBrian K. Devine |  | Chairman of the Board                                                                          |  | March 31, 2006
|                                   |  |                                                                                               
|/S/ JAMES M. MYERSJames M. Myers   |  | Chief Executive Officer and Director (Principal Executive Officer)                             |  | March 31, 2006
|                                   |  |                                                                                               
|/S/ RODNEY CARTERRodney Carter     |  | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |  | March 31, 2006
|                                   |  |                                                                                               
|/S/ DAVID B. APPELDavid. B. Appel  |  | Director                                                                                       |  | March 31, 2006
|                                   |  |                                                                                               
|/S/ PETER MASLENPeter Maslen       |  | Director                                                                                       |  | March 31, 2006
|                                   |  |                                                                                               
|/S/ JOHN G. DANHAKLJohn G. Danhakl |  | Director                                                                                       |  | March 31, 2006
|                                   |  |                                                                                               
|/S/ JULIAN C. DAYJulian C. Day     |  | Director                                                                                       |  | March 31, 2006



39



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|                                         |  |          |  |               
|---------------------------------------- |  | -------- |  | --------------
|Signature                                |  | Title    |  | Date          
|                                         |  |         
|/S/ CHARLES W. DUDDLESCharles W. Duddles |  | Director |  | March 31, 2006
|                                         |  |         
|/S/ DAVID CHINGDavid Ching               |  | Director |  | March 31, 2006
|                                         |  |         
|/S/ SANDRA N. BANESandra N. Bane         |  | Director |  | March 31, 2006



40



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##### Table of Contents

PE
TCO ANIMAL SUPPLIES, INC.



Index to Financial Statements



|                                                                                                                                             |  |     
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                             |  | Page
|Index to Financial Statements                                                                                                                |  | F-1 
|Report of Independent Registered Public Accounting Firm                                                                                      |  | F-2 
|Consolidated Balance Sheets as of January 29, 2005 and January 28, 2006                                                                      |  | F-3 
|Consolidated Statements of Operations for the Fiscal Years Ended January 31, 2004, January 29, 2005 and January 28, 2006                     |  | F-4 
|Consolidated Statements of Stockholders Equity (Deficit) for the Fiscal Years Ended January 31, 2004, January 29, 2005 and January 28, 2006 |  | F-5 
|Consolidated Statements of Cash Flows for the Fiscal Years Ended January 31, 2004, January 29, 2005 and January 28, 2006                     |  | F-6 
|Notes to Consolidated Financial Statements                                                                                                   |  | F-7 



F-1



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##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders

PETCO Animal Supplies, Inc.:



We have audited the accompanying consolidated balance sheets of PETCO Animal
Supplies, Inc. and subsidiaries as of January 28, 2006 and January 29, 2005, and the related consolidated statements of operations, stockholders equity (deficit), and cash flows for each of the years in the three-year period ended
January 28, 2006. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PETCO Animal Supplies, Inc. and subsidiaries as of January 28, 2006 and
January 29, 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended January 28, 2006, in conformity with U.S. generally accepted accounting principles.



We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Companys internal control over financial reporting as of January 28, 2006, based on criteria established in Internal ControlIntegrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 27, 2006 expressed an unqualified opinion on managements assessment of, and the effective operation of, internal control over
financial reporting.



/s/ KPMG LLP



San Diego, California

March 27, 2006



F-2



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##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



CONSOLIDATED BALANCE SHEETS



(In thousands,
except per share data)



|                                                                                                                                                                    |  |                  |         |                  |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | ---------------- | - | -------
|                                                                                                                                                                    |  | January 29, 2005 |         | January 28, 2006
|ASSETS                                                                                                                                                              |  |                  |         |                  |   |        
|Current assets:                                                                                                                                                     |  |                  |         |                  |   |        
|Cash and cash equivalents                                                                                                                                           |  | $                | 36,815  |                  | $ | 39,524 
|Receivables, net                                                                                                                                                    |  |                  | 17,875  |                  |   | 20,422 
|Merchandise inventories                                                                                                                                             |  |                  | 167,038 |                  |   | 183,336
|Deferred tax assets                                                                                                                                                 |  |                  | 17,680  |                  |   | 16,737 
|Other current assets                                                                                                                                                |  |                  | 10,916  |                  |   | 13,872 
|                                                                                                                                                                    |  |                  |         |                  |   |        
|Total current assets                                                                                                                                                |  |                  | 250,324 |                  |   | 273,891
|Fixed assets, net                                                                                                                                                   |  |                  | 333,300 |                  |   | 377,394
|Goodwill                                                                                                                                                            |  |                  | 40,179  |                  |   | 40,227 
|Other assets                                                                                                                                                        |  |                  | 16,650  |                  |   | 18,163 
|                                                                                                                                                                    |  |                  |         |                  |   |        
|Total assets                                                                                                                                                        |  | $                | 640,453 |                  | $ | 709,675
|                                                                                                                                                                    |  |                  |         |                  |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                |  |                  |         |                  |   |        
|Current liabilities:                                                                                                                                                |  |                  |         |                  |   |        
|Accounts payable                                                                                                                                                    |  | $                | 82,142  |                  | $ | 90,834 
|Accrued salaries and employee benefits                                                                                                                              |  |                  | 72,719  |                  |   | 76,321 
|Accrued expenses and other liabilities                                                                                                                              |  |                  | 68,325  |                  |   | 82,373 
|Current portion of long-term debt                                                                                                                                   |  |                  | 353     |                  |   | 1,755  
|                                                                                                                                                                    |  |                  |         |                  |   |        
|Total current liabilities                                                                                                                                           |  |                  | 223,539 |                  |   | 251,283
|Senior credit facility                                                                                                                                              |  |                  | 85,000  |                  |   | 60,000 
|Senior subordinated notes payable                                                                                                                                   |  |                  | 103,982 |                  |   | 89,267 
|Deferred tax liabilities                                                                                                                                            |  |                  | 32,159  |                  |   | 22,579 
|Deferred rent and other liabilities                                                                                                                                 |  |                  | 58,478  |                  |   | 69,708 
|                                                                                                                                                                    |  |                  |         |                  |   |        
|Total liabilities                                                                                                                                                   |  |                  | 503,158 |                  |   | 492,837
|                                                                                                                                                                    |  |                  |         |                  |   |        
|Commitments and contingencies (Notes 4, 5, 6 and 10)                                                                                                                |  |                  |         |                  |   |        
|                                                                                                                                                                    |  |                 
|Stockholders equity:                                                                                                                                               |  |                  |         |                  |   |        
|Preferred stock, $.01 par value, 5,000 shares authorized and no shares issued and outstanding at January 29, 2005 and January 28,
2006                              |  |                  |        |                  |   |       
|Common stock, $.001 par value, 250,000 shares authorized and 57,654 and 57,890 shares issued and outstanding at January 29, 2005 and
January 28, 2006, respectively |  |                  | 58      |                  |   | 58     
|Additional paid-in capital                                                                                                                                          |  |                  | 68,441  |                  |   | 72,814 
|Retained earnings                                                                                                                                                   |  |                  | 68,796  |                  |   | 143,966
|                                                                                                                                                                    |  |                  |         |                  |   |        
|Total stockholders equity                                                                                                                                          |  |                  | 137,295 |                  |   | 216,838
|                                                                                                                                                                    |  |                  |         |                  |   |        
|Total liabilities and stockholders equity                                                                                                                          |  | $                | 640,453 |                  | $ | 709,675
|                                                                                                                                                                    |  |                  |         |                  |   |        



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS



(In
thousands, except per share data)



|                                                  |  |                    |           |   |                  |   |           |                  |  |   |           |  
|------------------------------------------------- |  | ------------------ | --------- | - | ---------------- | - | --------- | ---------------- |  | - | --------- | -
|                                                  |  | Fiscal Years Ended |          
|                                                  |  | January 31, 2004   |           |   | January 29, 2005 |   |           | January 28, 2006 | 
|Net sales                                         |  | $                  | 1,610,431 |   |                  | $ | 1,812,145 |                  |  | $ | 1,996,089 |  
|Cost of sales and occupancy costs                 |  |                    | 1,060,942 |   |                  |   | 1,181,354 |                  |  |   | 1,330,054 |  
|                                                  |  |                    |           |   |                  |   |           |                  |  |   |           |  
|Gross profit                                      |  |                    | 549,489   |   |                  |   | 630,791   |                  |  |   | 666,035   |  
|Selling, general and administrative expenses      |  |                    | 411,816   |   |                  |   | 472,780   |                  |  |   | 524,566   |  
|                                                  |  |                    |           |   |                  |   |           |                  |  |   |           |  
|Operating income                                  |  |                    | 137,673   |   |                  |   | 158,011   |                  |  |   | 141,469   |  
|Interest income                                   |  |                    | (1,389    | ) |                  |   | (939      | )                |  |   | (403      | )
|Interest expense                                  |  |                    | 27,504    |   |                  |   | 20,276    |                  |  |   | 15,377    |  
|Debt retirement costs                             |  |                    | 12,189    |   |                  |   | 6,754     |                  |  |   | 2,447     |  
|                                                  |  |                    |           |   |                  |   |           |                  |  |   |           |  
|Earnings before income taxes                      |  |                    | 99,369    |   |                  |   | 131,920   |                  |  |   | 124,048   |  
|Income taxes                                      |  |                    | 34,656    |   |                  |   | 49,547    |                  |  |   | 48,878    |  
|                                                  |  |                    |           |   |                  |   |           |                  |  |   |           |  
|Net earnings                                      |  | $                  | 64,713    |   |                  | $ | 82,373    |                  |  | $ | 75,170    |  
|                                                  |  |                    |           |   |                  |   |           |                  |  |   |           |  
|Net earnings per share:                           |  |                    |           |   |                  |   |           |                  |  |   |           |  
|Basic                                             |  | $                  | 1.13      |   |                  | $ | 1.43      |                  |  | $ | 1.30      |  
|                                                  |  |                    |           |   |                  |   |           |                  |  |   |           |  
|Diluted                                           |  | $                  | 1.11      |   |                  | $ | 1.41      |                  |  | $ | 1.28      |  
|                                                  |  |                    |           |   |                  |   |           |                  |  |   |           |  
|Shares used for computing net earnings per share: |  |                    |           |   |                  |   |           |                  |  |   |           |  
|Basic                                             |  |                    | 57,422    |   |                  |   | 57,542    |                  |  |   | 57,802    |  
|                                                  |  |                    |           |   |                  |   |           |                  |  |   |           |  
|Diluted                                           |  |                    | 58,299    |   |                  |   | 58,511    |                  |  |   | 58,543    |  
|                                                  |  |                    |           |   |                  |   |           |                  |  |   |           |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)



For the fiscal years ended January 31, 2004, January 29, 2005 and January 28, 2006



(In thousands)



|                                               |        |              |        |                          |    |                                          |   |        |                                       |   |         |   |  |   |         |  
|---------------------------------------------- | ------ | ------------ | ------ | ------------------------ | -- | ---------------------------------------- | - | ------ | ------------------------------------- | - | ------- | - |  | - | ------- | -
|                                               |        | Common Stock |        | AdditionalPaid-inCapital |    | Retained Earnings/ (Accumulated Deficit) |   |        | Total Stockholders Equity/ (Deficit) |  
|                                               | Shares |              | Amount |                          |    |                                         
|Balances at February 1, 2003                   |        | 57,373       |        | $                        | 57 |                                          | $ | 65,179 |                                       | $ | (76,319 | ) |  | $ | (11,083 | )
|Exercise of options                            |        | 85           |        |                          |   |                                          |   | 91     |                                       |   |        |   |  |   | 91      |  
|Payments on notes receivable from stockholders |        |             |        |                          |   |                                          |   | 253    |                                       |   |        |   |  |   | 253     |  
|Tax benefit from exercise of options           |        |             |        |                          |   |                                          |   | 582    |                                       |   |        |   |  |   | 582     |  
|Costs of common stock sold by stockholders     |        |             |        |                          |   |                                          |   |       |                                       |   | (1,423  | ) |  |   | (1,423  | )
|Net earnings                                   |        |             |        |                          |   |                                          |   |       |                                       |   | 64,713  |   |  |   | 64,713  |  
|                                               |        |              |        |                          |    |                                          |   |        |                                       |   |         |   |  |   |         |  
|Balances at January 31, 2004                   |        | 57,458       |        |                          | 57 |                                          |   | 66,105 |                                       |   | (13,029 | ) |  |   | 53,133  |  
|Exercise of options                            |        | 196          |        |                          | 1  |                                          |   | 202    |                                       |   |        |   |  |   | 203     |  
|Payments on notes receivable from stockholders |        |             |        |                          |   |                                          |   | 527    |                                       |   |        |   |  |   | 527     |  
|Tax benefit from exercise of options           |        |             |        |                          |   |                                          |   | 1,607  |                                       |   |        |   |  |   | 1,607   |  
|Costs of common stock sold by stockholders     |        |             |        |                          |   |                                          |   |       |                                       |   | (548    | ) |  |   | (548    | )
|Net earnings                                   |        |             |        |                          |   |                                          |   |       |                                       |   | 82,373  |   |  |   | 82,373  |  
|                                               |        |              |        |                          |    |                                          |   |        |                                       |   |         |   |  |   |         |  
|Balances at January 29, 2005                   |        | 57,654       |        |                          | 58 |                                          |   | 68,441 |                                       |   | 68,796  |   |  |   | 137,295 |  
|Exercise of options                            |        | 236          |        |                          |   |                                          |   | 2,986  |                                       |   |        |   |  |   | 2,986   |  
|Tax benefit from exercise of options           |        |             |        |                          |   |                                          |   | 1,387  |                                       |   |        |   |  |   | 1,387   |  
|Net earnings                                   |        |             |        |                          |   |                                          |   |       |                                       |   | 75,170  |   |  |   | 75,170  |  
|                                               |        |              |        |                          |    |                                          |   |        |                                       |   |         |   |  |   |         |  
|Balances at January 28, 2006                   |        | 57,890       |        | $                        | 58 |                                          | $ | 72,814 |                                       | $ | 143,966 |   |  | $ | 216,838 |  
|                                               |        |              |        |                          |    |                                          |   |        |                                       |   |         |   |  |   |         |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS



(In
thousands)



|                                                        |  |                    |          |   |                  |   |          |                  |  |   |          |  
|------------------------------------------------------- |  | ------------------ | -------- | - | ---------------- | - | -------- | ---------------- |  | - | -------- | -
|                                                        |  | Fiscal Years Ended |         
|                                                        |  | January 31, 2004   |          |   | January 29, 2005 |   |          | January 28, 2006 | 
|Cash flows from operating activities:                   |  |                    |          |   |                  |   |          |                  |  |   |          |  
|Net earnings                                            |  | $                  | 64,713   |   |                  | $ | 82,373   |                  |  | $ | 75,170   |  
|Depreciation and amortization                           |  |                    | 56,552   |   |                  |   | 63,608   |                  |  |   | 77,845   |  
|Amortization of debt issuance costs                     |  |                    | 1,461    |   |                  |   | 1,108    |                  |  |   | 241      |  
|Provision for deferred and other taxes                  |  |                    | 16,678   |   |                  |   | 1,214    |                  |  |   | (7,250   | )
|Impairments and write-offs of fixed and other assets    |  |                    | 2,228    |   |                  |   | 1,965    |                  |  |   | 2,064    |  
|Non-cash write-off of debt issuance costs               |  |                    | 1,790    |   |                  |   | 3,984    |                  |  |   | 56       |  
|Changes in assets and liabilities:                      |  |                    |          |   |                  |   |          |                  |  |   |          |  
|Receivables                                             |  |                    | 1,789    |   |                  |   | (5,361   | )                |  |   | (2,547   | )
|Merchandise inventories                                 |  |                    | (1,103   | ) |                  |   | (27,525  | )                |  |   | (16,298  | )
|Other assets                                            |  |                    | (7,014   | ) |                  |   | 1,523    |                  |  |   | (3,062   | )
|Accounts payable                                        |  |                    | 2,465    |   |                  |   | 18,369   |                  |  |   | 8,692    |  
|Accrued salaries and employee benefits                  |  |                    | 15,483   |   |                  |   | 15,496   |                  |  |   | 3,602    |  
|Accrued expenses and other liabilities                  |  |                    | 1,026    |   |                  |   | 2,227    |                  |  |   | 13,924   |  
|Deferred rent and other liabilities                     |  |                    | 863      |   |                  |   | 13,662   |                  |  |   | 11,591   |  
|                                                        |  |                    |          |   |                  |   |          |                  |  |   |          |  
|Net cash provided by operating activities               |  |                    | 156,931  |   |                  |   | 172,643  |                  |  |   | 164,028  |  
|                                                        |  |                    |          |   |                  |   |          |                  |  |   |          |  
|Cash flows from investing activities:                   |  |                    |          |   |                  |   |          |                  |  |   |          |  
|Additions to fixed assets                               |  |                    | (95,870  | ) |                  |   | (119,806 | )                |  |   | (123,549 | )
|Net cash invested in acquisitions                       |  |                    | (3,087   | ) |                  |   | (5,147   | )                |  |   | (688     | )
|Repayments on employee stockholder loans                |  |                    | 253      |   |                  |   | 527      |                  |  |   |         |  
|                                                        |  |                    |          |   |                  |   |          |                  |  |   |          |  
|Net cash used in investing activities                   |  |                    | (98,704  | ) |                  |   | (124,426 | )                |  |   | (124,237 | )
|                                                        |  |                    |          |   |                  |   |          |                  |  |   |          |  
|Cash flows from financing activities:                   |  |                    |          |   |                  |   |          |                  |  |   |          |  
|Borrowings under long-term debt agreements              |  |                    |         |   |                  |   | 85,000   |                  |  |   | 131,700  |  
|Repayments of long-term debt                            |  |                    | (102,143 | ) |                  |   | (157,308 | )                |  |   | (171,768 | )
|Debt issuance costs                                     |  |                    | (1,488   | ) |                  |   | (950     | )                |  |   |         |  
|Net proceeds from issuance of common stock              |  |                    | 91       |   |                  |   | 203      |                  |  |   | 2,986    |  
|Costs of common stock sold by stockholders              |  |                    | (1,423   | ) |                  |   | (548     | )                |  |   |         |  
|                                                        |  |                    |          |   |                  |   |          |                  |  |   |          |  
|Net cash used in financing activities                   |  |                    | (104,963 | ) |                  |   | (73,603  | )                |  |   | (37,082  | )
|                                                        |  |                    |          |   |                  |   |          |                  |  |   |          |  
|Net increase (decrease) in cash and cash equivalents    |  |                    | (46,736  | ) |                  |   | (25,386  | )                |  |   | 2,709    |  
|Cash and cash equivalents at beginning of year          |  |                    | 108,937  |   |                  |   | 62,201   |                  |  |   | 36,815   |  
|                                                        |  |                    |          |   |                  |   |          |                  |  |   |          |  
|Cash and cash equivalents at end of year                |  | $                  | 62,201   |   |                  | $ | 36,815   |                  |  | $ | 39,524   |  
|                                                        |  |                    |          |   |                  |   |          |                  |  |   |          |  
|Supplemental cash flow disclosures:                     |  |                    |          |   |                  |   |          |                  |  |   |          |  
|Interest paid on debt                                   |  | $                  | 27,308   |   |                  | $ | 19,907   |                  |  | $ | 14,953   |  
|Premium paid on repurchase of senior subordinated notes |  | $                  | 10,000   |   |                  | $ | 2,782    |                  |  | $ | 2,391    |  
|Income taxes paid                                       |  | $                  | 21,888   |   |                  | $ | 58,094   |                  |  | $ | 43,401   |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



For the fiscal years ended January 31, 2004, January 29, 2005 and January 28, 2006



(In thousands, except per share data)



1. Summary of Significant Accounting Policies



(a) Description of Business:



PETCO Animal Supplies, Inc., a Delaware corporation, and its subsidiaries (collectively, the Company or PETCO), is a national
specialty retailer of premium pet food, supplies and services with 779 stores in 49 states and the District of Columbia as of January 28, 2006. The Companys pet-related products include food, supplies, grooming products, toys, novelty
items, vitamins, small pets such as fish, birds and other small animals (excluding cats and dogs), and veterinary supplies.



(b) Basis of Presentation:



The consolidated financial statements include the accounts of PETCO Animal Supplies, Inc. and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.



The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information that is
currently available and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions.



Certain amounts reported in prior fiscal periods have been reclassified to
conform with the current period presentation.



(c) Fiscal Year:



The Companys fiscal year ends on the Saturday
closest to January 31, resulting in years of either 52 or 53 weeks. All references to a fiscal year refer to the fiscal year ending on the Saturday closest to January 31 of the following year. For example, references to fiscal 2005 refer
to the fiscal year beginning on January 30, 2005 and ending on January 28, 2006.



(d) Cash Equivalents:



Cash equivalents represent all liquid investments with original maturities of three months or less and include money market funds.



(e) Vendor Rebates and Allowances:



Most of the Companys receivables are due from vendors. Receivables are stated net of an allowance for doubtful accounts for estimated losses
resulting from the inability to collect these receivables, which is determined by continually evaluating individual receivables, the vendors financial condition and current economic conditions. The allowance for doubtful accounts was $1,747
and $1,728 at January 29, 2005 and January 28, 2006, respectively.



Pursuant to Emerging Issues Task Force (EITF) 02-16, Accounting by a Customer (including a Reseller) for Cash Consideration Received from a Vendor,substantially all vendor support is initially
deferred as a



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##### Table of Contents

reduction of the cost of inventory purchased and recognized as a reduction of cost of sales and occupancy costs as the related inventory is sold. Certain
cooperative advertising reimbursements that represent a reimbursement of specific, incremental and identifiable advertising costs incurred by the Company in selling the vendors products are classified as a reduction of advertising expenses
within selling, general and administrative expenses.



In
accordance with EITF 03-10, Application of EITF Issue No. 02-16, Accounting by a Customer (including a Reseller) for Cash Consideration Received from a Vendor, by Resellers to Sales Incentives Offered to Consumers by
Manufacturers, consideration received in the form of a reimbursement by a vendor for honoring a vendors sales incentives offered directly to consumers is accounted for as a reduction of cost of sales unless certain criteria are met.



(f) Merchandise Inventories:



Merchandise inventories represent finished goods and are stated at the lower
of cost or market. Cost is determined by the average cost method. Physical inventories are taken on a regular basis to ensure that inventories reflected in the accompanying consolidated balance sheets are properly stated. During the periods between
physical inventory counts, the Company accrues for estimated losses related to shrink based on historical shrink results and current trends in the business. Shrink may occur due to theft, loss or the deterioration of goods, among other things. The
Company assesses its inventory for estimated obsolescence or unmarketable inventory and writes down the difference between the cost of inventory and the estimated market value based upon historical write-downs and assumptions about future sales and
supply on-hand.



(g) Fixed Assets and Depreciation and Amortization:



Fixed assets are stated at cost less accumulated
depreciation and amortization. Equipment under capital leases is recorded as the present value of minimum lease payments at the inception of the lease. Maintenance and repairs are expensed as incurred.



Buildings, equipment, furniture and fixtures are depreciated using the
straight-line method over the estimated useful life of the asset. Leasehold and building improvements are amortized using the straight-line method over the term of the lease or the estimated useful life of the improvement, whichever is shorter.
Amortization of fixed assets financed through capital leases is included in depreciation expense. The Companys fixed assets are depreciated or amortized using the following estimated useful lives:



|                                    |  |              
|----------------------------------- |  | -------------
|Buildings                           |  | 30 years     
|Equipment                           |  | 3 to 7 years 
|Furniture and fixtures              |  | 4 to 7 years 
|Leasehold and building improvements |  | 5 to 10 years



(h) Goodwill, Other Intangible
Assets and Long-Lived Assets:



Goodwill represents the
excess of the cost of acquired businesses over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, goodwill is not amortized.The Company performs its annual impairment test during the second quarter of each year, and performs additional impairment tests whenever events or changes in
circumstances indicate that the carrying value of goodwill may not be recoverable at the store level. Impairment charges are recorded for any store with allocated goodwill in excess of its fair value. Fair value is calculated based on the present
value of estimated future net cash flows expected to be generated by the store. Impairment charges were not significant in fiscal 2003, 2004 or 2005.



Non-compete agreements and acquired lease rights, which comprise substantially all of the Companys other intangible assets, have defined lives and
are included in other current and other long-term assets in the



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##### Table of Contents

accompanying consolidated balance sheets. Non-compete agreements had a gross carrying value of $3,337 and $3,087 and accumulated amortization of $1,141 and
$1,469 at January 29, 2005 and January 28, 2006, respectively. Non-compete agreements are amortized using the straight-line method over their estimated useful lives of two and five years. Acquired lease rights had a gross carrying value of
$4,947 and accumulated amortization of $96 and $549 at January 29, 2005 and January 28, 2006, respectively. Acquired lease rights are amortized using the straight-line method over the term of the leases, which range from 8 to 12 years.



The Company assesses its other long-lived assets, primarily
fixed assets, for impairment under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An impairment loss is
recognized when the undiscounted future cash flows expected to be generated by an asset (or group of assets) are less than its carrying value. Any required impairment losses are measured as the amount by which the assets carrying value exceeds
its fair value, and are recorded as a reduction in the carrying value of the related asset and charged to results of operations. Impairment assessments of long-lived assets resulted in write-downs of fixed assets of $736, $1,715 and $1,363 during
fiscal 2003, 2004 and 2005, respectively. These write-downs relate to fixed assets of closed and underperforming stores and are recorded in cost of sales and occupancy costs in the accompanying consolidated statements of operations.



(i) Self-Insurance Accruals:



The Company maintains accruals for self-insured workers compensation
costs, which is classified in accrued salaries and employee benefits in the accompanying consolidated balance sheets, and self-insured general liability costs, which is classified in accrued expenses and other liabilities in the accompanying
consolidated balance sheets. The Company determines these accruals, with the assistance of insurance actuaries, based on historical experience and trends related to claims and payments, information provided by the Companys insurance broker,
and industry experience and trends. Accruals for estimates of future claim costs for workers compensation and general liability are recorded on an undiscounted basis. All estimates of ultimate loss and loss adjustment expense, and resulting
reserves, are subject to inherent variability caused by the nature of the insurance process. The potentially long period of time between the occurrence of an incident and the final resolution of a claim and the possible effects of changes in the
legal, social and economic environments contribute to this variability.



(j)
Fair Value of Financial Instruments:



Because of their
short maturities, the carrying amounts for cash equivalents, receivables, accounts payable, accrued expenses and other liabilities, and accrued salaries and employee benefits approximate fair value. The estimated fair value of the senior
subordinated notes was approximately $96.6 million at January 28, 2006, based upon recent bids in the market place. The carrying amounts for the senior credit facility and other debt obligations approximate fair value, as the interest rates and
terms are substantially similar to those that could be obtained currently for similar instruments.



(k) Revenue Recognition:



Revenue from sales of the Companys products is recognized at the point of sale for retail stores. For merchandise shipped to customers, revenue, including outbound shipping charges, is recognized and title and risk of loss pass at the
time of shipment. Revenue from pet grooming, training and other services is recognized when services are performed. Revenue is recorded net of certain discounts and promotions offered to customers, including those offered under the Companys
customer loyalty program. The Company records an allowance for estimated returns in the period of sale.



(l) Cost of Sales and Occupancy Costs:



Cost of sales and occupancy costs includes the following types of expenses: direct costs associated with products sold, including inbound freight charges; shipping and handling costs; inventory shrink costs; payroll



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costs of pet groomers and trainers and other direct costs of the services line of business; store occupancy and utilities costs; purchasing costs;
warehousing and receiving costs; internal transfer costs; and other costs of the Companys distribution network. Also included in cost of sales and occupancy costs is certain consideration received from vendors for vendor rebates, allowances
and discounts.



(m) Store Closing Costs:



In accordance with SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, all costs associated with exit or disposal activities are recognized when they are incurred or when the Company ceases using a property. Store closing costs consist of lease obligations, property taxes and common
area maintenance costs, net of expected sub-lease income. Store closing costs are calculated using the net present value method, at a risk-free interest rate, over the remaining life of the lease, and are recorded in cost of sales and occupancy
costs in the accompanying consolidated statements of operations. For fiscal 2003, 2004 and 2005, store closing costs charged to operations were a net credit of $322, and net charges of $3,914, and $3,624, respectively. Total accrued store closing
costs were $3,043 and $3,040 as of January 29, 2005 and January 28, 2006, respectively, and are included in accrued expenses and other liabilities (short-term portion) and deferred rent and other liabilities (long-term portion).



(n) Selling, General and Administrative Expenses:



Selling, general and administrative expenses includes the following types of
expenses: payroll costs of store employees and management; other costs associated with store operations; store pre-opening and remodeling costs; advertising expenses; and general and administrative costs, including payroll and other costs associated
with the Companys management and other support functions.



(o)
Advertising Expenses:



The Company charges advertising
costs to expense as incurred and classifies advertising costs within selling, general and administrative expenses. Total advertising expenses were $41,665, $55,952 and $68,127 for fiscal 2003, 2004 and 2005 respectively.



(p) Operating Leases:



Rent expense under operating leases is recognized on a straight-line basis over the terms of the leases, which generally
range from ten to 15 years for store and distribution center sites and five years for equipment. Costs incurred in negotiating and signing an operating lease agreement are capitalized and recognized on a straight-line basis over the term of the
lease. Reimbursements from lessors of tenant improvement costs are recorded as deferred rent and amortized on a straight-line basis over the term of the lease.



(q) Income Taxes:



Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations
in the period that includes the enactment date. Valuation allowances are recorded against net deferred tax assets when it is considered more likely than not that some portion or all of a deferred tax asset may not be recoverable.



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(r) Stock-Based Compensation:



The Company accounts for its stock option plans using the intrinsic value method prescribed by Accounting Principles Board
(APB), Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, and recognizes compensation expense if the market price of the underlying stock exceeds the exercise price on the date of grant.
Stock-based compensation costs are amortized to expense over the vesting period of the option. Had compensation costs for the Companys stock option plans been determined based on the fair value of the awards at the grant date, consistent with
the methodology prescribed under SFAS No. 123, Accounting for Stock-Based Compensation, the Companys net earnings and net earnings per share would have been as presented below:



|                                                                               |  |                    |        |   |                  |   |        |                  |  |   |        |  
|------------------------------------------------------------------------------ |  | ------------------ | ------ | - | ---------------- | - | ------ | ---------------- |  | - | ------ | -
|                                                                               |  | Fiscal Years Ended |       
|                                                                               |  | January 31, 2004   |        |   | January 29, 2005 |   |        | January 28, 2006 | 
|Net earnings                                                                   |  | $                  | 64,713 |   |                  | $ | 82,373 |                  |  | $ | 75,170 |  
|Stock-based compensation recorded using the intrinsic value method, net of tax |  |                    |       |   |                  |   |       |                  |  |   |       |  
|Stock-based compensation using the fair value method, net of tax               |  |                    | (2,350 | ) |                  |   | (6,554 | )                |  |   | (6,831 | )
|                                                                               |  |                    |        |   |                  |   |        |                  |  |   |        |  
|Pro forma net earnings                                                         |  | $                  | 62,363 |   |                  | $ | 75,819 |                  |  | $ | 68,339 |  
|                                                                               |  |                    |        |   |                  |   |        |                  |  |   |        |  
|Basic earnings per share - as reported                                         |  | $                  | 1.13   |   |                  | $ | 1.43   |                  |  | $ | 1.30   |  
|Basic earnings per share - pro forma                                           |  | $                  | 1.09   |   |                  | $ | 1.32   |                  |  | $ | 1.18   |  
|Diluted earnings per share - as reported                                       |  | $                  | 1.11   |   |                  | $ | 1.41   |                  |  | $ | 1.28   |  
|Diluted earnings per share - pro forma                                         |  | $                  | 1.07   |   |                  | $ | 1.30   |                  |  | $ | 1.17   |  



The estimated
weighted-average fair value per share of the options granted during fiscal 2003, 2004 and 2005 was estimated to be $7.41, $12.95 and $12.02, respectively. The weighted-average fair value per share was calculated at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average assumptions:



|                        |  |                    |   |  |                  |   |  |                  |  
|----------------------- |  | ------------------ | - |  | ---------------- | - |  | ---------------- | -
|                        |  | Fiscal Years Ended |  
|                        |  | January 31, 2004   |   |  | January 29, 2005 |   |  | January 28, 2006 |  
|Dividend yield          |  | 0.0                | % |  | 0.0              | % |  | 0.0              | %
|Expected volatility     |  | 44.3               | % |  | 40.5             | % |  | 30.1             | %
|Risk-free interest rate |  | 3.0                | % |  | 2.7              | % |  | 4.2              | %
|Expected life           |  | 5.0 years          |   |  | 5.0 years        |   |  | 5.5 years        |  



See Note 1(r)
describing the Companys adoption of SFAS No. 123(R),Share-Based Payment(SFAS No.123(R)), in the first quarter of fiscal 2006.



(s) Pre-opening Costs:



Costs incurred in connection with opening new stores are expensed as incurred and are recorded in selling, general and administrative expenses. Such costs
include advertising, payroll, initial store supplies and utilities.



(t)
Debt Retirement Costs:



Debt retirement costs consist of
prepayment premiums, the write off of unamortized debt issuance costs, and legal and closing costs associated with the extinguishment of debt and are classified in recurring operations in the accompanying consolidated statements of operations.



(u) Segment Reporting:



SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, requires annual and interim reporting for an enterprises operating segments and related disclosures about its products, services,



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geographic areas and major customers. An operating segment is defined as a component of an enterprise that engages in business activities from which it may
earn revenues and incur expenses, and about which separate financial information is regularly evaluated by the chief operating decision maker in deciding how to allocate resources. All of the Companys stores are considered operating segments
and have been aggregated into one reportable segment given the similarities in economic characteristics among the operations represented by the stores and the common nature of the products, customers and methods of distribution.



(v) Future Accounting Requirements:



In December 2004, the Financial Accounting Standards Board (FASB)
issued SFAS No. 123(R). SFAS No. 123(R) supersedes APB No. 25 and SFAS No. 123, Accounting for Stock-Based Compensation(SFAS No. 123), and requires companies to expense the fair value of employee stock
options and other forms of employee stock-based compensation. SFAS No. 123 allowed companies to disclose the pro forma effects of expensing the fair value of employee stock-based compensation in the footnotes to the financial statements. SFAS
No. 123(R) applies to all stock-based compensation transactions with employees in which a company acquires services by issuing its stock or other equity instruments, except through arrangements resulting from employee stock ownership plans, or
by incurring liabilities that are based on the companys stock price. In March 2005, the Securities and Exchange Commission (SEC) released SEC Staff Accounting Bulletin No. 107, Share-Based Payment (SAB
No. 107). SAB No. 107 provides the SEC staffs position regarding the application of SFAS No. 123(R) and certain SEC rules and regulations, and also provides the staffs views regarding the valuation of share-based
payment arrangements for public companies. In April 2005, the SEC approved an amendment to Rule 4-01(a) of Regulation S-X to amend the date for compliance with SFAS No. 123(R). In accordance with this amendment, the accounting provisions of
SFAS No. 123(R) are effective for annual periods beginning after June 15, 2005. The Company adopted SFAS No. 123(R) in the first quarter of fiscal 2006 using the modified-prospective approach. The Company is evaluating the effects of
adopting SFAS No. 123(R) and SAB No. 107 and currently anticipates stock-based compensation expense, net of tax, of approximately $9 million (unaudited) in fiscal 2006. Actual fiscal 2006 stock-based compensation expense could vary
significantly from this estimate.



In March 2005, the FASB
issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47), which is an interpretation of SFAS No. 143, Accounting for Asset Retirement Obligations(SFAS
No. 143). FIN 47 clarifies terminology within SFAS No. 143 and requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liabilitys fair value can be
reasonably estimated. FIN 47 is effective for fiscal years ending after December 15, 2005. The Company adopted FIN 47 for the year ended January 28, 2006, which did not have a material impact on its consolidated results of operation,
financial condition or cash flows.



2. Net Earnings per Share:



Basic net earnings per share is computed using the
weighted average number of common shares outstanding during the period. Diluted net earnings per share includes the incremental shares issuable upon the assumed exercise of potentially issuable common stock.



Net earnings and the weighted average number of common shares used to compute
basic and diluted net earnings per share are presented below:



|                                 |  |                    |        |                  |   |                  |  |   |       
|-------------------------------- |  | ------------------ | ------ | ---------------- | - | ---------------- |  | - | ------
|                                 |  | Fiscal Years Ended
|                                 |  | January 31, 2004   |        | January 29, 2005 |   | January 28, 2006
|Net earnings                     |  | $                  | 64,713 |                  | $ | 82,373           |  | $ | 75,170
|                                 |  |                    |        |                  |   |                  |  |   |       
|Common shares, basic             |  |                    | 57,422 |                  |   | 57,542           |  |   | 57,802
|Dilutive effect of stock options |  |                    | 877    |                  |   | 969              |  |   | 741   
|                                 |  |                    |        |                  |   |                  |  |   |       
|Common shares, diluted           |  |                    | 58,299 |                  |   | 58,511           |  |   | 58,543
|                                 |  |                    |        |                  |   |                  |  |   |       



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Options to purchase common shares that were outstanding but were not included in the computation of
diluted net earnings per share because of their anti-dilutive impact were 7; 1,214 and 2,298 for fiscal 2003, 2004 and 2005, respectively.



3. Composition of Balance Sheet Accounts



Fixed assets, net



Fixed assets, net, consisted of the following at the balance sheet dates:



|                                               |  |                  |          |   |                  |   |          |  
|---------------------------------------------- |  | ---------------- | -------- | - | ---------------- | - | -------- | -
|                                               |  | January 29, 2005 |          |   | January 28, 2006 |  
|Land, buildings and related improvements       |  | $                | 24,843   |   |                  | $ | 34,536   |  
|Equipment                                      |  |                  | 227,470  |   |                  |   | 265,335  |  
|Furniture and fixtures                         |  |                  | 130,851  |   |                  |   | 148,046  |  
|Leasehold improvements                         |  |                  | 253,170  |   |                  |   | 302,723  |  
|                                               |  |                  |          |   |                  |   |          |  
|                                               |  |                  | 636,334  |   |                  |   | 750,640  |  
|Less accumulated depreciation and amortization |  |                  | (303,034 | ) |                  |   | (373,246 | )
|                                               |  |                  |          |   |                  |   |          |  
|                                               |  | $                | 333,300  |   |                  | $ | 377,394  |  
|                                               |  |                  |          |   |                  |   |          |  



The Company has $1,101
in fixed assets financed through capital leases at January 29, 2005 and January 28, 2006. Accumulated amortization related to these financed assets was $821 and $1,101 at January 29, 2005 and January 28, 2006, respectively.



Accrued salaries and employee benefits



Accrued salaries and employee benefits consisted of the following at the
balance sheet dates:



|                                    |  |                  |        |                  |   |       
|----------------------------------- |  | ---------------- | ------ | ---------------- | - | ------
|                                    |  | January 29, 2005 |        | January 28, 2006
|Accrued payroll                     |  | $                | 22,637 |                  | $ | 18,317
|Accrued compensated absences        |  |                  | 11,106 |                  |   | 12,617
|Accrued workers compensation costs |  |                  | 38,748 |                  |   | 43,162
|Other accrued employee benefits     |  |                  | 228    |                  |   | 2,225 
|                                    |  |                  |        |                  |   |       
|                                    |  | $                | 72,719 |                  | $ | 76,321
|                                    |  |                  |        |                  |   |       



Accrued expenses and other
liabilities



Accrued expenses and other liabilities
consisted of the following at the balance sheet dates:



|                                       |  |                  |        |                  |   |       
|-------------------------------------- |  | ---------------- | ------ | ---------------- | - | ------
|                                       |  | January 29, 2005 |        | January 28, 2006
|Accrued insurance                      |  | $                | 11,839 |                  | $ | 13,458
|Sales taxes payable                    |  |                  | 15,293 |                  |   | 16,152
|Accrued income taxes                   |  |                  | 518    |                  |   | 11,846
|Other accrued expenses and liabilities |  |                  | 40,675 |                  |   | 40,917
|                                       |  |                  |        |                  |   |       
|                                       |  | $                | 68,325 |                  | $ | 82,373
|                                       |  |                  |        |                  |   |       



4. Senior Credit Facility



On January 13, 2005, the Company entered into a new
senior credit facility consisting of a $200 million secured revolving credit facility (the revolving credit facility). At January 28, 2006, the revolving credit facility



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was scheduled to expire on January 31, 2010, although the Company had the option to extend the expiration for an additional one-year period, subject to
the satisfaction of certain conditions. At January 28, 2006, the Company also had the option to increase the amount of available credit under the revolving credit facility, subject to the satisfaction of certain conditions, by an additional
$125 million through April 30, 2007, reduced to an additional $50 million after April 30, 2007.



Borrowings under the revolving credit facility are secured by substantially all of the personal property assets of the Company and its subsidiaries and,
as of January 28, 2006, bore interest at the Companys option, at the agent banks base rate plus a margin of up to 0.75%, or LIBOR plus a margin of up to 1.875%, in each case based on the Companys leverage ratio at the time. In
addition, the Company has pledged all of the capital stock of its domestic subsidiaries to secure the Companys obligations under the revolving credit facility. At January 28, 2006, the Company incurred a fee of up to 2.1% on letters of
credit issued under the revolving credit facility and a fee of up to 0.3% on the unused commitment under the revolving credit facility, reduced for any letters of credit. The credit agreement contains certain affirmative and negative covenants
related to, among other things, indebtedness, capital expenditures, fixed charges coverage and total leverage. The revolving credit facility specifies a number of events of default (some of which are subject to applicable cure periods), including,
among others, the failure to make payments when due, defaults under other agreements or instruments of indebtedness and noncompliance with covenants. Upon the occurrence of an event of default, the lenders may terminate the facility and declare all
amounts outstanding under the revolving credit facility to be immediately due and payable.



Also on January 13, 2005, the Companys prior senior credit facility was terminated as a result of the payment in full of all amounts due and payable under the prior senior credit facility. In connection
with this termination and early repayments made during fiscal 2004 prior to this termination, the Company recorded debt retirement costs of $4.0 million related to the write off of unamortized debt issuance costs.



During fiscal 2003, the Company made an early repayment of $50.0 million on
the prior senior credit facility and recorded debt retirement costs of $1.6 million related to the write off of unamortized debt issuance costs.



At January 28, 2006, the Company was in compliance with all of the covenants under the revolving credit facility, and the outstanding balance of the
revolving credit facility was $60.0 million. The interest rate at January 28, 2006 on the borrowings under the revolving credit facility was 5.7%. At January 28, 2006, the Company had outstanding $30.1 million in letters of credit used for
general business purposes, which reduced the availability under the revolving credit facility to $109.9 million at January 28, 2006.



On March 17, 2006, the Company entered into an amendment of its senior credit facility (the amended senior credit facility). The
amendment increases the maximum borrowing under the senior credit facility from $200 million to $350 million and extends the maturity date from January 31, 2010 to March 31, 2011, although the Company has the option to extend the
expiration of the revolving credit facility for an additional one-year period, subject to the satisfaction of certain conditions. The Company also has the option to increase the amount of credit available under the revolving credit facility, subject
to the satisfaction of certain conditions, by an additional $100 million. Borrowings under the amended senior credit facility bear interest at the Companys option, at the agent banks base rate plus a margin of up to 0.50%, or LIBOR plus
a margin of up to 1.625%, in each case based on the Companys leverage ratio at the time. In addition, under the amended senior credit facility, the Company will incur a fee of up to 1.8% on letters of credit issued under the revolving credit
facility and a fee of up to 0.25% on the unused commitment under the revolving credit facility, which is reduced for any letters of credit.



5. Senior Subordinated Notes



The senior subordinated notes mature on November 1, 2011, and interest accrues at a rate of 10.75% per annum and is payable semi-annually in
arrears. The Company may redeem the senior subordinated notes at its option at any time on or after November 1, 2006, in whole or in part, based upon an agreed upon schedule of



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redemption prices. The redemption prices begin at 105.375% of the principal amount at November 1, 2006 and decline thereafter through November 1, 2009. The
indenture governing the senior subordinated notes specifies a number of events of default (many of which are subject to applicable cure periods), including, among others, the failure to make payments when due, defaults under other agreements or
instruments of indebtedness and noncompliance with covenants. Upon the occurrence of an event of default, the holders of the senior subordinated notes may declare all amounts outstanding to be immediately due and payable.



The Company repurchased $50.0 million, $16.0 million and $14.7 million in
principal amount of its senior subordinated notes and recorded debt retirement costs totaling $10.6 million, $2.8 million and $2.4 million consisting primarily of a purchase premium in fiscal 2003, fiscal 2004 and fiscal 2005, respectively. As of
January 28, 2006, there was $89.3 million in aggregate principal amount of the senior subordinated notes outstanding.



6. Lease Commitments and Other Obligations



The Company leases distribution center and store facilities and equipment under operating leases. These operating leases generally have terms from five to
15 years. Certain store leases include additional contingent rental payments of a percentage of store revenues above defined levels. Rent expense under operating leases for fiscal 2003, 2004 and 2005 was $145,129, $165,653 and $185,761,
respectively, excluding sublease income. Sublease income for fiscal 2003, 2004 and 2005 was $877, $1,140 and $1,248, respectively.



At January 28, 2006, future minimum lease payments under noncancelable operating leases were as follows:



|                       |  |                  |          
|---------------------- |  | ---------------- | ---------
|Years                  |  | Operating Leases
|2006                   |  | $                | 200,087  
|2007                   |  |                  | 199,609  
|2008                   |  |                  | 192,316  
|2009                   |  |                  | 176,576  
|2010                   |  |                  | 160,683  
|Thereafter             |  |                  | 582,132  
|                       |  |                  |          
|Total minimum payments |  | $                | 1,511,403
|                       |  |                  |          



7. Stockholders Equity



Common Stock



The authorized number of shares of common stock at January 29, 2005 and
January 28, 2006 was 250,000 with a par value of $.001 per share. The revolving credit facility and the indenture governing the senior subordinated notes limit the Companys ability to pay dividends or make other distributions in respect
of its common stock.



During fiscal 2003, certain selling
stockholders sold a total of 12,230 shares of the Companys common stock, pursuant to an effective shelf registration statement previously filed by the Company with the Securities and Exchange Commission. The Company did not receive any
proceeds from the sale of the shares by the selling stockholders. Offering expenses of $1,423 were recorded by the Company as a direct charge to accumulated deficit during fiscal 2003. The Company terminated the shelf registration statement on
June 30, 2003.



During fiscal 2004, certain selling
stockholders sold a total of 12,227 shares of the Companys common stock, pursuant to an effective shelf registration statement previously filed by the Company with the Securities and Exchange Commission. The Company did not receive any
proceeds from the sale of the shares by the selling stockholders. Offering expenses of $548 were recorded by the Company as a direct charge to retained earnings during fiscal 2004. All shares of common stock available for sale under this
registration statement have been sold.



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In March 2006, the Companys Board of Directors authorized the repurchase of up to $100 million of
its common stock. The number of shares to be purchased and the timing of purchases will be based on several factors, including the price of the Companys stock, general business and market conditions, and other investment opportunities. The
repurchase program may be suspended or discontinued at any time. As of the close of market on March 27, 2006, the Company had repurchased approximately 830 shares under the repurchase program for a total price of approximately $19.2 million.



Preferred Stock



The authorized number of shares of preferred stock at January 29, 2005
and January 28, 2006 was 5,000 with a par value of $.01 per share. No shares of preferred stock were issued or outstanding at January 29, 2005 or January 28, 2006.



8. Employee Benefit Plans



Employee Savings and Retirement Plans



The Company has employee savings plans that permit eligible participants to make contributions by salary reduction pursuant to either section 401(k) of
the Internal Revenue Code or under the Companys non-qualified deferred compensation plan. The Company matches 50% of the first 6% of compensation that is contributed by each participating employee to the plans. In connection with the required
match, the Companys contributions to the plans were $1,364 in fiscal 2003, $1,474 in fiscal 2004 and $1,706 in fiscal 2005.



Stock Option Plans



Stock options granted under the 1994 Stock Option Plan are exercisable for up to ten years following the date of grant. As of January 28, 2006, there
were 290 options outstanding under the 1994 Stock Option Plan, and no further grants will be made. Options granted under the 1994 Stock Option Plan generally vest 100% on the date which is three years from the date of the grant.



The 2002 Incentive Award Plan (the Incentive Plan) provides for
the granting of stock-based compensation awards, including stock options, stock appreciation rights, restricted stock, deferred stock, dividend equivalents, performance awards, stock payments and other stock-related benefits to officers, employees,
consultants and directors. Stock options granted under the Incentive Plan generally vest 100% on the date which is three years from the date of the grant and expire ten years from the date of the grant. Except with regard to grants to independent
directors, the aggregate share limit under the Incentive Plan is equal to the sum of (1) 1,115 shares of common stock, plus (2) on March 1 of each year during the term of the Incentive Plan commencing on March 1, 2003, a number
of shares of common stock equal to 2.0% of the total number of issued and outstanding shares of common stock outstanding as of the last day of the fiscal year immediately preceding such March 1. With respect to grants to the Companys
independent directors, the aggregate share limit under the Incentive Plan is equal to the sum of (1) 56 shares of common stock, plus (2) on March 1 of each year during the term of the Incentive Plan commencing on March 1, 2003, a
number of shares of common stock equal to 0.1% of the total number of issued and outstanding shares of common stock as of the last day of the fiscal year immediately preceding such March 1. At January 28, 2006, options to purchase 933
shares remained available for future grant under the Incentive Plan. All option grants under the Incentive Plan had an exercise price equal to the market price of the underlying common stock on the date of grant.



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Information regarding the Companys stock option plans is as follows:



|                                |  |        |   |  |                                |              |                              |   |      
|------------------------------- |  | ------ | - |  | ------------------------------ | ------------ | ---------------------------- | - | -----
|                                |  | Shares |   |  | Option ExercisePrice Per Share |              | WeightedAverageExercisePrice
|Outstanding at February 1, 2003 |  | 1,269  |   |  | $                              | 0.10-$25.09  |                              | $ | 10.16
|Granted                         |  | 1,098  |   |  | $                              | 16.85-$31.48 |                              | $ | 17.39
|Exercised                       |  | (85    | ) |  | $                              | 0.10-$  4.45 |                              | $ | 1.11 
|Cancelled                       |  | (124   | ) |  | $                              | 16.96-$21.79 |                              | $ | 17.97
|                                |  |        |   |  |                                |              |                              |   |      
|Outstanding at January 31, 2004 |  | 2,158  |   |  | $                              | 0.10-$31.48  |                              | $ | 13.76
|Granted                         |  | 1,385  |   |  | $                              | 28.19-$33.20 |                              | $ | 32.86
|Exercised                       |  | (196   | ) |  | $                              | 0.50-$  4.45 |                              | $ | 1.03 
|Cancelled                       |  | (216   | ) |  | $                              | 16.96-$33.20 |                              | $ | 23.55
|                                |  |        |   |  |                                |              |                              |   |      
|Outstanding at January 29, 2005 |  | 3,131  |   |  | $                              | 0.10-$33.20  |                              | $ | 22.33
|Granted                         |  | 1,592  |   |  | $                              | 20.55-$37.29 |                              | $ | 33.30
|Exercised                       |  | (236   | ) |  | $                              | 0.50-$25.09  |                              | $ | 12.74
|Cancelled                       |  | (489   | ) |  | $                              | 16.96-$35.53 |                              | $ | 27.85
|                                |  |        |   |  |                                |              |                              |   |      
|Outstanding at January 28, 2006 |  | 3,998  |   |  | $                              | 0.10-$37.29  |                              | $ | 26.59
|                                |  |        |   |  |                                |              |                              |   |      



The following table
summarizes information about the options outstanding under the Companys stock option plans at January 28, 2006:



|                         |  |                     |  |                                                 |  |                              |       |                   |     |                              |   |      
|------------------------ |  | ------------------- |  | ----------------------------------------------- |  | ---------------------------- | ----- | ----------------- | --- | ---------------------------- | - | -----
|                         |  | Options Outstanding |  | Options Exercisable                            
|Range of Exercise Prices |  | NumberOutstanding   |  | WeightedAverageRemainingContractualLife (Years) |  | WeightedAverageExercisePrice |       | NumberExercisable |     | WeightedAverageExercisePrice
|$  0.10-$16.85           |  | 292                 |  | 5.57                                            |  | $                            | 1.21  |                   | 292 |                              | $ | 1.21 
|$16.96                   |  | 750                 |  | 7.12                                            |  | $                            | 16.96 |                   |    |                              | $ |     
|$19.00-$32.53            |  | 708                 |  | 7.85                                            |  | $                            | 22.57 |                   | 427 |                              | $ | 21.96
|$32.81-$32.99            |  | 1,024               |  | 8.11                                            |  | $                            | 32.99 |                   | 3   |                              | $ | 32.81
|$33.20-$37.29            |  | 1,224               |  | 9.11                                            |  | $                            | 35.53 |                   | 36  |                              | $ | 35.77
|                         |  |                     |  |                                                 |  |                              |       |                   |     |                              |   |      
|$  0.10-$37.29           |  | 3,998               |  | 8.00                                            |  | $                            | 26.59 |                   | 758 |                              | $ | 14.66
|                         |  |                     |  |                                                 |  |                              |       |                   |     |                              |   |      



See Note 1(r) for a
discussion of the Companys accounting for stock-based compensation expense.



9. Income Taxes



Income taxes consisted of the
following:



|             |  |                    |        |                  |   |        |                  |  |   |        |  
|------------ |  | ------------------ | ------ | ---------------- | - | ------ | ---------------- |  | - | ------ | -
|             |  | Fiscal Years Ended |       
|             |  | January 31, 2004   |        | January 29, 2005 |   |        | January 28, 2006 | 
|Current:     |  |                    |        |                  |   |        |                  |  |   |        |  
|Federal      |  | $                  | 14,205 |                  | $ | 41,219 |                  |  | $ | 48,739 |  
|State        |  |                    | 4,355  |                  |   | 8,721  |                  |  |   | 8,776  |  
|             |  |                    |        |                  |   |        |                  |  |   |        |  
|             |  |                    | 18,560 |                  |   | 49,940 |                  |  |   | 57,515 |  
|             |  |                    |        |                  |   |        |                  |  |   |        |  
|Deferred:    |  |                    |        |                  |   |        |                  |  |   |        |  
|Federal      |  |                    | 14,991 |                  |   | 2,577  |                  |  |   | (8,968 | )
|State        |  |                    | 1,105  |                  |   | (2,970 | )                |  |   | 331    |  
|             |  |                    |        |                  |   |        |                  |  |   |        |  
|             |  |                    | 16,096 |                  |   | (393   | )                |  |   | (8,637 | )
|             |  |                    |        |                  |   |        |                  |  |   |        |  
|Income taxes |  | $                  | 34,656 |                  | $ | 49,547 |                  |  | $ | 48,878 |  
|             |  |                    |        |                  |   |        |                  |  |   |        |  



F-17



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##### Table of Contents

A reconciliation of income taxes at the federal statutory rate of 35% with the provision for income taxes
follows:



|                                        |  |                    |        |   |                  |   |        |                  |  |   |        |  
|--------------------------------------- |  | ------------------ | ------ | - | ---------------- | - | ------ | ---------------- |  | - | ------ | -
|                                        |  | Fiscal Years Ended |       
|                                        |  | January 31, 2004   |        |   | January 29, 2005 |   |        | January 28, 2006 | 
|Income taxes at federal statutory rate  |  | $                  | 34,779 |   |                  | $ | 46,172 |                  |  | $ | 43,417 |  
|Non-deductible expenses                 |  |                    | 270    |   |                  |   | 130    |                  |  |   | 215    |  
|State taxes, net of federal tax benefit |  |                    | 2,603  |   |                  |   | 3,960  |                  |  |   | 5,452  |  
|Net operating losses                    |  |                    | (3,379 | ) |                  |   |       |                  |  |   |       |  
|Other                                   |  |                    | 383    |   |                  |   | (715   | )                |  |   | (206   | )
|                                        |  |                    |        |   |                  |   |        |                  |  |   |        |  
|                                        |  | $                  | 34,656 |   |                  | $ | 49,547 |                  |  | $ | 48,878 |  
|                                        |  |                    |        |   |                  |   |        |                  |  |   |        |  



The sources of
significant temporary differences which gave rise to the deferred tax provision and their effects follow:



|                                                           |  |                    |        |   |                  |   |        |                  |  |   |        |  
|---------------------------------------------------------- |  | ------------------ | ------ | - | ---------------- | - | ------ | ---------------- |  | - | ------ | -
|                                                           |  | Fiscal Years Ended |       
|                                                           |  | January 31, 2004   |        |   | January 29, 2005 |   |        | January 28, 2006 | 
|Inventory                                                  |  | $                  | (2,200 | ) |                  | $ | (1,465 | )                |  | $ | (2,146 | )
|Deferred rent                                              |  |                    | (354   | ) |                  |   | (1,693 | )                |  |   | (1,597 | )
|Depreciation                                               |  |                    | 8,824  |   |                  |   | 6,063  |                  |  |   | (7,297 | )
|Accrued expenses                                           |  |                    | 219    |   |                  |   | 2,403  |                  |  |   | 1,722  |  
|Accrued employee benefits                                  |  |                    | (3,889 | ) |                  |   | (3,836 | )                |  |   | (2,222 | )
|Intangible assets                                          |  |                    | 1,997  |   |                  |   | (4     | )                |  |   | 964    |  
|Store closing costs                                        |  |                    | 654    |   |                  |   | (771   | )                |  |   | 12     |  
|Assets related to Internet investment                      |  |                    | 825    |   |                  |   | 86     |                  |  |   | 8,768  |  
|Benefit of net operating loss carryforwards                |  |                    | 6,984  |   |                  |   | 735    |                  |  |   | 95     |  
|Alternative minimum tax credit and other state tax credits |  |                    | 3,663  |   |                  |   | 25     |                  |  |   | 3      |  
|Change in valuation allowance                              |  |                    | (747   | ) |                  |   | (35    | )                |  |   | (8,768 | )
|Other                                                      |  |                    | 120    |   |                  |   | (1,901 | )                |  |   | 1,829  |  
|                                                           |  |                    |        |   |                  |   |        |                  |  |   |        |  
|                                                           |  | $                  | 16,096 |   |                  | $ | (393   | )                |  | $ | (8,637 | )
|                                                           |  |                    |        |   |                  |   |        |                  |  |   |        |  



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##### Table of Contents

Deferred income taxes reflect the tax effect of temporary differences between the carrying amount of
assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Companys deferred tax assets and liabilities follow:



|                                                           |  |                  |         |   |                  |   |         |  
|---------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------- | -
|                                                           |  | January 29, 2005 |         |   | January 28, 2006 |  
|Deferred tax assets:                                       |  |                  |         |   |                  |   |         |  
|Inventory                                                  |  | $                | 6,742   |   |                  | $ | 8,888   |  
|Deferred rent                                              |  |                  | 7,884   |   |                  |   | 9,481   |  
|Accrued employee benefits                                  |  |                  | 19,607  |   |                  |   | 21,829  |  
|Store closing costs                                        |  |                  | 1,181   |   |                  |   | 1,169   |  
|Assets related to Internet investment                      |  |                  | 8,768   |   |                  |   |        |  
|Net operating loss carryforwards                           |  |                  | 95      |   |                  |   |        |  
|Alternative minimum tax credit and other state tax credits |  |                  | 7       |   |                  |   | 4       |  
|Other                                                      |  |                  | 3,965   |   |                  |   | 2,532   |  
|                                                           |  |                  |         |   |                  |   |         |  
|Total deferred tax assets                                  |  |                  | 48,249  |   |                  |   | 43,903  |  
|Valuation allowance                                        |  |                  | (8,768  | ) |                  |   |        |  
|                                                           |  |                  |         |   |                  |   |         |  
|Net deferred tax assets                                    |  |                  | 39,481  |   |                  |   | 43,903  |  
|                                                           |  |                  |         |   |                  |   |         |  
|Deferred tax liabilities:                                  |  |                  |         |   |                  |   |         |  
|Depreciation                                               |  |                  | (37,436 | ) |                  |   | (30,139 | )
|Intangible assets                                          |  |                  | (4,063  | ) |                  |   | (5,027  | )
|Accrued expenses                                           |  |                  | (12,075 | ) |                  |   | (13,797 | )
|Other                                                      |  |                  | (386    | ) |                  |   | (782    | )
|                                                           |  |                  |         |   |                  |   |         |  
|Total deferred tax liabilities                             |  |                  | (53,960 | ) |                  |   | (49,745 | )
|                                                           |  |                  |         |   |                  |   |         |  
|                                                           |  | $                | (14,479 | ) |                  | $ | (5,842  | )
|                                                           |  |                  |         |   |                  |   |         |  



Deferred taxes are
reflected in the accompanying consolidated balance sheets as follows:



|                                 |  |                  |         |   |                  |   |         |  
|-------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------- | -
|                                 |  | January 29, 2005 |         |   | January 28, 2006 |  
|CurrentDeferred tax assets      |  | $                | 17,680  |   |                  | $ | 16,737  |  
|Long-termDeferred tax liability |  |                  | (32,159 | ) |                  |   | (22,579 | )
|                                 |  |                  |         |   |                  |   |         |  
|                                 |  | $                | (14,479 | ) |                  | $ | (5,842  | )
|                                 |  |                  |         |   |                  |   |         |  



The valuation
allowance of $8,768 at January 29, 2005 related to a capital loss arising from the Companys divestiture of an Internet investment in fiscal 2000. As the capital loss carryforward expired on January 28, 2006, the related deferred tax
asset and corresponding valuation allowance has been written off. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be
realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future
taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the valuation allowance.



At January 28, 2006, the Company has available net loss carryforwards
of $33 for state and local income tax purposes, which begin expiring in tax year 2021.



10. Contingencies



On April 18, 2005, the
Company and its Chief Executive Officer and Chief Financial Officer were named as defendants in a purported class action filed in United States District Court for the Southern District of California alleging violations of Sections 10 and 20 of the
Securities Exchange Act of 1934. The named plaintiff purports to



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##### Table of Contents

represent a class of purchasers of the Companys stock during the period November 18, 2004 to April 14, 2005, and alleges that during such
period the defendants misrepresented the Companys financial position and that the plaintiff and the purported class of purchasers during that period were damaged by paying artificially and falsely inflated prices for the Companys stock.
The complaint seeks unspecified monetary damages. Over the next several weeks, three additional purported class actions were filed in the same court alleging essentially the same claims against the Company and its officers and adding the
Companys Chairman as a defendant. These cases were consolidated, and in October 2005 a consolidated complaint was filed extending the class period from August 18, 2004 to August 25, 2005, adding additional but similar causes of
action, and naming additional defendants, including the Companys President and Chief Operating Officer, several of the Companys Senior Vice Presidents, several former and current members of the Companys Board of Directors, and two
former stockholders of the Company. In January 2006, the defendants filed a motion to dismiss the consolidated complaint on the ground that it failed to state facts sufficient to state a claim under the securities laws. A hearing on the motion is
scheduled for May 2006. The Company has tendered these matters to its insurance carriers.



Although there can be no assurance that unfavorable outcomes in the foregoing matters would not have a material adverse effect on the Companys financial position or results of operations, management believes the
claims are without merit, strong defenses exist, and management intends to vigorously defend against the actions. The Company has not recorded any accrual for contingent liability associated with the legal proceedings described above based on
managements belief that a liability, while possible, is not probable. Further, any possible range of loss cannot be estimated at this time.



On April 22, 2005, an alleged owner of the Companys stock, derivatively sued all of the Companys directors and its Chief Executive
Officer and Chief Financial Officer, purportedly on behalf of the Company, alleging that such officers and directors engaged in breaches of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment and other
violations of California law during the period November 18, 2004 to the present. The complaint, filed in Superior Court of the State of California for the County of San Diego, seeks to recover on behalf of the Company alleged unspecified
damages sustained by the Company as a result of such alleged actions, treble damages, disgorgement of profits from the sale of the Companys securities and benefits and compensation obtained by the individual defendants, and extraordinary
equitable and/or injunctive relief as permitted by law. Also on April 22, 2005, another shareholder derivative action was filed in Superior Court of the State of California for the County of San Diego on behalf of another alleged owner of the
Companys stock against the same defendants and with substantially similar allegations to those described above. These actions have been consolidated. In August 2005, the defendants moved to dismiss the consolidated complaint on the ground that
the stockholders had failed to make a demand on the Companys Board and failed to adequately allege that a demand was excused. The Court granted the motion but gave the plaintiffs leave to amend. The plaintiffs filed an amended complaint which
defendants have again moved to dismiss. A hearing on defendants motion is now scheduled for April 2006. The Company has tendered these matters to its insurance carriers, and does not believe the outcome of these matters will have a material
adverse impact on its consolidated financial position or results of operations in any future period.



On June 27, 2005, the Company was named as a defendant in a purported class action filed in the Superior Court of the State of California for the
County of Los Angeles alleging violations of the California Labor Code. The named plaintiffs, Wayne Boyd, Anthony Castro, Gilbert Hernandez, and Daniel Lepkosky, purport to represent all current and former hourly, non-exempt employees of the
Companys California stores from June 27, 2001 to the present. These plaintiffs allege that during this period they were not paid all wages, were not paid overtime, were not authorized and permitted to take rest breaks as required by law,
were not provided meal breaks as required by law, were not paid reporting time pay, and were not paid all wages upon separation from employment. The complaint seeks unspecified monetary damages in the form of unpaid wages, penalties and
other relief. On March 2, 2006, Plaintiff Gilbert Hernandez requested that his claims against the Company be dismissed. This request is subject to court approval.



On September 19, 2005, another purported class action alleging Labor Code violations was filed in the Superior Court of
the State of California for the County of Los Angeles naming the Company as the defendant.



F-20



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##### Table of Contents

The named plaintiff in the September 19 suit, Natalie Wade, purports to represent a class of current and former employees of the Company who she alleges
were not paid all wages earned, were not provided meal breaks, were not authorized and permitted to take rest breaks, and were not provided with itemized wage statements as required by law. This complaint also seeks unspecified monetary damages and
other relief. A first amended complaint was filed on or about November 16, 2005. This amendment neither added nor altered any of the causes of action asserted but appears to have been made in an effort to cure a failure to comply with certain
administrative requirements. In February 2006, Plaintiff Natalie Wades lawsuit against the Company was voluntarily dismissed by Ms. Wade in exchange for the Companys agreement not to seek costs incurred in defending against the
lawsuit.



Although there can be no assurance that unfavorable
outcomes in the foregoing matters would not have a material adverse effect on the Companys financial position or results of operations, management believes the claims are without merit, strong defenses exist, and management intends to
vigorously defend against these actions. The Company has not recorded any accrual for contingent liability associated with the legal proceedings described above based on managements belief that a liability, while possible, is not probable.
Further, any possible range of loss cannot be estimated at this time.



The Company is involved in other routine litigation arising in the ordinary course of its business. While the results of such litigation cannot be predicted with certainty, the Company believes that the final outcome of such matters will
not have a material adverse effect on its consolidated financial position or results of operations in any future period.



11. Supplemental Guarantor Condensed Consolidating Financial Information



Effective January 13, 2005, the Company implemented a new holding company structure. The restructuring was accomplished through a merger pursuant
to which all of the stockholders of PETCO Animal Supplies, Inc. at the effective time of the merger became stockholders of the new parent holding company, and PETCO Animal Supplies, Inc. became a wholly-owned subsidiary of the new parent holding
company and changed its name to PETCO Animal Supplies Stores, Inc. The business operations of the Company have not changed as a result of the restructuring. The new parent holding company has taken the PETCO Animal Supplies, Inc. name and trades
under the same symbol on the NASDAQ National Market.



The
Companys senior subordinated notes are issued by PETCO Animal Supplies Stores, Inc. (the subsidiary issuer) and are guaranteed by the parent company and certain subsidiaries of the parent company (the guarantor subsidiaries) on a full and
unconditional basis. Each of the guarantor subsidiaries is, directly or indirectly, 100% owned by the subsidiary issuer, and the guarantees are joint and several. One of the Companys subsidiaries (the non-guarantor subsidiary) does not
guarantee such debt.



F-21



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##### Table of Contents

The following tables present the condensed consolidating balance sheet information of PETCO Animal
Supplies, Inc. as of January 29, 2005 and January 28, 2006 and the related condensed consolidating statement of operation and cash flow information for each of the years in the three-year period ended January 28, 2006.



CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION



January 29, 2005

(in thousands)



|                                           |  |                                                      |         |   |                                                      |   |                        |  |   |                          |   |                                    |   |   |                                              |   |          |   |  |   |        
|------------------------------------------ |  | ---------------------------------------------------- | ------- | - | ---------------------------------------------------- | - | ---------------------- |  | - | ------------------------ | - | ---------------------------------- | - | - | -------------------------------------------- | - | -------- | - |  | - | -------
|                                           |  | PETCO Animal Supplies, Inc. Parent Company Guarantor |         |   | PETCO Animal Supplies Stores, Inc. Subsidiary Issuer |   | Guarantor Subsidiaries |  |   | Non-Guarantor Subsidiary |   | Reclassifications and Eliminations |   |   | PETCO Animal Supplies, Inc. and Subsidiaries
|ASSETS                                     |  |                                                      |         |   |                                                      |   |                        |  |   |                          |   |                                    |   |   |                                              |   |          |   |  |   |        
|Current assets:                            |  |                                                      |         |   |                                                      |   |                        |  |   |                          |   |                                    |   |   |                                              |   |          |   |  |   |        
|Cash and cash equivalents                  |  | $                                                    |        |   |                                                      | $ | 36,590                 |  | $ | 225                      |   |                                    | $ |  |                                              | $ |         |   |  | $ | 36,815 
|Receivables, net                           |  |                                                      |        |   |                                                      |   | 1,268                  |  |   | 16,607                   |   |                                    |   |  |                                              |   |         |   |  |   | 17,875 
|Merchandise inventories                    |  |                                                      |        |   |                                                      |   | 155,534                |  |   | 11,504                   |   |                                    |   |  |                                              |   |         |   |  |   | 167,038
|Deferred tax assets                        |  |                                                      |        |   |                                                      |   | 17,680                 |  |   |                         |   |                                    |   |  |                                              |   |         |   |  |   | 17,680 
|Other current assets                       |  |                                                      |        |   |                                                      |   | 10,778                 |  |   | 138                      |   |                                    |   |  |                                              |   |         |   |  |   | 10,916 
|                                           |  |                                                      |         |   |                                                      |   |                        |  |   |                          |   |                                    |   |   |                                              |   |          |   |  |   |        
|Total current assets                       |  |                                                      |        |   |                                                      |   | 221,850                |  |   | 28,474                   |   |                                    |   |  |                                              |   |         |   |  |   | 250,324
|Fixed assets, net                          |  |                                                      |        |   |                                                      |   | 306,901                |  |   | 26,399                   |   |                                    |   |  |                                              |   |         |   |  |   | 333,300
|Goodwill                                   |  |                                                      |        |   |                                                      |   |                       |  |   | 40,179                   |   |                                    |   |  |                                              |   |         |   |  |   | 40,179 
|Intercompany investments and advances      |  |                                                      | 68,796  |   |                                                      |   | 334,697                |  |   |                         |   |                                    |   |  |                                              |   | (403,493 | ) |  |   |       
|Other assets                               |  |                                                      |        |   |                                                      |   | 14,360                 |  |   | 2,290                    |   |                                    |   |  |                                              |   |         |   |  |   | 16,650 
|                                           |  |                                                      |         |   |                                                      |   |                        |  |   |                          |   |                                    |   |   |                                              |   |          |   |  |   |        
|Total assets                               |  | $                                                    | 68,796  |   |                                                      | $ | 877,808                |  | $ | 97,342                   |   |                                    | $ |  |                                              | $ | (403,493 | ) |  | $ | 640,453
|                                           |  |                                                      |         |   |                                                      |   |                        |  |   |                          |   |                                    |   |   |                                              |   |          |   |  |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY       |  |                                                      |         |   |                                                      |   |                        |  |   |                          |   |                                    |   |   |                                              |   |          |   |  |   |        
|Current liabilities:                       |  |                                                      |         |   |                                                      |   |                        |  |   |                          |   |                                    |   |   |                                              |   |          |   |  |   |        
|Accounts payable                           |  | $                                                    |        |   |                                                      | $ | 5,295                  |  | $ | 76,847                   |   |                                    | $ |  |                                              | $ |         |   |  | $ | 82,142 
|Intercompany payables                      |  |                                                      | (68,499 | ) |                                                      |   | 388,874                |  |   | (320,375                 | ) |                                    |   |  |                                              |   |         |   |  |   |       
|Accrued salaries and employee benefits     |  |                                                      |        |   |                                                      |   | 70,105                 |  |   | 2,614                    |   |                                    |   |  |                                              |   |         |   |  |   | 72,719 
|Accrued expenses and other liabilities     |  |                                                      |        |   |                                                      |   | 60,207                 |  |   | 8,118                    |   |                                    |   |  |                                              |   |         |   |  |   | 68,325 
|Current portion of long-term debt          |  |                                                      |        |   |                                                      |   | 5,953                  |  |   | (5,600                   | ) |                                    |   |  |                                              |   |         |   |  |   | 353    
|                                           |  |                                                      |         |   |                                                      |   |                        |  |   |                          |   |                                    |   |   |                                              |   |          |   |  |   |        
|Total current liabilities                  |  |                                                      | (68,499 | ) |                                                      |   | 530,434                |  |   | (238,396                 | ) |                                    |   |  |                                              |   |         |   |  |   | 223,539
|Senior credit facility                     |  |                                                      |        |   |                                                      |   | 85,000                 |  |   |                         |   |                                    |   |  |                                              |   |         |   |  |   | 85,000 
|Senior subordinated notes payable          |  |                                                      |        |   |                                                      |   | 103,982                |  |   |                         |   |                                    |   |  |                                              |   |         |   |  |   | 103,982
|Deferred tax liabilities                   |  |                                                      |        |   |                                                      |   | 32,159                 |  |   |                         |   |                                    |   |  |                                              |   |         |   |  |   | 32,159 
|Deferred rent and other liabilities        |  |                                                      |        |   |                                                      |   | 57,437                 |  |   | 1,041                    |   |                                    |   |  |                                              |   |         |   |  |   | 58,478 
|                                           |  |                                                      |         |   |                                                      |   |                        |  |   |                          |   |                                    |   |   |                                              |   |          |   |  |   |        
|Total liabilities                          |  |                                                      | (68,499 | ) |                                                      |   | 809,012                |  |   | (237,355                 | ) |                                    |   |  |                                              |   |         |   |  |   | 503,158
|Stockholders equity                       |  |                                                      | 137,295 |   |                                                      |   | 68,796                 |  |   | 334,697                  |   |                                    |   |  |                                              |   | (403,493 | ) |  |   | 137,295
|                                           |  |                                                      |         |   |                                                      |   |                        |  |   |                          |   |                                    |   |   |                                              |   |          |   |  |   |        
|Total liabilities and stockholders equity |  | $                                                    | 68,796  |   |                                                      | $ | 877,808                |  | $ | 97,342                   |   |                                    | $ |  |                                              | $ | (403,493 | ) |  | $ | 640,453
|                                           |  |                                                      |         |   |                                                      |   |                        |  |   |                          |   |                                    |   |   |                                              |   |          |   |  |   |        



F-22



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##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION



January 28, 2006

(in thousands)



|                                           |  |                                                      |         |   |                                                      |   |                        |  |   |                          |   |                                    |   |   |                                              |   |          |   |  |   |        
|------------------------------------------ |  | ---------------------------------------------------- | ------- | - | ---------------------------------------------------- | - | ---------------------- |  | - | ------------------------ | - | ---------------------------------- | - | - | -------------------------------------------- | - | -------- | - |  | - | -------
|                                           |  | PETCO Animal Supplies, Inc. Parent Company Guarantor |         |   | PETCO Animal Supplies Stores, Inc. Subsidiary Issuer |   | Guarantor Subsidiaries |  |   | Non-Guarantor Subsidiary |   | Reclassifications and Eliminations |   |   | PETCO Animal Supplies, Inc. and Subsidiaries
|ASSETS                                     |  |                                                      |         |   |                                                      |   |                        |  |   |                          |   |                                    |   |   |                                              |   |          |   |  |   |        
|Current assets:                            |  |                                                      |         |   |                                                      |   |                        |  |   |                          |   |                                    |   |   |                                              |   |          |   |  |   |        
|Cash and cash equivalents                  |  | $                                                    |        |   |                                                      | $ | 39,424                 |  | $ | 100                      |   |                                    | $ |  |                                              | $ |         |   |  | $ | 39,524 
|Receivables, net                           |  |                                                      |        |   |                                                      |   | 3,171                  |  |   | 17,251                   |   |                                    |   |  |                                              |   |         |   |  |   | 20,422 
|Merchandise inventories                    |  |                                                      |        |   |                                                      |   | 170,540                |  |   | 12,796                   |   |                                    |   |  |                                              |   |         |   |  |   | 183,336
|Deferred tax assets                        |  |                                                      |        |   |                                                      |   | 16,737                 |  |   |                         |   |                                    |   |  |                                              |   |         |   |  |   | 16,737 
|Other current assets                       |  |                                                      |        |   |                                                      |   | 13,844                 |  |   | 28                       |   |                                    |   |  |                                              |   |         |   |  |   | 13,872 
|                                           |  |                                                      |         |   |                                                      |   |                        |  |   |                          |   |                                    |   |   |                                              |   |          |   |  |   |        
|Total current assets                       |  |                                                      |        |   |                                                      |   | 243,716                |  |   | 30,175                   |   |                                    |   |  |                                              |   |         |   |  |   | 273,891
|Fixed assets, net                          |  |                                                      |        |   |                                                      |   | 344,771                |  |   | 32,623                   |   |                                    |   |  |                                              |   |         |   |  |   | 377,394
|Goodwill                                   |  |                                                      |        |   |                                                      |   |                       |  |   | 40,227                   |   |                                    |   |  |                                              |   |         |   |  |   | 40,227 
|Intercompany investments and advances      |  |                                                      | 143,967 |   |                                                      |   | 400,583                |  |   |                         |   |                                    |   |  |                                              |   | (544,550 | ) |  |   |       
|Other assets                               |  |                                                      |        |   |                                                      |   | 16,575                 |  |   | 1,588                    |   |                                    |   |  |                                              |   |         |   |  |   | 18,163 
|                                           |  |                                                      |         |   |                                                      |   |                        |  |   |                          |   |                                    |   |   |                                              |   |          |   |  |   |        
|Total assets                               |  | $                                                    | 143,967 |   |                                                      | $ | 1,005,645              |  | $ | 104,613                  |   |                                    | $ |  |                                              | $ | (544,550 | ) |  | $ | 709,675
|                                           |  |                                                      |         |   |                                                      |   |                        |  |   |                          |   |                                    |   |   |                                              |   |          |   |  |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY       |  |                                                      |         |   |                                                      |   |                        |  |   |                          |   |                                    |   |   |                                              |   |          |   |  |   |        
|Current liabilities:                       |  |                                                      |         |   |                                                      |   |                        |  |   |                          |   |                                    |   |   |                                              |   |          |   |  |   |        
|Accounts payable                           |  | $                                                    |        |   |                                                      | $ | 31,923                 |  | $ | 58,911                   |   |                                    | $ |  |                                              | $ |         |   |  | $ | 90,834 
|Intercompany payables                      |  |                                                      | (72,871 | ) |                                                      |   | 435,992                |  |   | (363,121                 | ) |                                    |   |  |                                              |   |         |   |  |   |       
|Accrued salaries and employee benefits     |  |                                                      |        |   |                                                      |   | 73,708                 |  |   | 2,613                    |   |                                    |   |  |                                              |   |         |   |  |   | 76,321 
|Accrued expenses and other liabilities     |  |                                                      |        |   |                                                      |   | 73,624                 |  |   | 8,749                    |   |                                    |   |  |                                              |   |         |   |  |   | 82,373 
|Current portion of long-term debt          |  |                                                      |        |   |                                                      |   | 7,355                  |  |   | (5,600                   | ) |                                    |   |  |                                              |   |         |   |  |   | 1,755  
|                                           |  |                                                      |         |   |                                                      |   |                        |  |   |                          |   |                                    |   |   |                                              |   |          |   |  |   |        
|Total current liabilities                  |  |                                                      | (72,871 | ) |                                                      |   | 622,602                |  |   | (298,448                 | ) |                                    |   |  |                                              |   |         |   |  |   | 251,283
|Senior credit facility                     |  |                                                      |        |   |                                                      |   | 60,000                 |  |   |                         |   |                                    |   |  |                                              |   |         |   |  |   | 60,000 
|Senior subordinated notes payable          |  |                                                      |        |   |                                                      |   | 89,267                 |  |   |                         |   |                                    |   |  |                                              |   |         |   |  |   | 89,267 
|Deferred tax liabilities                   |  |                                                      |        |   |                                                      |   | 22,579                 |  |   |                         |   |                                    |   |  |                                              |   |         |   |  |   | 22,579 
|Deferred rent and other liabilities        |  |                                                      |        |   |                                                      |   | 67,230                 |  |   | 2,478                    |   |                                    |   |  |                                              |   |         |   |  |   | 69,708 
|                                           |  |                                                      |         |   |                                                      |   |                        |  |   |                          |   |                                    |   |   |                                              |   |          |   |  |   |        
|Total liabilities                          |  |                                                      | (72,871 | ) |                                                      |   | 861,678                |  |   | (295,970                 | ) |                                    |   |  |                                              |   |         |   |  |   | 492,837
|Stockholders equity                       |  |                                                      | 216,838 |   |                                                      |   | 143,967                |  |   | 400,583                  |   |                                    |   |  |                                              |   | (544,550 | ) |  |   | 216,838
|                                           |  |                                                      |         |   |                                                      |   |                        |  |   |                          |   |                                    |   |   |                                              |   |          |   |  |   |        
|Total liabilities and stockholders equity |  | $                                                    | 143,967 |   |                                                      | $ | 1,005,645              |  | $ | 104,613                  |   |                                    | $ |  |                                              | $ | (544,550 | ) |  | $ | 709,675
|                                           |  |                                                      |         |   |                                                      |   |                        |  |   |                          |   |                                    |   |   |                                              |   |          |   |  |   |        



F-23



---

##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



CONDENSED CONSOLIDATING STATEMENT OF OPERATION INFORMATION



For the fiscal year ended January 31, 2004

(in thousands)



|                                                   |  |                                                      |           |                        |   |                          |  |                                    |   |  |                                              |          |   |  |   |          
|-------------------------------------------------- |  | ---------------------------------------------------- | --------- | ---------------------- | - | ------------------------ |  | ---------------------------------- | - |  | -------------------------------------------- | -------- | - |  | - | ---------
|                                                   |  | PETCO Animal Supplies, Inc. Parent Company Guarantor |           | Guarantor Subsidiaries |   | Non-Guarantor Subsidiary |  | Reclassifications and Eliminations |   |  | PETCO Animal Supplies, Inc. and Subsidiaries
|Net sales                                          |  | $                                                    | 1,486,224 |                        | $ | 1,087,757                |  | $                                  |  |  | $                                            | (963,550 | ) |  | $ | 1,610,431
|Cost of sales and occupancy costs                  |  |                                                      | 1,011,806 |                        |   | 884,572                  |  |                                    |  |  |                                              | (835,436 | ) |  |   | 1,060,942
|                                                   |  |                                                      |           |                        |   |                          |  |                                    |   |  |                                              |          |   |  |   |          
|Gross profit                                       |  |                                                      | 474,418   |                        |   | 203,185                  |  |                                    |  |  |                                              | (128,114 | ) |  |   | 549,489  
|Selling, general and administrative expenses       |  |                                                      | 386,328   |                        |   | 153,602                  |  |                                    |  |  |                                              | (128,114 | ) |  |   | 411,816  
|                                                   |  |                                                      |           |                        |   |                          |  |                                    |   |  |                                              |          |   |  |   |          
|Operating income                                   |  |                                                      | 88,090    |                        |   | 49,583                   |  |                                    |  |  |                                              |         |   |  |   | 137,673  
|Interest expense, net                              |  |                                                      | 26,115    |                        |   |                         |  |                                    |  |  |                                              |         |   |  |   | 26,115   
|Debt retirement costs                              |  |                                                      | 12,189    |                        |   |                         |  |                                    |  |  |                                              |         |   |  |   | 12,189   
|                                                   |  |                                                      |           |                        |   |                          |  |                                    |   |  |                                              |          |   |  |   |          
|Earnings before income taxes                       |  |                                                      | 49,786    |                        |   | 49,583                   |  |                                    |  |  |                                              |         |   |  |   | 99,369   
|Income taxes                                       |  |                                                      | 34,656    |                        |   |                         |  |                                    |  |  |                                              |         |   |  |   | 34,656   
|                                                   |  |                                                      |           |                        |   |                          |  |                                    |   |  |                                              |          |   |  |   |          
|Earnings before equity in earnings of subsidiaries |  |                                                      | 15,130    |                        |   | 49,583                   |  |                                    |  |  |                                              |         |   |  |   | 64,713   
|Equity in earnings of subsidiaries                 |  |                                                      | 49,583    |                        |   |                         |  |                                    |  |  |                                              | (49,583  | ) |  |   |         
|                                                   |  |                                                      |           |                        |   |                          |  |                                    |   |  |                                              |          |   |  |   |          
|Net earnings                                       |  | $                                                    | 64,713    |                        | $ | 49,583                   |  | $                                  |  |  | $                                            | (49,583  | ) |  | $ | 64,713   
|                                                   |  |                                                      |           |                        |   |                          |  |                                    |   |  |                                              |          |   |  |   |          



CONDENSED
CONSOLIDATING STATEMENT OF OPERATION INFORMATION



For
the fiscal year ended January 29, 2005

(in thousands)



|                                                   |  |                                                      |        |                                                      |   |                       |  |   |                          |   |                                    |   |   |                                              |   |            |   |  |   |          
|-------------------------------------------------- |  | ---------------------------------------------------- | ------ | ---------------------------------------------------- | - | --------------------- |  | - | ------------------------ | - | ---------------------------------- | - | - | -------------------------------------------- | - | ---------- | - |  | - | ---------
|                                                   |  | PETCO Animal Supplies, Inc. Parent Company Guarantor |        | PETCO Animal Supplies Stores, Inc. Subsidiary Issuer |   | GuarantorSubsidiaries |  |   | Non-Guarantor Subsidiary |   | Reclassifications and Eliminations |   |   | PETCO Animal Supplies, Inc. and Subsidiaries
|Net sales                                          |  | $                                                    |       |                                                      | $ | 1,680,848             |  | $ | 1,222,241                |   |                                    | $ |  |                                              | $ | (1,090,944 | ) |  | $ | 1,812,145
|Cost of sales and occupancy costs                  |  |                                                      |       |                                                      |   | 1,152,495             |  |   | 969,771                  |   |                                    |   |  |                                              |   | (940,912   | ) |  |   | 1,181,354
|                                                   |  |                                                      |        |                                                      |   |                       |  |   |                          |   |                                    |   |   |                                              |   |            |   |  |   |          
|Gross profit                                       |  |                                                      |       |                                                      |   | 528,353               |  |   | 252,470                  |   |                                    |   |  |                                              |   | (150,032   | ) |  |   | 630,791  
|Selling, general and administrative expenses       |  |                                                      |       |                                                      |   | 438,555               |  |   | 184,257                  |   |                                    |   |  |                                              |   | (150,032   | ) |  |   | 472,780  
|                                                   |  |                                                      |        |                                                      |   |                       |  |   |                          |   |                                    |   |   |                                              |   |            |   |  |   |          
|Operating income                                   |  |                                                      |       |                                                      |   | 89,798                |  |   | 68,213                   |   |                                    |   |  |                                              |   |           |   |  |   | 158,011  
|Interest expense, net                              |  |                                                      |       |                                                      |   | 19,361                |  |   | (24                      | ) |                                    |   |  |                                              |   |           |   |  |   | 19,337   
|Debt retirement costs                              |  |                                                      |       |                                                      |   | 6,754                 |  |   |                         |   |                                    |   |  |                                              |   |           |   |  |   | 6,754    
|                                                   |  |                                                      |        |                                                      |   |                       |  |   |                          |   |                                    |   |   |                                              |   |            |   |  |   |          
|Earnings before income taxes                       |  |                                                      |       |                                                      |   | 63,683                |  |   | 68,237                   |   |                                    |   |  |                                              |   |           |   |  |   | 131,920  
|Income taxes                                       |  |                                                      |       |                                                      |   | 49,547                |  |   |                         |   |                                    |   |  |                                              |   |           |   |  |   | 49,547   
|                                                   |  |                                                      |        |                                                      |   |                       |  |   |                          |   |                                    |   |   |                                              |   |            |   |  |   |          
|Earnings before equity in earnings of subsidiaries |  |                                                      |       |                                                      |   | 14,136                |  |   | 68,237                   |   |                                    |   |  |                                              |   |           |   |  |   | 82,373   
|Equity in earnings of subsidiaries                 |  |                                                      | 82,373 |                                                      |   | 68,237                |  |   |                         |   |                                    |   |  |                                              |   | (150,610   | ) |  |   |         
|                                                   |  |                                                      |        |                                                      |   |                       |  |   |                          |   |                                    |   |   |                                              |   |            |   |  |   |          
|Net earnings                                       |  | $                                                    | 82,373 |                                                      | $ | 82,373                |  | $ | 68,237                   |   |                                    | $ |  |                                              | $ | (150,610   | ) |  | $ | 82,373   
|                                                   |  |                                                      |        |                                                      |   |                       |  |   |                          |   |                                    |   |   |                                              |   |            |   |  |   |          



F-24



---

##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



CONDENSED CONSOLIDATING STATEMENT OF OPERATION INFORMATION



For the fiscal year ended January 28, 2006

(in thousands)



|                                                   |  |                                                      |        |                                                      |   |                       |  |   |                          |   |                                    |   |   |                                              |   |            |   |  |   |          
|-------------------------------------------------- |  | ---------------------------------------------------- | ------ | ---------------------------------------------------- | - | --------------------- |  | - | ------------------------ | - | ---------------------------------- | - | - | -------------------------------------------- | - | ---------- | - |  | - | ---------
|                                                   |  | PETCO Animal Supplies, Inc. Parent Company Guarantor |        | PETCO Animal Supplies Stores, Inc. Subsidiary Issuer |   | GuarantorSubsidiaries |  |   | Non-Guarantor Subsidiary |   | Reclassifications and Eliminations |   |   | PETCO Animal Supplies, Inc. and Subsidiaries
|Net sales                                          |  | $                                                    |       |                                                      | $ | 1,854,903             |  | $ | 1,338,443                |   |                                    | $ |  |                                              | $ | (1,197,257 | ) |  | $ | 1,996,089
|Cost of sales and occupancy costs                  |  |                                                      |       |                                                      |   | 1,295,558             |  |   | 1,059,236                |   |                                    |   |  |                                              |   | (1,024,740 | ) |  |   | 1,330,054
|                                                   |  |                                                      |        |                                                      |   |                       |  |   |                          |   |                                    |   |   |                                              |   |            |   |  |   |          
|Gross profit                                       |  |                                                      |       |                                                      |   | 559,345               |  |   | 279,207                  |   |                                    |   |  |                                              |   | (172,517   | ) |  |   | 666,035  
|Selling, general and administrative expenses       |  |                                                      |       |                                                      |   | 483,556               |  |   | 213,527                  |   |                                    |   |  |                                              |   | (172,517   | ) |  |   | 524,566  
|                                                   |  |                                                      |        |                                                      |   |                       |  |   |                          |   |                                    |   |   |                                              |   |            |   |  |   |          
|Operating income                                   |  |                                                      |       |                                                      |   | 75,789                |  |   | 65,680                   |   |                                    |   |  |                                              |   |           |   |  |   | 141,469  
|Interest expense, net                              |  |                                                      |       |                                                      |   | 15,180                |  |   | (206                     | ) |                                    |   |  |                                              |   |           |   |  |   | 14,974   
|Debt retirement costs                              |  |                                                      |       |                                                      |   | 2,447                 |  |   |                         |   |                                    |   |  |                                              |   |           |   |  |   | 2,447    
|                                                   |  |                                                      |        |                                                      |   |                       |  |   |                          |   |                                    |   |   |                                              |   |            |   |  |   |          
|Earnings before income taxes                       |  |                                                      |       |                                                      |   | 58,162                |  |   | 65,886                   |   |                                    |   |  |                                              |   |           |   |  |   | 124,048  
|Income taxes                                       |  |                                                      |       |                                                      |   | 48,878                |  |   |                         |   |                                    |   |  |                                              |   |           |   |  |   | 48,878   
|                                                   |  |                                                      |        |                                                      |   |                       |  |   |                          |   |                                    |   |   |                                              |   |            |   |  |   |          
|Earnings before equity in earnings of subsidiaries |  |                                                      |       |                                                      |   | 9,284                 |  |   | 65,886                   |   |                                    |   |  |                                              |   |           |   |  |   | 75,170   
|Equity in earnings of subsidiaries                 |  |                                                      | 75,170 |                                                      |   | 65,886                |  |   |                         |   |                                    |   |  |                                              |   | (141,056   | ) |  |   |         
|                                                   |  |                                                      |        |                                                      |   |                       |  |   |                          |   |                                    |   |   |                                              |   |            |   |  |   |          
|Net earnings                                       |  | $                                                    | 75,170 |                                                      | $ | 75,170                |  | $ | 65,886                   |   |                                    | $ |  |                                              | $ | (141,056   | ) |  | $ | 75,170   
|                                                   |  |                                                      |        |                                                      |   |                       |  |   |                          |   |                                    |   |   |                                              |   |            |   |  |   |          



CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOW INFORMATION



For
the fiscal year ended January 31, 2004

(in thousands)



|                                                                                   |  |                                                      |          |   |                       |   |         |                         |  |                                   |   |  |                                              |         |   |  |   |          |  
|---------------------------------------------------------------------------------- |  | ---------------------------------------------------- | -------- | - | --------------------- | - | ------- | ----------------------- |  | --------------------------------- | - |  | -------------------------------------------- | ------- | - |  | - | -------- | -
|                                                                                   |  | PETCO Animal Supplies, Inc. Parent Company Guarantor |          |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiary |  | Reclassificationsand Eliminations |   |  | PETCO Animal Supplies, Inc. and Subsidiaries |        
|Cash flows from operating activities:                                              |  |                                                      |          |   |                       |   |         |                         |  |                                   |   |  |                                              |         |   |  |   |          |  
|Net earnings                                                                       |  | $                                                    | 64,713   |   |                       | $ | 49,583  |                         |  | $                                 |  |  | $                                            | (49,583 | ) |  | $ | 64,713   |  
|Adjustments to reconcile net earnings to net cash provided by operating activities |  |                                                      | 84,660   |   |                       |   | (42,025 | )                       |  |                                   |  |  |                                              | 49,583  |   |  |   | 92,218   |  
|                                                                                   |  |                                                      |          |   |                       |   |         |                         |  |                                   |   |  |                                              |         |   |  |   |          |  
|Net cash provided by operating activities                                          |  |                                                      | 149,373  |   |                       |   | 7,558   |                         |  |                                   |  |  |                                              |        |   |  |   | 156,931  |  
|                                                                                   |  |                                                      |          |   |                       |   |         |                         |  |                                   |   |  |                                              |         |   |  |   |          |  
|Cash flows from investing activities:                                              |  |                                                      |          |   |                       |   |         |                         |  |                                   |   |  |                                              |         |   |  |   |          |  
|Additions to fixed assets                                                          |  |                                                      | (91,409  | ) |                       |   | (4,461  | )                       |  |                                   |  |  |                                              |        |   |  |   | (95,870  | )
|Net cash invested in acquisitions                                                  |  |                                                      |         |   |                       |   | (3,087  | )                       |  |                                   |  |  |                                              |        |   |  |   | (3,087   | )
|Repayments on employee stockholder loans                                           |  |                                                      | 253      |   |                       |   |        |                         |  |                                   |  |  |                                              |        |   |  |   | 253      |  
|                                                                                   |  |                                                      |          |   |                       |   |         |                         |  |                                   |   |  |                                              |         |   |  |   |          |  
|Net cash used in investing activities                                              |  |                                                      | (91,156  | ) |                       |   | (7,548  | )                       |  |                                   |  |  |                                              |        |   |  |   | (98,704  | )
|                                                                                   |  |                                                      |          |   |                       |   |         |                         |  |                                   |   |  |                                              |         |   |  |   |          |  
|Cash flows from financing activities:                                              |  |                                                      |          |   |                       |   |         |                         |  |                                   |   |  |                                              |         |   |  |   |          |  
|Repayments of long term debt                                                       |  |                                                      | (102,143 | ) |                       |   |        |                         |  |                                   |  |  |                                              |        |   |  |   | (102,143 | )
|Debt issuance costs                                                                |  |                                                      | (1,488   | ) |                       |   |        |                         |  |                                   |  |  |                                              |        |   |  |   | (1,488   | )
|Net proceeds from issuance of common stock                                         |  |                                                      | 91       |   |                       |   |        |                         |  |                                   |  |  |                                              |        |   |  |   | 91       |  
|Costs of common stock sold by stockholders                                         |  |                                                      | (1,423   | ) |                       |   |        |                         |  |                                   |  |  |                                              |        |   |  |   | (1,423   | )
|                                                                                   |  |                                                      |          |   |                       |   |         |                         |  |                                   |   |  |                                              |         |   |  |   |          |  
|Net cash used in financing activities                                              |  |                                                      | (104,963 | ) |                       |   |        |                         |  |                                   |  |  |                                              |        |   |  |   | (104,963 | )
|                                                                                   |  |                                                      |          |   |                       |   |         |                         |  |                                   |   |  |                                              |         |   |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                               |  |                                                      | (46,746  | ) |                       |   | 10      |                         |  |                                   |  |  |                                              |        |   |  |   | (46,736  | )
|Cash and cash equivalents at beginning of year                                     |  |                                                      | 108,174  |   |                       |   | 763     |                         |  |                                   |  |  |                                              |        |   |  |   | 108,937  |  
|                                                                                   |  |                                                      |          |   |                       |   |         |                         |  |                                   |   |  |                                              |         |   |  |   |          |  
|Cash and cash equivalents at end of year                                           |  | $                                                    | 61,428   |   |                       | $ | 773     |                         |  | $                                 |  |  | $                                            |        |   |  | $ | 62,201   |  
|                                                                                   |  |                                                      |          |   |                       |   |         |                         |  |                                   |   |  |                                              |         |   |  |   |          |  



F-25



---

##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW INFORMATION



For the fiscal year ended January 29, 2005

(in thousands)



|                                                                                   |  |                                                      |         |   |                                                      |   |          |                       |  |   |                         |   |                                    |   |   |                                              |   |          |   |  |   |          |  
|---------------------------------------------------------------------------------- |  | ---------------------------------------------------- | ------- | - | ---------------------------------------------------- | - | -------- | --------------------- |  | - | ----------------------- | - | ---------------------------------- | - | - | -------------------------------------------- | - | -------- | - |  | - | -------- | -
|                                                                                   |  | PETCO Animal Supplies, Inc. Parent Company Guarantor |         |   | PETCO Animal Supplies Stores, Inc. Subsidiary Issuer |   |          | GuarantorSubsidiaries |  |   | Non-GuarantorSubsidiary |   | Reclassifications and Eliminations |   |   | PETCO Animal Supplies, Inc. and Subsidiaries |  
|Cash flows from operating activities:                                              |  |                                                      |         |   |                                                      |   |          |                       |  |   |                         |   |                                    |   |   |                                              |   |          |   |  |   |          |  
|Net earnings                                                                       |  | $                                                    | 82,373  |   |                                                      | $ | 82,373   |                       |  | $ | 68,237                  |   |                                    | $ |  |                                              | $ | (150,610 | ) |  | $ | 82,373   |  
|Adjustments to reconcile net earnings to net cash provided by operating activities |  |                                                      | (82,373 | ) |                                                      |   | 82,410   |                       |  |   | (60,377                 | ) |                                    |   |  |                                              |   | 150,610  |   |  |   | 90,270   |  
|                                                                                   |  |                                                      |         |   |                                                      |   |          |                       |  |   |                         |   |                                    |   |   |                                              |   |          |   |  |   |          |  
|Net cash provided by operating activities                                          |  |                                                      |        |   |                                                      |   | 164,783  |                       |  |   | 7,860                   |   |                                    |   |  |                                              |   |         |   |  |   | 172,643  |  
|                                                                                   |  |                                                      |         |   |                                                      |   |          |                       |  |   |                         |   |                                    |   |   |                                              |   |          |   |  |   |          |  
|Cash flows from investing activities:                                              |  |                                                      |         |   |                                                      |   |          |                       |  |   |                         |   |                                    |   |   |                                              |   |          |   |  |   |          |  
|Additions to fixed assets                                                          |  |                                                      |        |   |                                                      |   | (111,398 | )                     |  |   | (8,408                  | ) |                                    |   |  |                                              |   |         |   |  |   | (119,806 | )
|Net cash invested in acquisitions                                                  |  |                                                      |        |   |                                                      |   | (5,147   | )                     |  |   |                        |   |                                    |   |  |                                              |   |         |   |  |   | (5,147   | )
|Repayments on employee stockholder loans                                           |  |                                                      |        |   |                                                      |   | 527      |                       |  |   |                        |   |                                    |   |  |                                              |   |         |   |  |   | 527      |  
|                                                                                   |  |                                                      |         |   |                                                      |   |          |                       |  |   |                         |   |                                    |   |   |                                              |   |          |   |  |   |          |  
|Net cash used in investing activities                                              |  |                                                      |        |   |                                                      |   | (116,018 | )                     |  |   | (8,408                  | ) |                                    |   |  |                                              |   |         |   |  |   | (124,426 | )
|                                                                                   |  |                                                      |         |   |                                                      |   |          |                       |  |   |                         |   |                                    |   |   |                                              |   |          |   |  |   |          |  
|Cash flows from financing activities:                                              |  |                                                      |         |   |                                                      |   |          |                       |  |   |                         |   |                                    |   |   |                                              |   |          |   |  |   |          |  
|Borrowings under long-term debt agreements                                         |  |                                                      |        |   |                                                      |   | 85,000   |                       |  |   |                        |   |                                    |   |  |                                              |   |         |   |  |   | 85,000   |  
|Repayments of long-term debt                                                       |  |                                                      |        |   |                                                      |   | (157,308 | )                     |  |   |                        |   |                                    |   |  |                                              |   |         |   |  |   | (157,308 | )
|Debt issuance costs                                                                |  |                                                      |        |   |                                                      |   | (950     | )                     |  |   |                        |   |                                    |   |  |                                              |   |         |   |  |   | (950     | )
|Net proceeds from issuance of common stock                                         |  |                                                      |        |   |                                                      |   | 203      |                       |  |   |                        |   |                                    |   |  |                                              |   |         |   |  |   | 203      |  
|Costs of common stock sold by stockholders                                         |  |                                                      |        |   |                                                      |   | (548     | )                     |  |   |                        |   |                                    |   |  |                                              |   |         |   |  |   | (548     | )
|                                                                                   |  |                                                      |         |   |                                                      |   |          |                       |  |   |                         |   |                                    |   |   |                                              |   |          |   |  |   |          |  
|Net cash used in financing activities                                              |  |                                                      |        |   |                                                      |   | (73,603  | )                     |  |   |                        |   |                                    |   |  |                                              |   |         |   |  |   | (73,603  | )
|                                                                                   |  |                                                      |         |   |                                                      |   |          |                       |  |   |                         |   |                                    |   |   |                                              |   |          |   |  |   |          |  
|Net decrease in cash and cash equivalents                                          |  |                                                      |        |   |                                                      |   | (24,838  | )                     |  |   | (548                    | ) |                                    |   |  |                                              |   |         |   |  |   | (25,386  | )
|Cash and cash equivalents at beginning of year                                     |  |                                                      |        |   |                                                      |   | 61,428   |                       |  |   | 773                     |   |                                    |   |  |                                              |   |         |   |  |   | 62,201   |  
|                                                                                   |  |                                                      |         |   |                                                      |   |          |                       |  |   |                         |   |                                    |   |   |                                              |   |          |   |  |   |          |  
|Cash and cash equivalents at end of period                                         |  | $                                                    |        |   |                                                      | $ | 36,590   |                       |  | $ | 225                     |   |                                    | $ |  |                                              | $ |         |   |  | $ | 36,815   |  
|                                                                                   |  |                                                      |         |   |                                                      |   |          |                       |  |   |                         |   |                                    |   |   |                                              |   |          |   |  |   |          |  



F-26



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##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW INFORMATION



For the fiscal year ended January 28, 2006

(in thousands)



|                                                                                   |  |                                                      |         |   |                                                      |   |          |                       |  |   |                         |   |                                    |   |   |                                              |   |          |   |  |   |          |  
|---------------------------------------------------------------------------------- |  | ---------------------------------------------------- | ------- | - | ---------------------------------------------------- | - | -------- | --------------------- |  | - | ----------------------- | - | ---------------------------------- | - | - | -------------------------------------------- | - | -------- | - |  | - | -------- | -
|                                                                                   |  | PETCO Animal Supplies, Inc. Parent Company Guarantor |         |   | PETCO Animal Supplies Stores, Inc. Subsidiary Issuer |   |          | GuarantorSubsidiaries |  |   | Non-GuarantorSubsidiary |   | Reclassifications and Eliminations |   |   | PETCO Animal Supplies, Inc. and Subsidiaries |  
|Cash flows from operating activities:                                              |  |                                                      |         |   |                                                      |   |          |                       |  |   |                         |   |                                    |   |   |                                              |   |          |   |  |   |          |  
|Net earnings                                                                       |  | $                                                    | 75,170  |   |                                                      | $ | 75,170   |                       |  | $ | 65,886                  |   |                                    | $ |  |                                              | $ | (141,056 | ) |  | $ | 75,170   |  
|Adjustments to reconcile net earnings to net cash provided by operating activities |  |                                                      | (75,170 | ) |                                                      |   | 77,891   |                       |  |   | (54,919                 | ) |                                    |   |  |                                              |   | 141,056  |   |  |   | 88,858   |  
|                                                                                   |  |                                                      |         |   |                                                      |   |          |                       |  |   |                         |   |                                    |   |   |                                              |   |          |   |  |   |          |  
|Net cash provided by operating activities                                          |  |                                                      |        |   |                                                      |   | 153,061  |                       |  |   | 10,967                  |   |                                    |   |  |                                              |   |         |   |  |   | 164,028  |  
|                                                                                   |  |                                                      |         |   |                                                      |   |          |                       |  |   |                         |   |                                    |   |   |                                              |   |          |   |  |   |          |  
|Cash flows from investing activities:                                              |  |                                                      |         |   |                                                      |   |          |                       |  |   |                         |   |                                    |   |   |                                              |   |          |   |  |   |          |  
|Additions to fixed assets                                                          |  |                                                      |        |   |                                                      |   | (112,457 | )                     |  |   | (11,092                 | ) |                                    |   |  |                                              |   |         |   |  |   | (123,549 | )
|Net cash invested in acquisitions                                                  |  |                                                      |        |   |                                                      |   | (688     | )                     |  |   |                        |   |                                    |   |  |                                              |   |         |   |  |   | (688     | )
|                                                                                   |  |                                                      |         |   |                                                      |   |          |                       |  |   |                         |   |                                    |   |   |                                              |   |          |   |  |   |          |  
|Net cash used in investing activities                                              |  |                                                      |        |   |                                                      |   | (113,145 | )                     |  |   | (11,092                 | ) |                                    |   |  |                                              |   |         |   |  |   | (124,237 | )
|                                                                                   |  |                                                      |         |   |                                                      |   |          |                       |  |   |                         |   |                                    |   |   |                                              |   |          |   |  |   |          |  
|Cash flows from financing activities:                                              |  |                                                      |         |   |                                                      |   |          |                       |  |   |                         |   |                                    |   |   |                                              |   |          |   |  |   |          |  
|Borrowings under long-term debt agreements                                         |  |                                                      |        |   |                                                      |   | 131,700  |                       |  |   |                        |   |                                    |   |  |                                              |   |         |   |  |   | 131,700  |  
|Repayments of long-term debt                                                       |  |                                                      |        |   |                                                      |   | (171,768 | )                     |  |   |                        |   |                                    |   |  |                                              |   |         |   |  |   | (171,768 | )
|Net proceeds from issuance of common stock                                         |  |                                                      |        |   |                                                      |   | 2,986    |                       |  |   |                        |   |                                    |   |  |                                              |   |         |   |  |   | 2,986    |  
|                                                                                   |  |                                                      |         |   |                                                      |   |          |                       |  |   |                         |   |                                    |   |   |                                              |   |          |   |  |   |          |  
|Net cash used in financing activities                                              |  |                                                      |        |   |                                                      |   | (37,082  | )                     |  |   |                        |   |                                    |   |  |                                              |   |         |   |  |   | (37,082  | )
|                                                                                   |  |                                                      |         |   |                                                      |   |          |                       |  |   |                         |   |                                    |   |   |                                              |   |          |   |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                               |  |                                                      |        |   |                                                      |   | 2,834    |                       |  |   | (125                    | ) |                                    |   |  |                                              |   |         |   |  |   | 2,709    |  
|Cash and cash equivalents at beginning of year                                     |  |                                                      |        |   |                                                      |   | 36,590   |                       |  |   | 225                     |   |                                    |   |  |                                              |   |         |   |  |   | 36,815   |  
|                                                                                   |  |                                                      |         |   |                                                      |   |          |                       |  |   |                         |   |                                    |   |   |                                              |   |          |   |  |   |          |  
|Cash and cash equivalents at end of period                                         |  | $                                                    |        |   |                                                      | $ | 39,424   |                       |  | $ | 100                     |   |                                    | $ |  |                                              | $ |         |   |  | $ | 39,524   |  
|                                                                                   |  |                                                      |         |   |                                                      |   |          |                       |  |   |                         |   |                                    |   |   |                                              |   |          |   |  |   |          |  



F-27



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##### Table of Contents

Exhibit Index



|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|2.1            |  | Agreement and Plan of Reorganization, dated as of January 13, 2005, by and among the PETCO Animal Supplies, Inc., PETCO Animal Supplies Stores, Inc. (formerly PETCO Animal Supplies,
Inc.) and PETCO Merger Co. (incorporated by reference to Current Report on Form 8-K filed on January 14, 2005 (with respect to the holding company reorganization of PETCO)).                                                                                                                       
|               | 
|3.1            |  | Certificate of Incorporation of PETCO Animal Supplies, Inc. as filed with the office of the Secretary of State of the State of Delaware on January 10, 2005, as amended by the Certificate
of Amendment of Certificate of Incorporation as filed with the office of the Secretary of State of the State of Delaware on January 13, 2005 (incorporated by reference to Current Report on Form 8-K filed on January 14, 2005 (with respect
to the holding company reorganization of PETCO)).
|               | 
|3.2            |  | Bylaws of PETCO Animal Supplies, Inc. (incorporated by reference to Current Report on Form 8-K filed on January 14, 2005 (with respect to the holding company reorganization of
PETCO)).                                                                                                                                                                                                                                                                                                  
|               | 
|4.1            |  | Indenture, dated as of October 26, 2001, by and among PETCO Animal Supplies Stores, Inc., certain subsidiaries of PETCO Animal Supplies Stores, Inc. and U.S. Bank N.A., as trustee
(incorporated by reference to Registration Statement on Form S-1, as amended (File No. 333-75830)).                                                                                                                                                                                                   
|               | 
|4.2            |  | Supplemental Indenture, dated as of January 14, 2005, by and among PETCO Animal Supplies, Inc., E-Pet Services, E-Pet Services, LLC and U.S. Bank National Association, as trustee
(incorporated by reference to Current Report on Form 8-K filed on January 14, 2005 (with respect to the holding company reorganization of PETCO)).                                                                                                                                                     
|               | 
|4.3            |  | Form of Specimen Common Stock Certificate (incorporated by reference to Annual Report on Form 10-K for the fiscal year ended February 2, 2002, as amended).                                                                                                                                                                                                                                                                                                                               
|               | 
|4.4            |  | Form of Amended and Restated Stockholders Agreement, dated as of February 19, 2002, by and among PETCO Animal Supplies, Inc. and certain stockholders of PETCO Animal Supplies, Inc.
(incorporated by reference to Registration Statement on Form S-1, as amended (File No. 333-75830)).                                                                                                                                                                                                  
|               | 
|10.1#          |  | Amended and Restated Employment Agreement, dated as of October 2, 2000, by and between PETCO Animal Supplies Stores, Inc. and Brian K. Devine (incorporated by reference to Registration
Statement on Form S-1, as amended (File No. 333-75830)).                                                                                                                                                                                                                                         
|               | 
|10.2#          |  | First Amendment, dated June 27, 2005, to Employment Agreement, dated as of October 2, 2000, by and between PETCO Animal Supplies, Inc. and Brian K. Devine (incorporated by reference
to Annual Report on Form 10-K for the fiscal year ended January 29, 2005).                                                                                                                                                                                                                          
|               | 
|10.3#          |  | Employment Agreement, dated as of October 2, 2000, by and between PETCO Animal Supplies Stores, Inc. and Bruce C. Hall (incorporated by reference to Registration Statement on Form S-1,
as amended (File No. 333-75830)).                                                                                                                                                                                                                                                                
|               | 
|10.4#          |  | First Amendment, dated June 27, 2005, to Employment Agreement, dated as of October 2, 2000, by and between PETCO Animal Supplies, Inc. and Bruce C. Hall (incorporated by reference
to Annual Report on Form 10-K for the fiscal year ended January 29, 2005).                                                                                                                                                                                                                            
|               | 
|10.5#          |  | Employment Agreement, dated as of October 2, 2000, by and between PETCO Animal Supplies Stores, Inc. and James M. Myers (incorporated by reference to Registration Statement on Form S-1,
as amended (File No. 333-75830)).                                                                                                                                                                                                                                                               
|               | 
|10.6#          |  | First Amendment, dated June 27, 2005, to Employment Agreement, dated as of October 2, 2000, by and between PETCO Animal Supplies, Inc. and James M. Myers (incorporated by reference
to Annual Report on Form 10-K for the fiscal year ended January 29, 2005).                                                                                                                                                                                                                           
|               | 
|10.7#          |  | Form of Indemnification Agreement between PETCO and certain officers and directors (incorporated by reference to Registration Statement on Form S-1, as amended (File No.
333-75830)).                                                                                                                                                                                                                                                                                                    



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##### Table of Contents

|               |  |                                                                                                                                                                                                                                                                          
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                              
|10.8#          |  | Form of Retention Agreement for executive officers (incorporated by reference to Registration Statement on Form S-1, as amended (File No. 333-75830)).                                                                                                                   
|               | 
|10.9#          |  | Form of Retention Agreement for non-executive officers (incorporated by reference to Registration Statement on Form S-1, as amended (File No. 333-75830)).                                                                                                               
|               | 
|10.10#         |  | Form of Second Amendment to Retention Agreement for executive and non-executive officers (incorporated by reference to Annual Report on Form 10-K for the fiscal year ended January 29,
2005).                                                                           
|               | 
|10.11#         |  | PETCO Animal Supplies 401(k) plan (incorporated by reference to Registration Statement on Form S-8 (File No. 333-100397)).                                                                                                                                               
|               | 
|10.12#         |  | PETCO Flexible Benefit Plan, amended and restated effective July 1, 1998 (incorporated by reference to Registration Statement on Form S-1, as amended (File No.
333-75830)).                                                                                             
|               | 
|10.13#         |  | The 1994 Stock Option and Restricted Stock Plan for Executive and Key Employees of PETCO Animal Supplies, Inc., as amended and restated as of October 2, 2000 (incorporated by reference
to Registration Statement on Form S-1, as amended (File No. 333-75830)).        
|               | 
|10.14#         |  | Form of PETCO Animal Supplies, Inc. Non-qualified Stock Option Agreement (1994 Stock Option and Restricted Stock Plan for Executive and Key Employees) (incorporated by reference to
Registration Statement on Form S-1, as amended (File No. 333-75830)).               
|               | 
|10.15#         |  | Form of PETCO Animal Supplies, Inc. Incentive Stock Option Agreement (1994 Stock Option and Restricted Stock Plan for Executive and Key Employees) (incorporated by reference to Registration
Statement on Form S-1, as amended (File No. 333-75830)).                   
|               | 
|10.16          |  | Agreement and Plan of Merger, dated as of May 17, 2000, by and between PETCO Animal Supplies Stores, Inc. and BD Recapitalization Corp. (incorporated by reference to Registration
Statement on Form S-1, as amended (File No. 333-75830)).                              
|               | 
|10.17          |  | First Amendment to Agreement and Plan of Merger, dated as of September 14, 2000, by and between PETCO Animal Supplies Stores, Inc. and BD Recapitalization Corp. (incorporated by
reference to Registration Statement on Form S-1, as amended (File No. 333-75830)).     
|               | 
|10.18#        |  | Form of Restricted Stock Unit Agreement for units granted pursuant to the 2002 Incentive Award Plan of PETCO Animal Supplies, Inc.                                                                                                                                       
|               | 
|10.19#         |  | PETCO Animal Supplies, Inc. Deferred Compensation Plan (incorporated by reference to Registration Statement on Form S-1, as amended (File No. 333-75830)).                                                                                                               
|               | 
|10.20#         |  | First Amendment to PETCO Animal Supplies, Inc. Deferred Compensation Plan (incorporated by reference to Annual Report on Form 10-K for the fiscal year ended January 29,
2005).                                                                                          
|               | 
|10.21#         |  | 2002 Incentive Award Plan of PETCO Animal Supplies, Inc. (incorporated by reference to Registration Statement on Form S-1, as amended (File No. 333-75830)).                                                                                                             
|               | 
|10.22#        |  | Form of PETCO Animal Supplies, Inc. Stock Option Agreement (2002 Incentive Award Plan).                                                                                                                                                                                  
|               | 
|10.23#         |  | Consulting Agreement, dated as of November 29, 2001, by and between PETCO Animal Supplies Stores, Inc. and Brian K. Devine (incorporated by reference to Annual Report on Form 10-K for
the fiscal year ended February 2, 2002, as amended).                             
|               | 
|10.24#         |  | First Amendment, dated June 27, 2005, to Consulting Agreement, dated as of November 29, 2001, by and between PETCO Animal Supplies Stores, Inc. and Brian K. Devine (incorporated by
reference to Annual Report on Form 10-K for the fiscal year ended January 29, 2005).
|               | 
|10.25#         |  | Supplemental Executive Retirement Program, dated as of November 29, 2001, by and between PETCO Animal Supplies Stores, Inc. and Brian K. Devine (incorporated by reference to Annual
Report on Form 10-K for the fiscal year ended February 2, 2002, as amended).        



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##### Table of Contents

|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.26#         |  | PETCO Animal Supplies, Inc. Amended and Restated Executive Incentive Bonus Plan (incorporated by reference to Annual Report on Form 10-K for the fiscal year ended January 29,
2005).                                                                                                                                                                                                                                                                                                                                                                                                              
|               | 
|10.27          |  | Credit Agreement, dated as of January 13, 2005, by and among PETCO Animal Supplies, Inc., PETCO Animal Supplies Stores, Inc., the financial institutions party thereto as lenders, Wells
Fargo Bank, National Association, as sole lead arranger, book runner and administrative agent for the lenders, Bank of America, N.A., as syndication agent, and U.S. Bank National Association and Union Bank of California, N.A., as co-documentation
agents (incorporated by reference to Current Report on Form 8-K filed on January 14, 2005 (with respect to the execution of the Credit Agreement)).
|               | 
|10.28          |  | Form of Revolving Note executed in connection with the Credit Agreement referenced as Exhibit 10.27 (incorporated by reference to Current Report on Form 8-K filed on January 14, 2005
(with respect to the execution of the Credit Agreement)).                                                                                                                                                                                                                                                                                                                                                   
|               | 
|10.29          |  | First Amendment, dated as of March 10, 2005, to Credit Agreement, dated as of January 13, 2005, by and among PETCO Animal Supplies, Inc., PETCO Animal Supplies Stores, Inc., the
financial institutions party thereto as lenders, and Wells Fargo Bank, National Association, as administrative agent for the lenders (incorporated by reference to Annual Report on Form 10-K for the fiscal year ended January 29,
2005).                                                                                                                                                                       
|               | 
|10.30          |  | Second Amendment, dated as of April 29, 2005, to Credit Agreement, dated as of January 13, 2005, by and among PETCO Animal Supplies, Inc., PETCO Animal Supplies Stores, Inc., the
financial institutions party thereto as lenders, and Wells Fargo Bank, National Association, as administrative agent for the lenders (incorporated by reference to Current Report on Form 8-K filed on April 29, 2005).                                                                                                                                                                                         
|               | 
|10.31          |  | Third Amendment, dated as of May 31, 2005, to Credit Agreement, dated as of January 13, 2005, by and among PETCO Animal Supplies, Inc. PETCO Animal Supplies Stores, Inc., the
financial institutions party thereto as lenders, and Wells Fargo Bank, National Association, as administrative agent for the lenders (incorporated by reference to Current Report on Form 8-K filed on June 3, 2005).                                                                                                                                                                                               
|               | 
|10.32          |  | Fourth Amendment, dated as of March 17, 2006, to Credit Agreement, dated as of January 13, 2005, as amended, by and among PETCO Animal Supplies, Inc., PETCO Animal Supplies Stores,
Inc., the financial institutions party thereto as Lenders and Wells Fargo Bank, National Association, as administrative agent for the Lenders (incorporated by reference to Current Report on Form 8-K filed on March 23,
2006).                                                                                                                                                                            
|               | 
|10.33          |  | Assignment and Assumption Agreement, dated as of January 13, 2005, by and between PETCO Animal Supplies, Inc. and PETCO Animal Supplies Stores, Inc. (incorporated by reference to Current
Report on Form 8-K filed on January 14, 2005 (with respect to the holding company reorganization of PETCO)).                                                                                                                                                                                                                                                                                            
|               | 
|10.34#        |  | Form of Waiver and Amendment of Retention Agreement, dated as of January 13, 2005, for executive and non-executive officers, and Form of Waiver and Amendment to Employment Agreement,
dated as of January 13, 2005, for certain executive officers.                                                                                                                                                                                                                                                                                                                                               
|               | 
|10.35#         |  | Employment Agreement, dated January 23, 2006, by and between PETCO Animal Supplies, Inc. and David Bolen (incorporated by reference to Current Report on Form 8-K filed on
January 23, 2006).                                                                                                                                                                                                                                                                                                                                                                                                      
|               | 
|21.1          |  | List of subsidiaries of PETCO Animal Supplies, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|               | 
|23.1          |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|               | 
|31.1          |  | Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934.                                                                                                                                                                                                                                                                                                                                                                                                                                                                



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##### Table of Contents

|               |   |  |                                                                                                                                                                       
|-------------- | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |   |  | Description                                                                                                                                                           
|31.2          |   |  | Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934.                                   
|               |  
|32.1          | * |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.



| | Filed herewith.
|- | ---------------



|# | Indicates a management contract or compensatory plan or arrangement.
|- | --------------------------------------------------------------------



|* | These certifications are being furnished solely to accompany this annual report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of
the Exchange Act and are not to be incorporated by reference into any filing of PETCO Animal Supplies, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------