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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 31, 2004



Commission File
Number: 0-23574



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PETCO ANIMAL SUPPLIES, INC.

(Exact
Name of Registrant As Specified In Its Charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 33-0479906                          
|(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)



Registrants telephone number, including area code:

(858) 453-7845



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



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



Common Stock, $.001 par value

(Title of
Class)



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 an accelerated filer (as defined in Exchange Act Rule 12b-2).  Yes  x  No ̈



As of March 31, 2004, there were outstanding 57,473,300 shares of the registrants Common Stock, $0.001 par value. As
of August 2, 2003, the last day of the registrants second fiscal quarter of fiscal 2003, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $830 million, 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.



DOCUMENTS INCORPORATED BY REFERENCE: Certain information called for by Part III of this Form 10-K will either be filed with the Commission under
Regulation 14A under the Securities Exchange Act of 1934 or by amendment to this Form 10-K, in either case on or before May 30, 2004.



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TABLE OF CONTENTS



|                     |  |                                                                                                |  |     
|-------------------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|                     |  |                                                                                                |  | Page
|PART I              
|Item 1.              |  | Business                                                                                       |  | 1   
|Item 2.              |  | Properties                                                                                     |  | 13  
|Item 3.              |  | Legal Proceedings                                                                              |  | 14  
|Item 4.              |  | Submission of Matters to a Vote of Security Holders                                            |  | 15  
|                    
|PART II             
|Item 5.              |  | Market for Registrants Common Equity and Related Stockholder Matters                          |  | 16  
|Item 6.              |  | Selected Financial Data                                                                        |  | 17  
|Item 7.              |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 19  
|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  
|                    
|PART III            
|Item 10.             |  | Directors and Executive Officers of the Registrant                                             |  | 31  
|Item 11.             |  | Executive Compensation                                                                         |  | 31  
|Item 12.             |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 31  
|Item 13.             |  | Certain Relationships and Related Transactions                                                 |  | 31  
|Item 14.             |  | Principal Accountant Fees and Services                                                         |  | 31  
|                    
|PART IV             
|Item 15.             |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                               |  | 32  
|Signatures           |  | 35                                                                                            
|Financial Statements |  | F-1                                                                                           
|Exhibit Index        |  |                                                                                               





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PART I



|ITEM 1. | BUSINESS
|------- | --------



We are a leading specialty retailer of premium pet food, supplies and services with 654 stores in 43 states and the District of Columbia. Our products
include pet 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 competitive prices, with superior levels of customer service at convenient locations.



Our stores combine the broad merchandise selection and everyday low prices of a pet supply warehouse store with the convenient location and knowledgeable
customer service of a neighborhood pet supply store. We believe that this combination differentiates our stores and provides us with a competitive advantage. Our principal format is a 12,000 to 15,000 square foot store, conveniently located near
local neighborhood shopping destinations, including supermarkets, bookstores, coffee shops, dry cleaners and video stores, where our target pet parent customer makes regular weekly shopping trips. We believe that our stores are well
positioned, both in terms of product offerings and location, to benefit from favorable long-term demographic trends, a growing pet population and an increasing willingness of pet owners to spend on their pets.



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 2003 refer to the fiscal year beginning on February 2, 2003 and ended on January 31, 2004.



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 steadily growing pet population. The U.S. pet population has now reached 353 million companion animals, including 141 million
cats and dogs, with an estimated 62% 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 $28 billion in 2002. 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 $10.8 billion in sales for 2002. Sales of premium dog and cat food represented approximately 37.1% of the total dog and cat food market in 2002 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 $511 million, or 31%, of our fiscal 2003 net sales, of which $475 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 accounted for approximately $7.5 billion in sales for 2002 and will grow at a compound annual growth rate, or CAGR, of 8.0% over the next few years. Sales of pet supplies and small animals (excluding cats and dogs) accounted for $1.1
billion, or 65%, of our fiscal 2003 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, rabbits, 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
and dogs, which are administered through local animal welfare programs.



Pet Services.    Pet services are estimated to account for the remaining $9.7 billion of the overall $28 billion market projected by management. The market for pet services includes grooming, obedience
training, 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. Although
services represented only 4.2% of our fiscal 2003 net sales, services represent an increasing portion of our net sales and we believe that offering selected pet services better serves our best customers and increases traffic flow in our stores. For
fiscal 2003, services sales increased 21% from fiscal 2002, almost double our overall sales growth.



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 2001, 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 competitive 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 $839.6 million in fiscal 1998 to $1.65 billion in fiscal 2003, for a CAGR
of 14.5%. We also increased our operating income from $31.8 million in fiscal 2001, which includes unusual charges and expenses totaling $58.0 million, to $137.7 million in fiscal 2003. The principal contributors to this improvement in our financial
performance include: (1) our ability to generate continuous comparable store net sales growth; (2) strategic expansion in both existing and new markets; (3) targeted merchandising efforts to drive greater sales of higher margin supplies and
services, which have grown to 69.3% of net sales in fiscal 2003, up
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| | from 62.2% of net sales in fiscal 1999; (4) our expanding store base that offers economies of scale and purchasing efficiencies; and (5) 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 approximately 8% to 10% per year on a long-term basis, both by focusing on
existing markets and by targeting one or two new geographic markets per year. Our year-over-year increase in square footage in fiscal 2003 was 10.5%, and our total store square footage at January 31, 2004 was approximately 9.0 million square feet.
We plan to open 90 new stores in fiscal 2004, or 70 stores net of relocations and closings. In March 2004, we agreed to acquire 20 former Kids R Us stores from Office Depot, Inc., approximately one-half of which are located in South
Florida and Ohio, markets where we are currently underrepresented. We carefully measure each proposed store opening against demographic, economic and competitive factors. We have established an operating model that we believe enables us to quickly
and profitably execute our expansion strategy after we have analyzed a markets potential. Our new stores generally have become profitable by the end of their first year of operation, and we target for each store a five-year return on
investment of more than 20%. In fiscal 2004, we intend to remodel 50 to 55 of our existing stores into our millennium format. Together with our plan to add 90 new stores in fiscal 2004, we intend to create a total of 140 to 145 new millennium stores
in fiscal 2004. Our millennium format incorporates a more dramatic presentation of our companion animals and emphasizes higher-margin supplies categories.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Leverage Our Industry-Leading Integrated Information Systems. Our highly integrated point-of-sale, or POS, system in each of our stores provides our management team with
timely and valuable information on store and regional level sales and merchandising trends, inventory tracking and operational data. By integrating all of our key functional areas, our systems empower regional, district and store managers to
increase sales, improve operational efficiency, control inventory, monitor critical performance indicators and enhance customer service and satisfaction.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Continue Our Focus on Expanding Our Services Business. We continue to expand our offerings of services to our customers, including grooming, canine education 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Utilize Our Logistics Expertise. Our distribution system has over one million square feet of distribution capacity, including an integrated network of three national and five
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. Our inventory control systems provide for effective replenishment of inventory
and allow us to achieve optimal in-stock levels at our stores. Our logistics expertise has enabled us to dramatically increase inventory turns from 6.5x for fiscal 1999 to 7.8x for fiscal 2003.
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| |  | 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. P.A.L.S., our highly successful customer loyalty program, further enhances and
reinforces the loyalty, brand awareness and satisfaction of our customers. Our customers have recently been signing up for approximately one million new P.A.L.S. cards per quarter. Our P.A.L.S. members account for over 75% of our net sales and spend
on average over 50% more per transaction than do our non-P.A.L.S. customers. Our exclusive 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 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.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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



Our centralized
purchasing and distribution system minimizes the delivered cost of merchandise and maximizes the in-stock position of our stores. We currently operate three central and five regional distribution centers. The central 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
central distribution facilities which we then distribute either to regional centers or directly to store locations. We believe that our centralized distribution system enables our stores to maximize selling space by reducing necessary levels of
safety stock carried in each store. We also provide order fulfillment services for our Internet customers through our three central 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.



In late 1997 we launched our P.A.L.S. customer loyalty program, which provides us with one of the largest databases of customer information in the
industry, as our customers have recently been signing up for approximately one million new P.A.L.S. cards per quarter. Our P.A.L.S. database is integrated with our 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.



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Local store marketing activities are conducted on a regular basis in most stores. These marketing
activities include store 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 new 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. We believe that the principal competitive factors influencing our business are product
selection and quality, convenient store locations, customer service and price. 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.



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), The Iams Company and Nutro Products, Inc. Supplies of
products from these vendors accounted for approximately 9%, 8% and 8%, respectively, of our net sales in each of fiscal 2002 and fiscal 2003. 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 Nutro, Science Diet 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 regional and central distribution centers and is integrated into product buying decisions. Store labor planning and visual presentation levels are 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 believe the Internet offers opportunities to complement our
brick-and-mortar stores and to increase our retail commerce and consumer brand awareness of our products. We operate the popular e-commerce site



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www.petco.com, which provides our customers with pet-related content, commerce and community via the Internet. 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 31, 2004, we employed approximately 15,300 associates, of whom approximately 7,800 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 corporate headquarters 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. However, a complaint filed in June 2002 by the San Francisco City Attorneys office
alleged that certain associates have not properly cared for animals for sale in our two San Francisco stores. See Item 3Legal Proceedings. Prior to the opening of each store, 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.



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



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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, the following:



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 approximately 40 to 60 stores per year (offset by closings and relocations of existing stores) between fiscal 1998 and fiscal 2003. We plan to increase our aggregate
store square footage by approximately 8% to 10% per year on a long-term basis, both by focusing on existing markets and by targeting one or two new geographic markets per year. Our year-over-year increase in square footage in fiscal 2003 was 10.5%,
and our total store square footage at January 31, 2004 was approximately 9.0 million square feet. We plan to open 90 new stores in fiscal 2004, or 70 stores net of relocations and closings.



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 8.6%, 8.0% and 5.6% for fiscal 2001, 2002 and 2003, 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 millennium format, which incorporates our most recent merchandising strategies. There can be no assurance that our millennium format 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 and inventory and pre-opening expenses;
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| |  | our ability to locate and obtain favorable store sites and negotiate acceptable lease terms;
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| |  | our ability to obtain and distribute adequate product supplies to our stores, including by expanding our distribution facilities;
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| |  | our ability to hire, train and retain skilled managers and personnel; and
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| |  | 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 which 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.



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 six stores in fiscal 2001, six stores in fiscal 2002
and two stores in fiscal 2003. 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 31, 2004, our
debt consisted primarily of (1) $140.8 million of borrowings under our senior credit facility (with $55.0 million of additional available credit, subject to certain conditions) and (2) $120.0 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 substantial 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;
| | - | --------------------------------------------------------------------------



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| |  | 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 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), The Iams Company and Nutro Products, Inc. Supplies of products from these vendors accounted for approximately
9%, 8% and 8%, respectively, of our net sales in each of fiscal 2002 and fiscal 2003. 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.



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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.



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 which 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.



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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. For example, in January 2002 we terminated our relationship with Canadian Petcetera Limited Partnership, which operated 32 Petcetera retail pet food and supplies stores in
Canada, because the stores operated by the Canadian partnership were not producing the results we had anticipated. At the time of the termination of our relationship, we also entered into a settlement agreement with the other partners of the
partnership to resolve allegations made by the other partners that we had reneged on an alleged agreement to buy out their interests in the Canadian partnership. We recorded a write-off of approximately $26.7 million in the fourth quarter of fiscal
2001, which represented the carrying value of our Canadian investment and related assets, and settlement expenses of approximately $10.3 million related to the settlement of the related dispute.



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 care properly for some of the animals we sell. For example, allegations were made
in a complaint filed in June 2002 in the San Francisco Superior Court by the San Francisco City Attorneys office to the effect that certain associates have not properly cared for companion animals for sale in our two San Francisco stores. The
complaint, which has been subsequently transferred to the Santa Clara Superior Court, seeks damages, penalties and an injunction against the sale of companion animals in our San Francisco stores. The complaint and related news reports have caused
negative publicity and subsequently certain other California counties have indicated that they are reviewing our animal care policies. We take seriously any allegations regarding the proper care of companion animals and have taken steps to reiterate
to all our associates the importance of proper care for all companion animals in all our stores. We are responding to the complaint and are defending it vigorously. The complaint and any similar allegations or actions which could be filed in the
future could cause negative publicity which could 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



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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.



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.



Concentration of ownership among our existing executive officers, directors and principal
stockholders may prevent new investors from influencing significant corporate decisions.



Our executive officers, directors and principal stockholders currently own, in the aggregate, approximately 36% of our outstanding common stock. As a result, these stockholders have significant influence over all
matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation and approval of significant corporate transactions, and will otherwise have significant influence over our management and
policies. Green Equity Investors III, L.P. and TPG Partners III, L.P. and its affiliates are parties to an agreement, pursuant to which they agreed to vote their shares of PETCO common stock for two nominees of Green Equity Investors III, L.P. and
two nominees of TPG Partners III, L.P. and its affiliates to serve on our board of directors. This concentration of ownership may have the effect of deterring hostile takeovers, delaying or preventing changes in control or changes in management, or
limiting the ability of our other stockholders to approve transactions that they may deem to be in their best interests.



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 31, 2004, we had 57,473,300 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. In addition, in February 2004, we filed a registration statement on
Form S-3 to register 12,226,909 shares of common stock currently held by Green Equity Investors III, L.P., TPG Partners III, L.P. and its affiliates, and certain of our senior executives, which registration statement was declared effective in
February 2004. As a result, these shares of common stock are available for sale in the public market from time to time.



We also have 4,136,139 shares of common stock reserved for issuance under our stock option and incentive plans, of which 3,963,853 shares were subject to
outstanding options as of March 31, 2004. 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



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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. If similar litigation were instituted against us, it 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.



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.
| | - | ----------------------------------------------



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.



|ITEM 2. | PROPERTIES
|------- | ----------



We lease all of our store and warehouse locations. The original lease terms for our stores generally range from five to 20 years, with many of these
leases containing renewal options. Leases on 128 stores expire within the next three years. Of these leases, 101 contain renewal options.



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Our headquarters, located in San Diego, California, consists of three owned facilities comprising a total
of 156,000 square feet. One of the San Diego facilities is financed under an obligation that expires in February 2006. We also lease three central and five regional distribution centers. Our three central distribution centers collectively occupy
approximately 900,000 square feet of space in Monroe, New Jersey; Joliet, Illinois; and Mira Loma, California under leases that expire in May 2018, April 2005 and September 2005, respectively. Our five regional distribution centers collectively
occupy approximately 240,000 square feet of space in Stockton, California; Portland, Oregon; New Hope, Minnesota; Mansfield, Massachusetts; and Garland, Texas under leases that expire in April 2009, February 2007, September 2007, December 2008 and
August 2004, respectively. Except with respect to the leases for our Stockton, California; Portland, Oregon; and Mansfield, Massachusetts facilities, all of our distribution center leases contain a renewal option.



We design our stores to offer a fun, vibrant and enjoyable shopping
experience for our customers and their pets. A typical PETCO store is moderately sized at 12,000 to 15,000 square feet, with low ceilings, attractive signage and bright lighting, resulting in a distinctive retail setting. Below is a table listing,
for our 654 stores at January 31, 2004, the number of stores by state:



Number of PETCO Stores

as of January 31, 2004



|                     |  |                 |  |               |  |                
|-------------------- |  | --------------- |  | ------------- |  | ---------------
|State                |  | Number ofStores |  | State         |  | Number ofStores
|Alabama              |  | 4               |  | Mississippi   |  | 1              
|Arizona              |  | 17              |  | Missouri      |  | 16             
|Arkansas             |  | 6               |  | Montana       |  | 2              
|California           |  | 137             |  | Nebraska      |  | 6              
|Colorado             |  | 17              |  | Nevada        |  | 9              
|Connecticut          |  | 15              |  | New Hampshire |  | 7              
|Delaware             |  | 1               |  | New Jersey    |  | 17             
|District of Columbia |  | 1               |  | New Mexico    |  | 4              
|Florida              |  | 15              |  | New York      |  | 36             
|Georgia              |  | 12              |  | North Dakota  |  | 2              
|Idaho                |  | 5               |  | Ohio          |  | 4              
|Illinois             |  | 43              |  | Oregon        |  | 15             
|Indiana              |  | 7               |  | Pennsylvania  |  | 28             
|Iowa                 |  | 7               |  | Rhode Island  |  | 3              
|Kansas               |  | 7               |  | South Dakota  |  | 1              
|Kentucky             |  | 1               |  | Tennessee     |  | 10             
|Louisiana            |  | 5               |  | Texas         |  | 54             
|Maine                |  | 3               |  | Utah          |  | 6              
|Maryland             |  | 12              |  | Vermont       |  | 1              
|Massachusetts        |  | 24              |  | Virginia      |  | 13             
|Michigan             |  | 18              |  | Washington    |  | 29             
|Minnesota            |  | 19              |  | Wisconsin     |  | 14             



|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------



In June 2002, allegations were made in a complaint filed in the San Francisco Superior Court by the San Francisco City Attorneys office to the
effect that certain associates have not properly cared for companion animals for sale in our two San Francisco stores. The complaint, which has been subsequently transferred to the Santa Clara Superior Court, seeks damages, penalties and an
injunction against the sale of companion animals in our San Francisco stores. The complaint and related news reports have caused negative publicity and



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subsequently certain other California counties have indicated that they are reviewing our animal care policies. We take seriously any allegations regarding
the proper care of companion animals and have taken steps to reiterate to all our associates the importance of proper care for all companion animals in all of our stores. We are responding to the complaint and are defending it vigorously. The
complaint and any similar actions which could be filed in the future could cause negative publicity, which could have a material adverse effect on our results of operations.



The District Attorneys of various California counties, through the San Diego and Los Angeles District Attorneys, have
informed us that they are investigating certain alleged weights and measures violations. The investigation specifically concerns whether checkout price scanners used in our stores identified prices that in some instances did not match the posted
prices for certain products, and whether the sale tags regarding those products were misleading. No legal action has been filed against us with respect to this investigation. We are working cooperatively with the District Attorneys to reach a
satisfactory resolution of this matter, and do not believe that the outcome of the matter will have a material impact on our results of operations or financial condition in any future period. From time to time, we also receive inquiries or notices
from other jurisdictions or regulatory authorities with respect to similar alleged weights and measures issues or violations, which we respond to in the ordinary course of business.



In April 2003, three alleged applicants for employment instituted an action against over 100 retailers, including us, in the
Superior Court of California for the County of Los Angeles. The complaint in the action was filed individually and on behalf of a purported class. The complaint alleges that the individual plaintiffs and the purported class members sought employment
with the other retailers, or us, and that the written employment application asked, in violation of the California Labor Code and Unfair Business Practices Act, about convictions for certain marijuana offenses and about convictions that resulted in
the defendant being sent to a diversion program. In December 2003, the court granted our request to dismiss the action due to certain defects regarding parties named in the initial complaint. Shortly thereafter, the three plaintiffs filed lawsuits
against each retailer separately, but to date we have not been formally served with a complaint. Following formal receipt of the complaint, we intend to vigorously defend the action, and do not believe that the outcome of the matter will have a
material impact on our results of operations or financial condition in any future period.



In October 2003, we were served with a Civil Investigative Demand from the United States Federal Trade Commission, or FTC, seeking information and documents relating to our e-commerce website, petco.com, and more
particularly our policies and practices regarding the protection of personal information furnished by customers to the website. The request stems from an incident in late June 2003 in which a self-proclaimed hacker purportedly obtained unauthorized
access to a portion of our website. We have cooperated with the FTCs inquiry by providing documents and information, and have taken and are taking additional steps to insure that our e-commerce customers privacy is maintained. At the
present time, we are unable to determine whether the FTC will initiate any enforcement action against us or the financial impact any such action might entail.



We have recorded accruals for estimated losses related to certain of the above matters. We are also involved in other routine litigation arising in the
ordinary course of our business. While the results of such other 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 2003.



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PART II



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|------- | ---------------------------------------------------------------------



Market Information



Our common stock has been listed on The Nasdaq Stock Markets National Market under the symbol PETC since it was initially offered to the
public on February 22, 2002. Prior to that time, there had not been a market for our common stock. The following table shows the high and low per share sale prices of our common stock, as reported on the Nasdaq National Market for the periods
indicated:



|                                                |  |      |       |     |   |      
|----------------------------------------------- |  | ---- | ----- | --- | - | -----
|                                                |  | High |       | Low
|Fiscal 2002                                     |  |      |       |     |   |      
|First Quarter (commencing on February 22, 2002) |  | $    | 25.75 |     | $ | 19.00
|Second Quarter                                  |  |      | 26.70 |     |   | 16.55
|Third Quarter                                   |  |      | 25.20 |     |   | 16.31
|Fourth Quarter                                  |  |      | 25.95 |     |   | 20.57
|                                                |  |     
|Fiscal 2003                                     |  |      |       |     |   |      
|First Quarter                                   |  | $    | 21.72 |     | $ | 15.20
|Second Quarter                                  |  |      | 25.75 |     |   | 18.92
|Third Quarter                                   |  |      | 34.40 |     |   | 23.49
|Fourth Quarter                                  |  |      | 35.87 |     |   | 28.86



On March 31, 2004, the
last reported sale price of our common stock on the Nasdaq National Market was $28.18. As of March 31, 2004, there were approximately 100 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, including the DGCL, which provides that dividends are only payable out of surplus or current net profits.



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|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------



The following selected historical consolidated financial data as of and for the fiscal years ended January 29, 2000, February 3, 2001, February 2, 2002,
February 1, 2003 and January 31, 2004, 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                                               |        
|                                                                                                            |  | Jan. 29,2000                                                    |         |   | Feb. 3,2001 (1) |   |           | Feb. 2, 2002 |  |   | Feb. 1, 2003 |   |  | Jan. 31, 2004 |          
|                                                                                                            |  | (amounts in thousands, except per share amounts and store data) |        
|Statement of Operations Data:                                                                               |  |                                                                 |         |   |                 |   |           |              |  |   |              |   |  |               |           |   |  |   |           |  
|Net sales                                                                                                   |  | $                                                               | 990,289 |   |                 | $ | 1,151,178 |              |  | $ | 1,300,949    |   |  | $             | 1,476,634 |   |  | $ | 1,654,138 |  
|Cost of sales and occupancy costs                                                                           |  |                                                                 | 720,711 |   |                 |   | 817,084   |              |  |   | 909,186      |   |  |               | 1,016,249 |   |  |   | 1,104,649 |  
|                                                                                                            |  |                                                                 |         |   |                 |   |           |              |  |   |              |   |  |               |           |   |  |   |           |  
|Gross profit                                                                                                |  |                                                                 | 269,578 |   |                 |   | 334,094   |              |  |   | 391,763      |   |  |               | 460,385   |   |  |   | 549,489   |  
|Selling, general and administrative expenses                                                                |  |                                                                 | 220,800 |   |                 |   | 263,713   |              |  |   | 304,967      |   |  |               | 343,752   |   |  |   | 411,816   |  
|Management fees and termination costs                                                                       |  |                                                                 |        |   |                 |   | 1,040     |              |  |   | 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                                                                              |  |                                                                 |        |   |                 |   | 55,928    |              |  |   | 445          |   |  |               |          |   |  |   |          |  
|                                                                                                            |  |                                                                 |         |   |                 |   |           |              |  |   |              |   |  |               |           |   |  |   |           |  
|Operating income (2)                                                                                        |  |                                                                 | 48,778  |   |                 |   | 13,413    |              |  |   | 31,846       |   |  |               | 91,988    |   |  |   | 137,673   |  
|Interest expense, net                                                                                       |  |                                                                 | 8,936   |   |                 |   | 22,971    |              |  |   | 40,837       |   |  |               | 32,666    |   |  |   | 26,115    |  
|Debt retirement costs                                                                                       |  |                                                                 |        |   |                 |   | 2,089     |              |  |   | 20,830       |   |  |               | 3,336     |   |  |   | 12,189    |  
|                                                                                                            |  |                                                                 |         |   |                 |   |           |              |  |   |              |   |  |               |           |   |  |   |           |  
|Earnings (loss) before Internet operations and equity in loss of unconsolidated affiliates and income taxes |  |                                                                 | 39,842  |   |                 |   | (11,647   | )            |  |   | (29,821      | ) |  |               | 55,986    |   |  |   | 99,369    |  
|Internet operations and equity in loss of unconsolidated affiliates                                         |  |                                                                 | (1,254  | ) |                 |   | (4,543    | )            |  |   | (3,083       | ) |  |               |          |   |  |   |          |  
|                                                                                                            |  |                                                                 |         |   |                 |   |           |              |  |   |              |   |  |               |           |   |  |   |           |  
|Earnings (loss) before income taxes                                                                         |  |                                                                 | 38,588  |   |                 |   | (16,190   | )            |  |   | (32,904      | ) |  |               | 55,986    |   |  |   | 99,369    |  
|Income taxes (benefit)                                                                                      |  |                                                                 | 16,831  |   |                 |   | 4,149     |              |  |   | (10,103      | ) |  |               | 23,845    |   |  |   | 34,656    |  
|                                                                                                            |  |                                                                 |         |   |                 |   |           |              |  |   |              |   |  |               |           |   |  |   |           |  
|Net earnings (loss)                                                                                         |  |                                                                 | 21,757  |   |                 |   | (20,339   | )            |  |   | (22,801      | ) |  |               | 32,141    |   |  |   | 64,713    |  
|Increase in carrying amount and premium on redemption of redeemable preferred stock                         |  |                                                                 |        |   |                 |   | (8,486    | )            |  |   | (27,745      | ) |  |               | (20,487   | ) |  |   |          |  
|                                                                                                            |  |                                                                 |         |   |                 |   |           |              |  |   |              |   |  |               |           |   |  |   |           |  
|Net earnings (loss) available to common stockholders                                                        |  | $                                                               | 21,757  |   |                 | $ | (28,825   | )            |  | $ | (50,546      | ) |  | $             | 11,654    |   |  | $ | 64,713    |  
|                                                                                                            |  |                                                                 |         |   |                 |   |           |              |  |   |              |   |  |               |           |   |  |   |           |  
|Basic earnings (loss) per share                                                                             |  | $                                                               | 0.02    |   |                 | $ | (0.05     | )            |  | $ | (1.32        | ) |  | $             | 0.21      |   |  | $ | 1.13      |  
|Diluted earnings (loss) per share                                                                           |  | $                                                               | 0.02    |   |                 | $ | (0.05     | )            |  | $ | (1.32        | ) |  | $             | 0.20      |   |  | $ | 1.11      |  
|Shares used for computing basic earnings (loss) per share                                                   |  |                                                                 | 928,136 |   |                 |   | 632,162   |              |  |   | 38,429       |   |  |               | 56,094    |   |  |   | 57,422    |  
|Shares used for computing diluted earnings (loss) per share                                                 |  |                                                                 | 938,872 |   |                 |   | 632,162   |              |  |   | 38,429       |   |  |               | 56,906    |   |  |   | 58,299    |  
|Other Financial Data:                                                                                       |  |                                                                 |         |   |                 |   |           |              |  |   |              |   |  |               |           |   |  |   |           |  
|Gross profit margin                                                                                         |  |                                                                 | 27.2    | % |                 |   | 29.0      | %            |  |   | 30.1         | % |  |               | 31.2      | % |  |   | 33.2      | %
|Depreciation and amortization                                                                               |  | $                                                               | 39,280  |   |                 | $ | 46,798    |              |  | $ | 49,449       |   |  | $             | 50,526    |   |  | $ | 58,780    |  
|Inventory turns (3)                                                                                         |  |                                                                 | 6.5     | x |                 |   | 6.7       | x            |  |   | 7.4          | x |  |               | 7.7       | x |  |   | 7.8       | x
|Store Data:                                                                                                 |  |                                                                 |         |   |                 |   |           |              |  |   |              |   |  |               |           |   |  |   |           |  
|Percentage increase in comparable store net sales                                                           |  |                                                                 | 11.1    | % |                 |   | 6.4       | %            |  |   | 8.6          | % |  |               | 8.0       | % |  |   | 5.6       | %
|Net sales per square foot (4)                                                                               |  | $                                                               | 168     |   |                 | $ | 177       | (5)          |  | $ | 180          |   |  | $             | 188       |   |  | $ | 190       |  
|Number of stores at year end                                                                                |  |                                                                 | 490     |   |                 |   | 528       |              |  |   | 561          |   |  |               | 600       |   |  |   | 654       |  



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|                                             |  |                        |         |                 |   |          |             |  |   |             |   |  |              |         |   |  |   |        
|-------------------------------------------- |  | ---------------------- | ------- | --------------- | - | -------- | ----------- |  | - | ----------- | - |  | ------------ | ------- | - |  | - | -------
|                                             |  | As of                 
|                                             |  | Jan. 29,2000           |         | Feb. 3,2001 (1) |   |          | Feb. 2,2002 |  |   | Feb. 1,2003 |   |  | Jan. 31,2004
|                                             |  | (amounts in thousands)
|Balance Sheet Data:                          |  |                        |         |                 |   |          |             |  |   |             |   |  |              |         |   |  |   |        
|Cash and cash equivalents                    |  | $                      | 36,059  |                 | $ | 18,044   |             |  | $ | 36,215      |   |  | $            | 108,937 |   |  | $ | 62,201 
|Working capital                              |  |                        | 68,883  |                 |   | 39,523   |             |  |   | 68,429      |   |  |              | 113,051 |   |  |   | 49,006 
|Total assets                                 |  |                        | 453,894 |                 |   | 454,319  |             |  |   | 473,572     |   |  |              | 554,855 |   |  |   | 551,862
|Total debt, including current maturities (6) |  |                        | 118,465 |                 |   | 391,191  |             |  |   | 401,157     |   |  |              | 365,541 |   |  |   | 263,398
|Redeemable preferred stock                   |  |                        |        |                 |   | 191,537  |             |  |   | 219,282     |   |  |              |        |   |  |   |       
|Stockholders equity (deficit)               |  |                        | 205,890 |                 |   | (268,407 | )           |  |   | (305,707    | ) |  |              | (11,083 | ) |  |   | 53,133 

---

|(1) | The fiscal year ended February 3, 2001 consisted of 53 weeks, as compared to 52 weeks for each of the fiscal years ended January 29, 2000, February 2, 2002, February 1, 2003 and
January 31, 2004.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Operating income includes the following unusual charges and expenses for the periods indicated:
|--- | -----------------------------------------------------------------------------------------------



|                                         |  |                        |   |             |   |             |  |             |        |              |   |        |  |   |  
|---------------------------------------- |  | ---------------------- | - | ----------- | - | ----------- |  | ----------- | ------ | ------------ | - | ------ |  | - | -
|                                         |  | Fiscal Year Ended     
|                                         |  | Jan. 29,2000           |   | Feb. 3,2001 |   | Feb. 2,2002 |  | Feb. 1,2003 |        | Jan. 31,2004
|                                         |  | (amounts in thousands)
|Merger and non-recurring costs           |  | $                      |  |             | $ | 55,928      |  | $           | 445    |              | $ |       |  | $ | 
|Write-off of Canadian investment         |  |                        |  |             |   |            |  |             | 37,035 |              |   |       |  |   | 
|Management fees and terminationcosts (a) |  |                        |  |             |   | 1,040       |  |             | 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                                    |  | $                      |  |             | $ | 56,968      |  | $           | 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 deemed increase in fair value related to outstanding stock options for accounting purposes 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.
| | --- | ------------------------------------------------------------



|(3) | Calculated by dividing cost of sales and occupancy costs, excluding the impact of the 53rdweek in fiscal 2000, for the most recent four quarters, by average fiscal quarter end inventory for the five most recent quarters.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Calculated by dividing net sales by gross square footage of stores open, weighted by the number of months stores are open during the period.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------

|(5) | As adjusted to a 52-week period, net sales per square foot would have been $173 for the fiscal year ended February 3, 2001.
|--- | ---------------------------------------------------------------------------------------------------------------------------

|(6) | 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 1 of this
Annual Report under the heading Certain Cautionary Statements. 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 31, 2004, we operated 654 stores in 43 states and the
District of Columbia. Our strategy is to offer our customers a complete assortment of pet-related products and services at competitive prices, with superior levels of customer service at convenient locations. Our stores combine the broad merchandise
selection and everyday low prices of a pet supply warehouse store with the convenient location and knowledgeable customer service of a neighborhood pet supply store. We believe that this combination differentiates our stores and provides us with a
competitive advantage. Our principal format is a 12,000 to 15,000 square foot store, conveniently located near local neighborhood shopping destinations, including supermarkets, bookstores, coffee shops, dry cleaners and video stores, where our
target pet parent customer makes regular weekly shopping trips. We believe that our stores are well positioned, both in terms of product offerings and location, to benefit from favorable long-term demographic trends, a growing pet
population and an increasing willingness of pet owners to spend on their pets. Since the middle of 2001, all new stores have been opened in our new millennium format, which incorporates a more dramatic presentation of our companion animals and
emphasizes higher-margin supplies categories.



We have
increased our net sales from $839.6 million in fiscal 1998 to $1.65 billion in fiscal 2003, for a compound annual growth rate, or CAGR, of 14.5%. We also increased our operating income from $31.8 million in fiscal 2001, which includes unusual
charges and expenses totaling $58.0 million, to $137.7 million in fiscal 2003. The principal contributors to this improvement in our financial performance include: (1) our ability to generate continuous comparable store net sales growth; (2)
strategic expansion in both existing and new markets; (3) targeted merchandising efforts to drive greater sales of higher margin supplies and services, which have grown to 69.3% of net sales in fiscal 2003, up from 62.2% of net sales in fiscal 1999;
(4) our expanding store base that offers economies of scale and purchasing efficiencies; and (5) 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
approximately 8% to 10% per year on a long-term basis, both by focusing on existing markets and by targeting one or two new geographic markets per year. Our year-over-year increase in square footage in fiscal 2003 was 10.5%, and our total store
square footage at January 31, 2004 was approximately 9.0 million square feet. We plan to open 90 new stores in fiscal 2004, or 70 stores net of relocations and closings. Our new stores generally have become profitable by the end of their first year
of operation, and we target for each store a five-year return on investment of more than 20%. In fiscal 2004, we intend to remodel 50 to 55 of our existing stores into our millennium format, and we plan to remodel additional existing stores in the
future. We also plan to relocate certain existing stores and close 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. We believe that the principal competitive factors influencing our business are product selection and quality,
convenient store locations, customer service and price. Our strategy is to focus our assortment on specialty products and premium pet foods, which minimizes the



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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.



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 |   
|                                                                                   |  | Feb. 2,2002       |    |  | Feb. 1,2003 |   |  | Jan. 31,2004 |  
|Net sales                                                                          |  | 100.0             | %  |  | 100.0       | % |  | 100.0        | %
|Cost of sales and occupancy costs                                                  |  | 69.9              |    |  | 68.8        |   |  | 66.8         |  
|                                                                                   |  |                   |    |  |             |   |  |              |  
|Gross profit                                                                       |  | 30.1              |    |  | 31.2        |   |  | 33.2         |  
|Selling, general and administrative expenses                                       |  | 23.5              |    |  | 23.3        |   |  | 24.9         |  
|Management fees and termination costs                                              |  | 0.2               |    |  | 0.9         |   |  |             |  
|Stock-based compensation and other costs                                           |  | 1.1               |    |  | 0.6         |   |  |             |  
|Litigation settlement                                                              |  |                  |    |  | 0.2         |   |  |             |  
|Write-off of Canadian investment                                                   |  | 2.9               |    |  |            |   |  |             |  
|                                                                                   |  |                   |    |  |             |   |  |              |  
|Operating income                                                                   |  | 2.4               |    |  | 6.2         |   |  | 8.3          |  
|Interest expense, net                                                              |  | 3.1               |    |  | 2.2         |   |  | 1.6          |  
|Debt retirement costs                                                              |  | 1.6               |    |  | 0.2         |   |  | 0.7          |  
|                                                                                   |  |                   |    |  |             |   |  |              |  
|Earnings (loss) before equity in loss of unconsolidated affiliate and income taxes |  | (2.3              | )  |  | 3.8         |   |  | 6.0          |  
|Equity in loss of unconsolidated affiliate                                         |  | (0.2              | )  |  |            |   |  |             |  
|                                                                                   |  |                   |    |  |             |   |  |              |  
|Earnings (loss) before income taxes                                                |  | (2.5              | )  |  | 3.8         |   |  | 6.0          |  
|Income taxes (benefit)                                                             |  | (0.7              | )  |  | 1.6         |   |  | 2.1          |  
|                                                                                   |  |                   |    |  |             |   |  |              |  
|Net earnings (loss)                                                                |  | (1.8              | )% |  | 2.2         | % |  | 3.9          | %
|                                                                                   |  |                   |    |  |             |   |  |              |  



Fiscal Year Ended January 31, 2004
Compared with Fiscal Year Ended February 1, 2003



Net
sales increased 12.0% to $1.65 billion for fiscal 2003, from $1.48 billion for fiscal 2002. The increase in net sales resulted primarily from the comparable store net sales increase of 5.6% and the addition of 63 new stores, or 54 stores net of
relocations and closures. Our store base has increased to 654 stores as of January 31, 2004, and our year-over-year increase in square footage in fiscal 2003 was 10.5%. The comparable store net sales increase was attributable to increased customer
traffic, improvements in product mix to higher-price categories such as pet accessories, supplies and services and, to a lesser extent, increased prices. The increase in comparable store net sales accounted for approximately $82.0 million, or 46.2%,
of the net sales increase. The net increase in our store base accounted for approximately $95.5 million, or 53.8%, of the net sales increase.



Gross profit, defined as net sales less cost of sales including store occupancy costs, increased $89.1 million, or 19.4%, to $549.5 million for fiscal
2003, from $460.4 million for fiscal 2002. Gross profit as a percentage of net sales increased to 33.2% for fiscal 2003 from 31.2% in the prior year period. The increase was driven partly by the continuing change in mix from lower-margin premium pet
food sales to higher-margin categories such as pet accessories, supplies and services, which accounted for an increase in gross profit of 0.9% of net sales. The balance of the increase is a result of our adoption in fiscal 2003 of Emerging Issues
Task Force, or EITF, Issue No. 02-16, an accounting change related to the treatment of cash consideration received from vendors. Pursuant to this accounting change, substantially all of our vendor support is deferred as a reduction of inventory



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purchased and realized as a reduction of cost of sales as the related inventory is sold. In prior years, we recorded certain vendor support, including
cooperative advertising support, as a reduction of selling, general and administrative expenses when earned. For fiscal 2003, the effect of this accounting change consisted of the reclassification of $24.2 million, or 1.5% of net sales, of vendor
consideration from selling, general and administrative expenses to cost of sales and occupancy costs, before the deferral of $6.5 million, or 0.4% of net sales, as a reduction of inventory.



Selling, general and administrative expenses increased $68.0 million, or
19.8%, to $411.8 million for fiscal 2003, from $343.8 million for fiscal 2002. As a percentage of net sales, selling, general and administrative expenses increased to 24.9% for fiscal 2003 from 23.3% in the prior year period. Most of this increase
resulted from the adoption of EITF Issue No. 02-16, which accounted for an increase in selling, general and administrative expenses of $24.2 million, or 1.5% of net sales, in fiscal 2003 compared with the prior year. Excluding the impact of this
accounting change, selling, general and administrative expenses increased by 0.1% of net sales in fiscal 2003 from the prior year. Increased store remodel costs and increased depreciation expense slightly offset the benefit from the leveraging of
store and other operating costs.



In fiscal 2002, we incurred
management fees and termination costs of $12.8 million related to a management services agreement that we entered into in conjunction with our leveraged recapitalization in fiscal 2000. We paid $12.5 million in termination costs to terminate this
agreement in February 2002 in conjunction with our initial public offering.



In fiscal 2002, we incurred non-cash stock-based compensation and other costs of $8.4 million primarily related to stock options granted in periods prior to our initial public offering in February 2002. All
outstanding options prior to the initial public offering were modified and became fully vested at the time of the initial public offering. Stock-based compensation and other costs in fiscal 2002 also included $1.2 million of financing and legal
expenses related to the initial public offering.



In fiscal
2002, we incurred a litigation settlement of $3.5 million relating to the settlement of a complaint filed against us alleging violations of the California Labor Code and the Business and Professions Code requirements to pay overtime to certain
employees.



Operating income was $137.7 million in fiscal 2003,
or 8.3% of net sales, compared with operating income of $92.0 million in fiscal 2002, or 6.2% of net sales. Operating income in fiscal 2002 included management fees and termination costs of $12.8 million pursuant to the management services agreement
that was terminated in connection with our initial public offering in February 2002, non-cash stock-based compensation and other costs of $9.6 million, and a litigation settlement of $3.5 million. Together, these items made up 1.8% of net sales in
fiscal 2002.



Net interest expense was $26.1 million in fiscal
2003, compared with net interest expense of $32.7 million in fiscal 2002. The reduction in interest expense related primarily to a reduction in interest expense on our senior credit facility. This decrease was due mainly to a reduction in variable
interest rates and the early repayment of $50.0 million on our term loan facility in the second quarter of fiscal 2003.



In fiscal 2003, we incurred debt retirement costs of $10.6 million, including a premium of $10.0 million, 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 senior credit facility in the second
quarter. In fiscal 2002, we incurred debt retirement costs of $3.3 million related to the repurchase of $30.0 million in principal amount of our 10.75% senior subordinated notes.



Income taxes were $34.7 million in fiscal 2003, compared with income taxes of $23.8 million in fiscal 2002. Our effective
tax rate was 34.9% in fiscal 2003 and 42.6% in fiscal 2002. During fiscal 2003, we realized a tax



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benefit of approximately $0.4 million with respect to certain state net operating losses, a tax benefit of approximately $3.4 million with respect to certain
federal net operating losses, and a tax benefit of approximately $0.4 million with respect to certain federal and state credits. Excluding the tax benefits resulting from the federal and state net operating losses and tax credits, we had an
effective tax rate of approximately 39% for fiscal 2003. In fiscal 2002, we did not recognize any tax benefits related to certain expenses, including stock-based compensation, which resulted in a higher effective tax rate. Excluding the effect of
such nondeductible expenses, we had an effective tax rate of approximately 39% for fiscal 2002.



Net earnings were $64.7 million in fiscal 2003, compared with net earnings of $32.1 million in fiscal 2002. Our fiscal 2002 results included management
fees and termination costs pursuant to the management services agreement that was terminated in connection with our initial public offering in February 2002, non-cash stock-based compensation and other costs, and a litigation settlement totaling
$19.8 million on a net-of-tax basis.



Fiscal Year Ended February 1, 2003
Compared with Fiscal Year Ended February 2, 2002



Net
sales increased 13.5% to $1.48 billion for fiscal 2002, from $1.30 billion for fiscal 2001. The increase in net sales resulted primarily from the comparable store net sales increase of 8.0% and the addition of 61 stores, or 39 stores net of
relocations and closures. The comparable store net sales increase was attributable to maturing stores, increased marketing and merchandising efforts and increased customer traffic. The increase in comparable store net sales accounted for
approximately $102.8 million, or 58.5%, of the net sales increase. The net increase in our store base accounted for approximately $72.9 million, or 41.5%, of the net sales increase.



Gross profit, defined as net sales less the cost of sales including store occupancy costs, increased $68.6 million, or
17.5%, to $460.4 million for fiscal 2002, from $391.8 million for fiscal 2001. Gross profit in fiscal 2002 included $1.4 million in non-cash stock-based compensation expense related to stock options granted in periods prior to our initial public
offering in February 2002, compared to $3.0 million in fiscal 2001. Gross profit, excluding the non-cash stock-based compensation expense, as a percentage of net sales increased to 31.3% for fiscal 2002, from 30.3% in the prior year period. The
increase was driven by the continuing change in mix from lower-margin premium pet food sales to higher-margin categories, such as companion animals, toys, supplies and services; favorable shrink results; and improved margins on premium pet food due
to shifts within the mix of pet food to higher-margin segments. The current year period also benefited from the leveraging of occupancy costs and efficiencies in distribution logistics and freight costs.



Selling, general and administrative expenses increased $38.8 million, or
12.7%, to $343.8 million for fiscal 2002, from $305.0 million for fiscal 2001. As a percentage of net sales, these expenses decreased to 23.3% for fiscal 2002 from 23.5% in the prior year period. Increased investments in store associate training,
increased pre-opening costs, increased fees to process debit and credit cards, and increased insurance, medical, dental, legal and travel costs offset the benefit from the elimination of goodwill amortization and the leveraging of store operating
costs. The adoption of SFAS No. 142 resulted in a $5.0 million benefit from the elimination of goodwill amortization, which was slightly offset by the recognition of goodwill impairment of $0.3 million in the second quarter of fiscal 2002.



Management fees and termination costs were $12.8 million for
fiscal 2002, compared to management fees of $3.1 million in the prior year period. We paid $12.5 million in termination costs in February 2002 to terminate the management services agreement that we entered into in conjunction with our leveraged
recapitalization.



Stock-based compensation and other costs
decreased to $8.4 million for fiscal 2002 from $14.4 million in the prior year period. The non-cash stock-based compensation expense relates to stock options granted in periods prior to our initial public offering in February 2002. All outstanding
options prior to the initial public offering were modified and became fully vested at the time of the initial public offering. Stock-based compensation and other costs in fiscal 2002 also include $1.2 million of financing and legal expenses related
to the initial public offering.



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Litigation settlement of $3.5 million in fiscal 2002 relates to the settlement of a complaint filed
against us alleging violations of the California Labor Code and the Business and Professions Code requirements to pay overtime to certain employees.



We previously owned a non-controlling limited partnership interest in Canadian Petcetera Limited Partnership, which operated retail pet food and supplies
stores in Canada. On January 28, 2002, we terminated our relationship with the partnership. Accordingly, we recorded $37.0 million for the write-off of our Canadian investment in the fourth fiscal quarter of 2001, consisting of the write-off of
approximately $26.7 million, which represented the carrying value of our investment and related assets as of the termination date, and approximately $10.3 million of settlement expense as a result of the settlement of a dispute between us and the
other partners of the partnership.



Operating income was $92.0
million in fiscal 2002, or 6.2% of net sales, compared with operating income of $31.8 million in fiscal 2001, or 2.4% of net sales. Operating income includes the $37.0 million write-off and settlement related to our former Canadian investment in
fiscal 2001, management fees and termination costs of $12.8 million and $3.1 million in fiscal 2002 and 2001, respectively, pursuant to a management services agreement that was terminated in connection with our initial public offering, non-cash
stock-based compensation and other costs of $9.6 million and $17.4 million in fiscal 2002 and 2001, respectively, and litigation settlement expense of $3.5 million in fiscal 2002.



Net interest expense was $32.7 million in fiscal 2002, compared with net interest expense of $40.8 million in fiscal 2001.
Lower debt levels and decreased interest rates, as a result of the refinancing of our senior subordinated notes and the amendment and restatement of our senior credit facility, both in October 2001, the repurchase of $30.0 million in principal
amount of our senior subordinated notes in the first quarter of fiscal 2002 and the refinancing of our senior credit facility in August 2002, contributed to the reduction in interest expense.



We repurchased $30.0 million in principal amount of our 10.75% senior
subordinated notes due 2011 in fiscal 2002, resulting in debt retirement costs upon early repurchase of $3.3 million. We redeemed our 13% senior subordinated notes due 2010 in fiscal 2001, resulting in debt retirement costs upon early redemption of
$19.5 million. We retired approximately $71 million of our term loan facilities in fiscal 2001, resulting in debt retirement costs upon early retirement of $1.3 million.



We recognized $3.1 million in equity in loss of unconsolidated affiliate for fiscal 2001 from our former limited partner
interest in Canadian Petcetera Limited Partnership. We accounted for our investment in the limited partnership using the equity method as we did not exercise control over the limited partnership, and we recorded our proportionate share of earnings
or loss according to the partnership agreement through January 28, 2002, when we terminated our relationship with the partnership.



We had income taxes of $23.8 million in fiscal 2002, compared with an income tax benefit of $10.1 million in fiscal 2001. Our effective tax rate before
non-recurring costs was approximately 39% in fiscal 2002, and our effective tax rate before equity in loss of unconsolidated affiliate and non-deductible costs was approximately 39% in fiscal 2001. We did not recognize any tax benefits from our
equity in loss of unconsolidated affiliate in fiscal 2001, and we did not recognize any tax benefits related to certain expenses, including stock-based compensation, in fiscal 2002, resulting in effective tax rates of 42.6% incomes taxes and 30.7%
income tax benefit in fiscal 2002 and fiscal 2001, respectively.



Net earnings were $32.1 million in fiscal 2002, compared with a net loss of $22.8 million in fiscal 2001. Our results include the write-off and settlement related to our former Canadian investment, management fees and termination costs
pursuant to a management services agreement that was terminated in connection with our initial public offering, non-cash stock-based compensation and other costs, a litigation settlement, and equity in loss of unconsolidated affiliate totaling $19.8
million and $52.7 million on a net-of-tax basis in fiscal 2002 and fiscal 2001, respectively.



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The holders of our series A preferred stock and our series B preferred stock were entitled to receive
dividends at a rate of 14% and 12%, respectively. We were not required to pay these dividends in cash. The dividends that were not paid in cash compounded quarterly. The dividends earned were added to the principal balance of the preferred stock,
with a corresponding deduction in net income available to common stockholders. All of the preferred stock was redeemed in the first quarter of fiscal 2002 in connection with our initial public offering.



Quarterly Data



The following tables set forth the unaudited quarterly results of operations for fiscal 2002 and fiscal 2003. 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 2002                                       |  | May 4, 2002            |           |   | Aug. 3, 2002 |   |           | Nov. 2, 2002 |  |   | Feb. 1, 2003  |  
|                                                  |  | (dollars in thousands) |          
|Net sales                                         |  | $                      | 349,212   |   |              | $ | 354,469   |              |  | $ | 367,530       |   |  | $ | 405,423   |  
|Gross profit                                      |  |                        | 103,703   |   |              |   | 108,420   |              |  |   | 114,277       |   |  |   | 133,985   |  
|Operating income (1)                              |  |                        | 654       |   |              |   | 24,653    |              |  |   | 27,817        |   |  |   | 38,864    |  
|Net earnings (loss) (1)                           |  |                        | (9,227    | ) |              |   | 9,930     |              |  |   | 12,006        |   |  |   | 19,432    |  
|Stores open at end of period                      |  |                        | 571       |   |              |   | 585       |              |  |   | 600           |   |  |   | 600       |  
|Aggregate gross square footage                    |  |                        | 7,607,758 |   |              |   | 7,830,343 |              |  |   | 8,106,409     |   |  |   | 8,116,344 |  
|Percentage increase in comparable store net sales |  |                        | 9.3       | % |              |   | 8.5       | %            |  |   | 8.3           | % |  |   | 6.0       | %
|                                                  | 
|                                                  |  | Fiscal Quarter Ended   |          
|Fiscal 2003                                       |  | May 3, 2003            |           |   | Aug. 2, 2003 |   |           | Nov. 1, 2003 |  |   | Jan. 31, 2004 |  
|                                                  |  | (dollars in thousands) |          
|Net sales                                         |  | $                      | 384,707   |   |              | $ | 398,446   |              |  | $ | 415,334       |   |  | $ | 455,651   |  
|Gross profit                                      |  |                        | 119,059   |   |              |   | 129,771   |              |  |   | 137,121       |   |  |   | 163,538   |  
|Operating income                                  |  |                        | 24,739    |   |              |   | 30,182    |              |  |   | 32,336        |   |  |   | 50,416    |  
|Net earnings (2) (3) (4)                          |  |                        | 11,079    |   |              |   | 13,478    |              |  |   | 19,209        |   |  |   | 20,947    |  
|Stores open at end of period                      |  |                        | 617       |   |              |   | 636       |              |  |   | 652           |   |  |   | 654       |  
|Aggregate gross square footage                    |  |                        | 8,388,249 |   |              |   | 8,671,305 |              |  |   | 8,918,498     |   |  |   | 8,970,032 |  
|Percentage increase in comparable store net sales |  |                        | 4.6       | % |              |   | 6.1       | %            |  |   | 6.0           | % |  |   | 5.6       | %

---

|(1) | In the first quarter of fiscal 2002, we completed an initial public offering, and the results for that quarter include $12.8 million in management fees and termination costs
pursuant to a management services agreement that was terminated in conjunction with the offering, $9.6 million in non-cash stock-based compensation and other costs, and $3.3 million in debt retirement costs related to the early repurchase of senior
subordinated notes with proceeds from the offering.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | In the second quarter of fiscal 2003, we incurred debt retirement costs of $1.6 million related to the early repayment of $50.0 million on the term loan under our senior credit
facility.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | In the third quarter of fiscal 2003, we realized a tax benefit of approximately $3.4 million with respect to certain federal net operating losses.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | In the fourth quarter of fiscal 2003, we incurred debt retirement costs of $10.6 million related to the repurchase of $50.0 million in principal amount of our 10.75% senior
subordinated notes.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 $79.8 million, $133.5 million and $156.9 million for fiscal 2001, 2002 and 2003, 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 our inventory purchases is financed through vendor credit terms.



We use cash in investing activities primarily to construct leasehold
improvements for new stores, to purchase fixed assets for new stores, to remodel certain existing stores and, to a lesser extent, to purchase warehouse 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 2004 will be approximately $100 million, which includes the opening of approximately 90 new stores and the estimated cost of remodeling 50 to 55 existing stores
to our millennium format. Cash used in investing activities was $60.3 million, $56.0 million and $98.7 million for fiscal 2001, 2002 and 2003, respectively.



Net cash used in financing activities was $1.3 million, $4.8 million and $105.0 million in fiscal 2001, 2002 and 2003, respectively. During fiscal 2003,
we reduced our overall level of debt by $101.7 million, primarily through the early repayment and repurchase of $100.0 million of debt. As a result, our balance of cash and cash equivalents decreased from $108.9 million at February 1, 2003 to $62.2
million at January 31, 2004.



In October 2001, we issued $200
million of our 10.75% senior subordinated notes due November 2011 and amended and restated our senior credit facility. We used the proceeds from the issuance of our 10.75% senior subordinated notes to repay all of our then outstanding 13% senior
subordinated notes due 2010 and retired approximately $71 million of the term loan facilities under our senior credit facility. As a result of the retirement and other amendments to the senior credit facility, the total commitment under our senior
credit facility was reduced to $270 million, consisting of a $75 million revolving credit facility and a $195 million term loan facility. In August 2002, we refinanced our term loan facility so that the senior credit facility consisted of a $75
million revolving credit facility and a $193.5 million term loan facility for a total commitment of $268.5 million. In August 2003, we made an early repayment of $50.0 million on the term loan under our senior credit facility. In connection with the
repayment, we entered into an amendment of the senior credit facility that resulted in an immediate interest rate reduction of 0.5% on the term loan and more favorable credit terms.



The senior credit facility now consists of a $75.0 million revolving credit facility and a $141.5 million term loan for a
total commitment of $216.5 million. Borrowings under the senior credit facility are secured by substantially all of our assets and bear interest (1) in the case of the revolving credit facility, at our option, at the agent banks base rate plus
a margin of up to 2.25%, or LIBOR plus a margin of up to 3.25%, based on our leverage ratio at the time, and (2) in the case of the term loan, at our option, at the agent banks base rate plus a fixed margin of 1.5%, or LIBOR plus a fixed
margin of 2.5%. The interest rate on these borrowings at January 31, 2004 was 3.67%. Our senior credit facility expires between October 2, 2006 and October 2, 2008. The agreement governing our senior credit facility contains certain affirmative and
negative covenants related to, among other things, indebtedness, interest and fixed charges coverage and consolidated net worth. At January 31, 2004, we were in full compliance with all of these covenants, and the outstanding balance of our term
loan facility was $140.8 million, including a current portion of $1.4 million. In addition, there were no borrowings on our revolving credit facility at January 31, 2004, which has $55.0 million of available credit. Amounts can be withdrawn under
the revolving credit facility for general business purposes. At January 31, 2004, we had outstanding $20.0 million in letters of credit used for general business purposes, which reduce the availability under our revolving credit facility.



In May and June of 2003, certain selling stockholders sold an
aggregate of 12.23 million shares of our common stock pursuant to an effective shelf registration statement we previously filed with the SEC. We did not



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receive any proceeds from the sale of these shares by the selling stockholders. We recorded offering expenses of approximately $1.4 million as a direct
charge to accumulated deficit during 2003. We terminated the shelf registration statement on June 30, 2003.



On February 27, 2002, we completed an initial public offering of our common stock. We received net proceeds of approximately $272.5 million from the
offering of 15.5 million shares of our common stock, including 1 million shares of our common stock pursuant to the subsequent exercise of the underwriters over-allotment option. We used approximately $239.8 million of the net proceeds from
our initial public offering to redeem in full all of our then outstanding shares of series A and series B preferred stock. We used approximately $32.7 million of the net proceeds from the offering plus approximately $1.8 million in cash-on-hand to
repurchase $30.0 million in aggregate principal amount of our 10.75% senior subordinated notes at 110.5% of their face value plus accrued and unpaid interest.



In January 2004, we repurchased $50.0 million in aggregate principal amount of our 10.75% senior subordinated notes for an aggregate payment of $60.0
million plus accrued and unpaid interest, leaving $120.0 million in aggregate principal amount of our senior subordinated notes outstanding at January 31, 2004.



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.



At January 31,
2004, we had available net loss carryforwards of $15.6 million for state income tax purposes, which begin expiring in 2005.



Our primary long-term capital requirement is funding for the opening of new stores as well as the remodeling of certain existing stores. We anticipate
that funds generated by operations and funds available under the senior credit facility will be sufficient to finance our continued operations and planned store openings at least through fiscal 2004.



Contractual Obligations and Off-Balance Sheet Arrangements



Contractual Obligations



The following summarizes our contractual obligations at January 31, 2004,
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                      |  | $                      | 1,420   |              | $ | 2,840        |  | $          | 136,530 |       | $ | 120,000 |  | $ | 260,790  
|Capital lease and other obligations |  |                        | 522     |              |   | 2,143        |  |            |        |       |   |        |  |   | 2,665    
|Operating leases                    |  |                        | 155,793 |              |   | 286,469      |  |            | 242,832 |       |   | 448,565 |  |   | 1,133,659
|Purchase obligations (1)            |  |                        | 41,221  |              |   | 57,280       |  |            | 39,080  |       |   | 82,695  |  |   | 220,276  
|Other long-term liabilities (2)     |  |                        |        |              |   |             |  |            |        |       |   |        |  |   |         
|                                    |  |                        |         |              |   |              |  |            |         |       |   |         |  |   |          
|Total contractual cash obligations  |  | $                      | 198,956 |              | $ | 348,732      |  | $          | 418,442 |       | $ | 651,260 |  | $ | 1,617,390
|                                    |  |                        |         |              |   |              |  |            |         |       |   |         |  |   |          

---

|(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 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
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | advertising and marketing agreements, noncancelable purchase orders, future interest payments (assuming the existing long-term debt remains outstanding and,
for our senior credit facility, based on the interest rate in effect at January 31, 2004), commitment and other fees associated with our senior 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 31, 2004, we had outstanding $20.0 million in letters of credit
used for general business purposes, which reduce the availability under our revolving credit facility.



At February 1, 2003 and January 31, 2004, 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 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 on-going basis, we evaluate these estimates, including those related to inventories, asset impairment, accruals for self-insured workers compensation 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 the 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 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 inventory reserve for the estimated shrinkage between physical inventories. This reserve is based primarily on actual shrink
results from previous physical inventories. Changes in actual shrink results from completed 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 of these inventory reserves. Our actual shrink results and inventory write-downs have not varied significantly from our estimates.



We assess the impairment of long-lived 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 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;
| | - | ------------------------------------------------------------------------------------------------



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



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



When we determine that the carrying value of fixed 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 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, which is determined by discounting the expected future net cash flows. To the extent cash flows for certain stores 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 not material during any of fiscal 2001, 2002 or 2003.



We have recorded significant amounts of goodwill resulting from the acquisitions we have completed. Through February 2,
2002, we amortized goodwill on a straight-line basis over useful lives ranging from three to fifteen years. As a result of the adoption of Statement of Financial Accounting Standards, or SFAS, No. 142, on February 3, 2002, we ceased amortizing
goodwill. During the second quarter of 2002, we completed our transitional impairment analysis to assess the recoverability of the goodwill and recorded $0.3 million of goodwill impairment, in accordance with the provisions of SFAS No. 142. Based
upon this analysis, we allocated all remaining goodwill to the individual stores open at the time of acquisition. We perform our required 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 determined based on
the present value of the future net cash flows expected to be generated by the store. To the extent cash flows for certain stores are less than anticipated, additional impairment charges may result. Impairment charges on goodwill were not
significant in either fiscal 2002 or 2003.



We maintain an
accrual for self-insured workers compensation costs, which is classified in accrued salaries and employee benefits in our consolidated balance sheets. We determine the adequacy of these accruals by periodically evaluating our historical experience
and trends related to workers compensation claims and payments, information provided to us by our insurance broker, and industry experience and trends. 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 accident 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. At February 1, 2003 and January 31, 2004, our accrual for workers compensation costs was
$15.1 million and $26.5 million, respectively.



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, considering
the vendors financial condition, and current economic conditions. If the financial condition 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 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 likely, 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



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scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in 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 November 2003, the EITF reached a consensus on Issue 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. EITF Issue 03-10
provides guidance on the accounting for consideration received by a reseller in the form of a reimbursement by the vendor for honoring the vendors sales incentives offered directly to consumers. The transition provisions apply prospectively to
arrangements with vendors entered into or modified in fiscal periods beginning in our first fiscal quarter ending May 1, 2004. The adoption of EITF Issue 03-10 will result in certain vendors sales incentives being reflected as a reduction of
both net sales and cost of sales and occupancy costs and will have no effect on our earnings or balance sheet. The effect of adopting EITF Issue 03-10 in fiscal 2003 would have resulted in the reclassification of approximately $43 million in vendor
reimbursements from net sales to a reduction of cost of sales and occupancy costs. Fiscal 2003 financial statements presented for comparative purposes in fiscal 2004 will be reclassified to comply with EITF Issue 03-10.



Financial Accounting Standards Board, or FASB, Interpretation No. 46, or FIN
46, Consolidation of Variable Interest Entities, was issued in January 2003, and a revised interpretation of FIN 46, or FIN 46R, was issued in December 2003. FIN 46 requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated
financial support from other parties. The provisions of FIN 46 are effective immediately for all arrangements entered into after January 31, 2003. Since January 31, 2003, we have no interest in any entities we believe are variable interest entities
for which we are the primary beneficiary. For all arrangements entered into after January 31, 2003, we are required to continue to apply FIN 46 through the end of fiscal 2003. We are required to adopt the provisions of FIN 46R for those arrangements
in the first quarter of fiscal 2004. For arrangements entered into prior to February 1, 2003, we are required to adopt the provisions of FIN 46R in the first quarter of fiscal 2004. We have no interest in any entities we believe are variable
interest entities for which we are the primary beneficiary, and we do not believe that the adoption of FIN 46R will have a material impact on our consolidated financial position or results of operations.



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 senior 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 entered into a $75.0 million interest rate collar agreement, or hedge, in December 2000 to offset this interest rate risk. This hedge
expired in December 2002 with no further liability. Changes in the intrinsic value of the hedge were recorded as accumulated other comprehensive income (loss). Amounts received or paid under the hedge were recorded as reductions of or additions to
interest expense. We periodically evaluate alternative hedging strategies, although currently we have no hedges outstanding, and we do not enter into derivative financial instruments for trading or speculative purposes.



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All of the $140.8 million in debt under our senior credit facility as of January 31, 2004 was subject to
variable interest rate fluctuations. Based on this debt level, a hypothetical 10% increase in variable rates from the applicable rates at January 31, 2004 would increase net interest expense by approximately $0.2 million on an annual basis, and
would decrease both 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 material foreign exchange or other significant market risk at January 31, 2004.



|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
|-------- | -----------------------



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.



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



30



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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 2004 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 2004 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 AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------



The information required by Item 12 is incorporated by reference to our Proxy Statement relating to the 2004 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 2004 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 2004 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.



31



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##### Table of Contents

PART IV



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



|(a) | Financial Statements
|--- | --------------------



1.    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



The exhibits listed under Item 15(c) hereof are filed as part of this
Annual Report on Form 10-K.



|(b) | Reports on Form 8-K.
|--- | --------------------



On December 22, 2003, we filed a report on Form 8-K with respect to a tender offer for up to $50,000,000 aggregate principal amount of our outstanding
10.75% Senior Subordinated Notes due 2011.



On January 23,
2004, we filed a report on Form 8-K with respect to the results of our tender offer for up to $50,000,000 aggregate principal amount of our outstanding 10.75% Senior Subordinated Notes due 2011.



|(c) | Exhibits
|--- | --------



The following exhibits are filed with this Annual Report on Form 10-K:



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Description                                                                                                                                                                                                                                                                                                                                                                            
|3.1(1)        |  | Third Amended and Restated Certificate of Incorporation of PETCO Animal Supplies, Inc.                                                                                                                                                                                                                                                                                                         
|              | 
|3.2(1)        |  | Amended and Restated Bylaws of PETCO Animal Supplies, Inc.                                                                                                                                                                                                                                                                                                                                     
|              | 
|4.1(2)        |  | Indenture, dated as of October 26, 2001, by and among PETCO, certain subsidiaries of PETCO and U.S. Bank N.A., as trustee.                                                                                                                                                                                                                                                                     
|              | 
|4.2(2)        |  | Exchange and Registration Rights Agreement, dated as of October 26, 2001, by and between PETCO, certain subsidiaries of PETCO and Goldman Sachs & Co., as initial
purchaser.                                                                                                                                                                                                                   
|              | 
|4.3(3)        |  | Form of Specimen Common Stock Certificate.                                                                                                                                                                                                                                                                                                                                                     
|              | 
|4.4(2)        |  | Amended and Restated Stockholders Agreement, dated as of February 19, 2002, by and among PETCO and certain stockholders of PETCO.                                                                                                                                                                                                                                                              
|              | 
|4.5(2)        |  | Amended and Restated Securityholders Agreement, dated as of February 19, 2002, by and among PETCO and certain securityholders of PETCO.                                                                                                                                                                                                                                                        
|              | 
|10.1(2)       |  | Form of Amended and Restated Credit Agreement, dated as of October 26, 2001, by and among PETCO, Goldman Sachs Credit Partners L.P., as joint lead arranger, joint book-runner and sole
syndication agent, Wells Fargo Bank National Association, as joint lead arranger, joint book-runner and sole administrative agent, and the lenders party thereto, as amended.                          
|              | 
|10.2(4)       |  | Second Amendment dated as of July 31, 2002 to Amended and Restated Credit Agreement, dated as of October 26, 2001, by and among PETCO, Goldman Sachs Credit Partners L.P., as joint lead
arranger, joint book-runner and sole syndication agent, Wells Fargo Bank National Association, as joint lead arranger, joint book-runner and sole administrative agent, and the lenders party thereto.



32



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##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                                                                                                                                                  
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Description                                                                                                                                                                                                                                                                                                                                                                              
|10.3(7)       |  | Third Amendment dated as of February 3, 2003 to Amended and Restated Credit Agreement, dated as of October 26, 2001, by and among PETCO, Goldman Sachs Credit Partners L.P., as joint lead
arranger, joint book-runner and sole syndication agent, Wells Fargo Bank National Association, as joint lead arranger, joint book-runner and sole administrative agent, and the lenders party thereto.
|              | 
|10.4(2)       |  | Distribution Center Lease, dated as of February 20, 1998, by and between PETCO and Industrial Developments International, Inc. for 3801 Rock Creek Boulevard, Joliet,
Illinois.                                                                                                                                                                                                                  
|              | 
|10.5(2)       |  | Distribution Center Lease, dated as of November 24, 1997, by and between PETCO and Opus West Corporation for 4345 Parkhurst Street, Mira Loma, California.                                                                                                                                                                                                                                       
|              | 
|10.6(2)       |  | Management Services Agreement, dated as of October, 2, 2000, by and among PETCO, Leonard Green & Partners, L.P. and TPG GenPar III, L.P.                                                                                                                                                                                                                                                         
|              | 
|10.7(2)       |  | Amended and Restated Employment Agreement, dated as of October 2, 2000, by and between PETCO and Brian K. Devine.                                                                                                                                                                                                                                                                                
|              | 
|10.8(2)       |  | Employment Agreement, dated as of October 2, 2000, by and between PETCO and Bruce C. Hall.                                                                                                                                                                                                                                                                                                       
|              | 
|10.9(2)       |  | Employment Agreement, dated as of October 2, 2000, by and between PETCO and James M. Myers.                                                                                                                                                                                                                                                                                                      
|              | 
|10.10(2)      |  | Form of Indemnification Agreement between PETCO and certain officers and directors.                                                                                                                                                                                                                                                                                                              
|              | 
|10.11(2)      |  | Form of Retention Agreement for executive officers.                                                                                                                                                                                                                                                                                                                                              
|              | 
|10.12(2)      |  | Form of Retention Agreement for non-executive officers.                                                                                                                                                                                                                                                                                                                                          
|              | 
|10.13(5)      |  | PETCO Animal Supplies 401(k) plan.                                                                                                                                                                                                                                                                                                                                                               
|              | 
|10.14(2)      |  | PETCO Flexible Benefit Plan, amended and restated effective July 1, 1998.                                                                                                                                                                                                                                                                                                                        
|              | 
|10.15(2)      |  | 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.                                                                                                                                                                                                                                   
|              | 
|10.16(2)      |  | Form of PETCO Animal Supplies, Inc. Non-qualified Stock Option Agreement.                                                                                                                                                                                                                                                                                                                        
|              | 
|10.17(2)      |  | Form of PETCO Animal Supplies, Inc. Incentive Stock Option Agreement.                                                                                                                                                                                                                                                                                                                            
|              | 
|10.18(2)      |  | Form of PETCO Animal Supplies, Inc. Restricted Stock Agreement.                                                                                                                                                                                                                                                                                                                                  
|              | 
|10.19(2)      |  | Agreement and Plan of Merger, dated as of May 17, 2000, by and between PETCO and BD Recapitalization Corp.                                                                                                                                                                                                                                                                                       
|              | 
|10.20(2)      |  | First Amendment to Agreement and Plan of Merger, dated as of September 14, 2000, by and between PETCO and BD Recapitalization Corp.                                                                                                                                                                                                                                                              
|              | 
|10.21(2)      |  | Standard Industrial/Commercial Lease, dated as of February 28, 2001, by and between PETCO and Carol Canyon Properties, LLC for 8945 Rehco Road, San Diego, California.                                                                                                                                                                                                                           
|              | 
|10.22(2)      |  | PETCO Animal Supplies Deferred Compensation Plan.                                                                                                                                                                                                                                                                                                                                                
|              | 
|10.23(2)      |  | 2002 Incentive Award Plan of PETCO Animal Supplies, Inc.                                                                                                                                                                                                                                                                                                                                         
|              | 
|10.24(3)      |  | Consulting Agreement, effective as of November 29, 2001, by and between PETCO and Brian K. Devine.                                                                                                                                                                                                                                                                                               
|              | 
|10.25(3)      |  | Supplemental Executive Retirement Program, effective as of November 29, 2001, by and between PETCO and Brian K. Devine.                                                                                                                                                                                                                                                                          
|              | 
|10.26(6)      |  | Distribution Center Lease, dated as of May 30, 2002, by and between PETCO and South Middlesex Development Company, LLC for 24 Englehard drive, Monroe, New Jersey.                                                                                                                                                                                                                               



33



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##### Table of Contents

|              |  |                                                                   
|------------- |  | ------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Description                                               
|              | 
|10.27(8)      |  | Fourth Amendment to Amended and Restated Credit Agreement.        
|              | 
|10.28(8)      |  | Fifth Amendment to Amended and Restated Credit Agreement.         
|              | 
|21.1(2)       |  | Subsidiaries of PETCO.                                            
|              | 
|23.1*         |  | Consent of KPMG LLP, Independent Auditors.                        
|              | 
|31.1*         |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
|              | 
|31.2*         |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
|              | 
|32.1*         |  | Section 1350 Certifications.                                      

---

|* | Filed herewith
|- | --------------

|(1) | Incorporated by reference to PETCOs Registration Statement on Form S-4, as amended (File No. 333-84474).
|--- | ---------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to PETCOs Registration Statement on Form S-1, as amended (File No. 333-75830).
|--- | ---------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to PETCOs Annual Report on Form 10-K for the fiscal year ended February 2, 2002, as amended.
|--- | -----------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference to PETCOs Quarterly Report on Form 10-Q for the quarterly period ended August 3, 2002.
|--- | -----------------------------------------------------------------------------------------------------------------

|(5) | Incorporated by reference to PETCOs Registrations Statement on Form S-8 (File No. 333-100397).
|--- | -----------------------------------------------------------------------------------------------

|(6) | Incorporated by reference to PETCOs Quarterly Report on Form 10-Q for the quarterly period ended May 4, 2002.
|--- | --------------------------------------------------------------------------------------------------------------

|(7) | Incorporated by reference to PETCOs Annual Report on Form 10-K for the fiscal year ended February 1, 2003, as amended.
|--- | -----------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated by reference to PETCOs Quarterly Report on Form 10-Q for the quarterly period ended August 2, 2003.
|--- | -----------------------------------------------------------------------------------------------------------------



|(d) | Financial Statement Schedules.
|--- | ------------------------------



None.



34



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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: April 5, 2004



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                                                                          |  | April 5, 2004
|                                                |  |                                                                                               
|/s/    JAMES M. MYERSJames M. Myers             |  | Chief Executive Officer and Director (Principal Executive Officer)                             |  | April 5, 2004
|                                                |  |                                                                                               
|/s/    RODNEY CARTERRodney Carter               |  | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |  | April 5, 2004
|                                                |  |                                                                                               
|/s/    JOHN M. BAUMERJohn M. Baumer             |  | Director                                                                                       |  | April 5, 2004
|                                                |  |                                                                                               
|/s/    JONATHAN COSLETJonathan Coslet           |  | Director                                                                                       |  | April 5, 2004
|                                                |  |                                                                                               
|/s/    JOHN G. DANHAKLJohn G. Danhakl           |  | Director                                                                                       |  | April 5, 2004
|                                                |  |                                                                                               
|/s/    JULIAN C. DAYJulian C. Day               |  | Director                                                                                       |  | April 5, 2004
|                                                |  |                                                                                               
|/s/    CHARLES W. DUDDLESCharles W. Duddles     |  | Director                                                                                       |  | April 5, 2004
|                                                |  |                                                                                               
|/s/    ARTHUR B. LAFFERArthur B. Laffer         |  | Director                                                                                       |  | April 5, 2004
|                                                |  |                                                                                               
|/s/    WILLIAM S. PRICE IIIWilliam S. Price III |  | Director                                                                                       |  | April 5, 2004



35



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##### Table of Contents

Index to Financial Statements



|                                                                                                                                      |  |     
|------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                      |  | Page
|Index to Financial Statements                                                                                                         |  | F-1 
|Independent Auditors Report                                                                                                          |  | F-2 
|Consolidated Balance Sheets as of February 1, 2003 and January 31, 2004                                                               |  | F-3 
|Consolidated Statements of Operations for the Years Ended February 2, 2002, February 1, 2003 and January 31, 2004                     |  | F-4 
|Consolidated Statements of Stockholders Equity (Deficit) for the Years Ended February 2, 2002, February 1, 2003 and January 31, 2004 |  | F-5 
|Consolidated Statements of Cash Flows for the Years Ended February 2, 2002, February 1, 2003 and January 31, 2004                     |  | F-6 
|Notes to Consolidated Financial Statements                                                                                            |  | F-7 



F-1



---

##### Table of Contents

INDEPENDENT AUDITORS REPORT



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 February 1, 2003 and January 31, 2004,
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 31, 2004. 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 auditing standards generally accepted in the United States of America. 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 February 1, 2003 and January 31, 2004, and the results of their operations and their cash flows for each of the years in
the three-year period ended January 31, 2004, in conformity with accounting principles generally accepted in the United States of America.



As discussed in Note 1(f) to the consolidated financial statements, the Company adopted Emerging Issues Task Force No. 02-16, Accounting by a Customer
(Including a Reseller) for Certain Consideration Received from a Vendor, and accordingly, changed its method of accounting for vendor consideration in 2003. Also as discussed in Note 1(u) to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 145,Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections, and accordingly, changed its method of accounting for gains and losses
from the extinguishment of debt in 2003. Also as discussed in Note 1(j) to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, and accordingly,
changed its method of accounting for goodwill in 2002.



/s/ KPMG LLP



San Diego, California

March 8, 2004





F-2



---

##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



CONSOLIDATED BALANCE SHEETS



(In thousands,
except per share data)



|                                                                                                                                                                    |  |                  |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                    |  | February 1, 2003 |          |   | January 31, 2004 |  
|ASSETS (note 3)                                                                                                                                                     |  |                  |          |   |                  |   |          |  
|Current assets:                                                                                                                                                     |  |                  |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                           |  | $                | 108,937  |   |                  | $ | 62,201   |  
|Receivables                                                                                                                                                         |  |                  | 14,303   |   |                  |   | 12,514   |  
|Inventories                                                                                                                                                         |  |                  | 138,410  |   |                  |   | 139,513  |  
|Deferred tax assets (note 9)                                                                                                                                        |  |                  | 14,492   |   |                  |   | 12,047   |  
|Other                                                                                                                                                               |  |                  | 7,459    |   |                  |   | 12,907   |  
|                                                                                                                                                                    |  |                  |          |   |                  |   |          |  
|Total current assets                                                                                                                                                |  |                  | 283,601  |   |                  |   | 239,182  |  
|                                                                                                                                                                    |  |                  |          |   |                  |   |          |  
|Fixed assets (note 5):                                                                                                                                              |  |                  |          |   |                  |   |          |  
|Land and buildings                                                                                                                                                  |  |                  | 5,796    |   |                  |   | 23,849   |  
|Equipment                                                                                                                                                           |  |                  | 173,048  |   |                  |   | 202,268  |  
|Furniture and fixtures                                                                                                                                              |  |                  | 92,768   |   |                  |   | 111,207  |  
|Leasehold improvements                                                                                                                                              |  |                  | 166,129  |   |                  |   | 183,179  |  
|                                                                                                                                                                    |  |                  |          |   |                  |   |          |  
|                                                                                                                                                                    |  |                  | 437,741  |   |                  |   | 520,503  |  
|Less accumulated depreciation and amortization                                                                                                                      |  |                  | (219,299 | ) |                  |   | (264,156 | )
|                                                                                                                                                                    |  |                  |          |   |                  |   |          |  
|                                                                                                                                                                    |  |                  | 218,442  |   |                  |   | 256,347  |  
|Debt issuance costs                                                                                                                                                 |  |                  | 5,724    |   |                  |   | 4,251    |  
|Goodwill                                                                                                                                                            |  |                  | 40,644   |   |                  |   | 40,289   |  
|Other assets                                                                                                                                                        |  |                  | 6,444    |   |                  |   | 11,793   |  
|                                                                                                                                                                    |  |                  |          |   |                  |   |          |  
|                                                                                                                                                                    |  | $                | 554,855  |   |                  | $ | 551,862  |  
|                                                                                                                                                                    |  |                  |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                                                      |  |                  |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                |  |                  |          |   |                  |   |          |  
|Accounts payable                                                                                                                                                    |  | $                | 61,308   |   |                  | $ | 63,773   |  
|Accrued expenses                                                                                                                                                    |  |                  | 65,091   |   |                  |   | 67,260   |  
|Accrued salaries and employee benefits                                                                                                                              |  |                  | 41,740   |   |                  |   | 57,223   |  
|Current portion of long-term debt (note 3)                                                                                                                          |  |                  | 2,000    |   |                  |   | 1,420    |  
|Current portion of capital lease and other obligations (note 5)                                                                                                     |  |                  | 411      |   |                  |   | 500      |  
|                                                                                                                                                                    |  |                  |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                           |  |                  | 170,550  |   |                  |   | 190,176  |  
|Long-term debt, excluding current portion (note 3)                                                                                                                  |  |                  | 190,500  |   |                  |   | 139,370  |  
|Senior subordinated notes payable (note 4)                                                                                                                          |  |                  | 170,000  |   |                  |   | 120,000  |  
|Capital lease and other obligations, excluding current portion (note 5)                                                                                             |  |                  | 2,630    |   |                  |   | 2,108    |  
|Deferred tax liability (note 9)                                                                                                                                     |  |                  | 13,268   |   |                  |   | 26,919   |  
|Deferred rent and other liabilities                                                                                                                                 |  |                  | 18,990   |   |                  |   | 20,156   |  
|                                                                                                                                                                    |  |                  |          |   |                  |   |          |  
|Total liabilities                                                                                                                                                   |  |                  | 565,938  |   |                  |   | 498,729  |  
|                                                                                                                                                                    |  |                  |          |   |                  |   |          |  
|Stockholders equity (deficit) (notes 6, 7 and 8):                                                                                                                  |  |                  |          |   |                  |   |          |  
|Preferred stock, $.01 par value, 5,000 shares authorized and no shares issued and outstanding at February 1, 2003 and January 31,
2004                              |  |                  |         |   |                  |   |         |  
|Common stock, $.001 par value, 250,000 shares authorized and 57,373 and 57,458 shares issued and outstanding at February 1, 2003 and January
31, 2004, respectively |  |                  | 57       |   |                  |   | 57       |  
|Additional paid-in capital                                                                                                                                          |  |                  | 65,179   |   |                  |   | 66,105   |  
|Accumulated deficit                                                                                                                                                 |  |                  | (76,319  | ) |                  |   | (13,029  | )
|                                                                                                                                                                    |  |                  |          |   |                  |   |          |  
|Total stockholders equity (deficit)                                                                                                                                |  |                  | (11,083  | ) |                  |   | 53,133   |  
|                                                                                                                                                                    |  |                  |          |   |                  |   |          |  
|Commitments and contingencies (notes 3, 4, 5 and 12)                                                                                                                |  |                  |          |   |                  |   |          |  
|                                                                                                                                                                    |  | $                | 554,855  |   |                  | $ | 551,862  |  
|                                                                                                                                                                    |  |                  |          |   |                  |   |          |  



See accompanying notes
to consolidated financial statements.



F-3



---

##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS



(In
thousands, except per share data)



|                                                                                   |  |                 |           |   |                 |   |           |                  |  |   |           |  
|---------------------------------------------------------------------------------- |  | --------------- | --------- | - | --------------- | - | --------- | ---------------- |  | - | --------- | -
|                                                                                   |  | Years Ended     |          
|                                                                                   |  | February 2,2002 |           |   | February 1,2003 |   |           | January 31, 2004 | 
|Net sales                                                                          |  | $               | 1,300,949 |   |                 | $ | 1,476,634 |                  |  | $ | 1,654,138 |  
|Cost of sales and occupancy costs                                                  |  |                 | 909,186   |   |                 |   | 1,016,249 |                  |  |   | 1,104,649 |  
|                                                                                   |  |                 |           |   |                 |   |           |                  |  |   |           |  
|Gross profit                                                                       |  |                 | 391,763   |   |                 |   | 460,385   |                  |  |   | 549,489   |  
|Selling, general and administrative expenses                                       |  |                 | 304,967   |   |                 |   | 343,752   |                  |  |   | 411,816   |  
|Management fees and termination costs (note 11)                                    |  |                 | 3,120     |   |                 |   | 12,760    |                  |  |   |          |  
|Stock-based compensation and other costs                                           |  |                 | 14,350    |   |                 |   | 8,388     |                  |  |   |          |  
|Litigation settlement                                                              |  |                 |          |   |                 |   | 3,497     |                  |  |   |          |  
|Write-off of Canadian investment (note 2)                                          |  |                 | 37,035    |   |                 |   |          |                  |  |   |          |  
|Other                                                                              |  |                 | 445       |   |                 |   |          |                  |  |   |          |  
|                                                                                   |  |                 |           |   |                 |   |           |                  |  |   |           |  
|Operating income                                                                   |  |                 | 31,846    |   |                 |   | 91,988    |                  |  |   | 137,673   |  
|Interest income                                                                    |  |                 | (612      | ) |                 |   | (801      | )                |  |   | (1,389    | )
|Interest expense                                                                   |  |                 | 41,449    |   |                 |   | 33,467    |                  |  |   | 27,504    |  
|Debt retirement costs                                                              |  |                 | 20,830    |   |                 |   | 3,336     |                  |  |   | 12,189    |  
|                                                                                   |  |                 |           |   |                 |   |           |                  |  |   |           |  
|Earnings (loss) before equity in loss of unconsolidated affiliate and income taxes |  |                 | (29,821   | ) |                 |   | 55,986    |                  |  |   | 99,369    |  
|Equity in loss of unconsolidated affiliate (note 2)                                |  |                 | (3,083    | ) |                 |   |          |                  |  |   |          |  
|                                                                                   |  |                 |           |   |                 |   |           |                  |  |   |           |  
|Earnings (loss) before income taxes                                                |  |                 | (32,904   | ) |                 |   | 55,986    |                  |  |   | 99,369    |  
|Income taxes (benefit) (note 9)                                                    |  |                 | (10,103   | ) |                 |   | 23,845    |                  |  |   | 34,656    |  
|                                                                                   |  |                 |           |   |                 |   |           |                  |  |   |           |  
|Net earnings (loss)                                                                |  |                 | (22,801   | ) |                 |   | 32,141    |                  |  |   | 64,713    |  
|Increase in carrying amount and premium on redemption of preferred stock           |  |                 | (27,745   | ) |                 |   | (20,487   | )                |  |   |          |  
|                                                                                   |  |                 |           |   |                 |   |           |                  |  |   |           |  
|Net earnings (loss) available to common stockholders                               |  | $               | (50,546   | ) |                 | $ | 11,654    |                  |  | $ | 64,713    |  
|                                                                                   |  |                 |           |   |                 |   |           |                  |  |   |           |  
|Basic earnings (loss) per common share                                             |  | $               | (1.32     | ) |                 | $ | 0.21      |                  |  | $ | 1.13      |  
|                                                                                   |  |                 |           |   |                 |   |           |                  |  |   |           |  
|Diluted earnings (loss) per common share                                           |  | $               | (1.32     | ) |                 | $ | 0.20      |                  |  | $ | 1.11      |  
|                                                                                   |  |                 |           |   |                 |   |           |                  |  |   |           |  
|Shares used for computing basic earnings (loss) per share                          |  |                 | 38,429    |   |                 |   | 56,094    |                  |  |   | 57,422    |  
|                                                                                   |  |                 |           |   |                 |   |           |                  |  |   |           |  
|Shares used for computing diluted earnings (loss) per share                        |  |                 | 38,429    |   |                 |   | 56,906    |                  |  |   | 58,299    |  
|                                                                                   |  |                 |           |   |                 |   |           |                  |  |   |           |  



See accompanying notes
to consolidated financial statements.



F-4



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##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)



For the years ended February 2, 2002, February 1, 2003 and January 31, 2004



(In thousands)



|                                                                       |  |              |   |                          |        |    |                      |   |          |                    |  |   |                                 |   |  |                                    |          |   |  |   |        |   |  |   |          |  
|---------------------------------------------------------------------- |  | ------------ | - | ------------------------ | ------ | -- | -------------------- | - | -------- | ------------------ |  | - | ------------------------------- | - |  | ---------------------------------- | -------- | - |  | - | ------ | - |  | - | -------- | -
|                                                                       |  | Common Stock |   | AdditionalPaid-inCapital |        |    | DeferredCompensation |   |          | AccumulatedDeficit |  |   | OtherComprehensiveIncome (Loss) |   |  | TotalStockholdersEquity/(Deficit) |         
|                                                                       |  | Shares       |   |                          | Amount |    |                      |   |          |                   
|Balances at February 3, 2001                                           |  | 38,194       |   |                          | $      | 38 |                      | $ | (182,786 | )                  |  | $ |                                |   |  | $                                  | (85,659  | ) |  | $ |       |   |  | $ | (268,407 | )
|Exercise of options                                                    |  | 923          |   |                          |        | 1  |                      |   | 123      |                    |  |   |                                |   |  |                                    |         |   |  |   |       |   |  |   | 124      |  
|Stock-based compensation                                               |  |             |   |                          |        |   |                      |   | 23,934   |                    |  |   | (9,288                          | ) |  |                                    |         |   |  |   |       |   |  |   | 14,646   |  
|Amortization of deferred compensation                                  |  |             |   |                          |        |   |                      |   |         |                    |  |   | 849                             |   |  |                                    |         |   |  |   |       |   |  |   | 849      |  
|Notes receivable from stockholders for exercise of options             |  |             |   |                          |        |   |                      |   | (906     | )                  |  |   |                                |   |  |                                    |         |   |  |   |       |   |  |   | (906     | )
|Accretion of redeemable preferred stock                                |  |             |   |                          |        |   |                      |   | (27,745  | )                  |  |   |                                |   |  |                                    |         |   |  |   |       |   |  |   | (27,745  | )
|Unrealized loss on hedge                                               |  |             |   |                          |        |   |                      |   |         |                    |  |   |                                |   |  |                                    |         |   |  |   | (1,467 | ) |  |   | (1,467   | )
|Net loss                                                               |  |             |   |                          |        |   |                      |   |         |                    |  |   |                                |   |  |                                    | (22,801  | ) |  |   |       |   |  |   | (22,801  | )
|                                                                       |  |              |   |                          |        |    |                      |   |          |                    |  |   |                                 |   |  |                                    |          |   |  |   |        |   |  |   |          |  
|Balances at February 2, 2002                                           |  | 39,117       |   |                          | $      | 39 |                      | $ | (187,380 | )                  |  | $ | (8,439                          | ) |  | $                                  | (108,460 | ) |  | $ | (1,467 | ) |  | $ | (305,707 | )
|Exercise of options                                                    |  | 639          |   |                          |        | 1  |                      |   | 651      |                    |  |   |                                |   |  |                                    |         |   |  |   |       |   |  |   | 652      |  
|Issuance of common stock                                               |  | 15,500       |   |                          |        | 15 |                      |   | 272,496  |                    |  |   |                                |   |  |                                    |         |   |  |   |       |   |  |   | 272,511  |  
|Exercise of warrants                                                   |  | 2,132        |   |                          |        | 2  |                      |   | (2       | )                  |  |   |                                |   |  |                                    |         |   |  |   |       |   |  |   |         |  
|Retirement of stock                                                    |  | (15          | ) |                          |        |   |                      |   | (19      | )                  |  |   |                                |   |  |                                    |         |   |  |   |       |   |  |   | (19      | )
|Amortization of deferred compensation (net)                            |  |             |   |                          |        |   |                      |   | (290     | )                  |  |   | 8,439                           |   |  |                                    |         |   |  |   |       |   |  |   | 8,149    |  
|Payments on notes receivable from stockholders for exercise of options |  |             |   |                          |        |   |                      |   | 210      |                    |  |   |                                |   |  |                                    |         |   |  |   |       |   |  |   | 210      |  
|Accretion and premium on redemption of redeemable preferred stock      |  |             |   |                          |        |   |                      |   | (20,487  | )                  |  |   |                                |   |  |                                    |         |   |  |   |       |   |  |   | (20,487  | )
|Unrealized gain on hedge                                               |  |             |   |                          |        |   |                      |   |         |                    |  |   |                                |   |  |                                    |         |   |  |   | 1,467  |   |  |   | 1,467    |  
|Net earnings                                                           |  |             |   |                          |        |   |                      |   |         |                    |  |   |                                |   |  |                                    | 32,141   |   |  |   |       |   |  |   | 32,141   |  
|                                                                       |  |              |   |                          |        |    |                      |   |          |                    |  |   |                                 |   |  |                                    |          |   |  |   |        |   |  |   |          |  
|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 for exercise of options |  |             |   |                          |        |   |                      |   | 253      |                    |  |   |                                |   |  |                                    |         |   |  |   |       |   |  |   | 253      |  
|Tax benefit from exercise of options                                   |  |             |   |                          |        |   |                      |   | 582      |                    |  |   |                                |   |  |                                    |         |   |  |   |       |   |  |   | 582      |  
|Costs of common stock issued 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   |  
|                                                                       |  |              |   |                          |        |    |                      |   |          |                    |  |   |                                 |   |  |                                    |          |   |  |   |        |   |  |   |          |  



See accompanying notes
to consolidated financial statements.



F-5



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##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS



(In
thousands)



|                                                                        |  |                 |          |   |                 |   |          |                  |  |   |          |  
|----------------------------------------------------------------------- |  | --------------- | -------- | - | --------------- | - | -------- | ---------------- |  | - | -------- | -
|                                                                        |  | Years Ended     |         
|                                                                        |  | February 2,2002 |          |   | February 1,2003 |   |          | January 31, 2004 | 
|Cash flows from operating activities:                                   |  |                 |          |   |                 |   |          |                  |  |   |          |  
|Net earnings (loss)                                                     |  | $               | (22,801  | ) |                 | $ | 32,141   |                  |  | $ | 64,713   |  
|Depreciation and amortization                                           |  |                 | 49,449   |   |                 |   | 50,526   |                  |  |   | 58,780   |  
|Amortization of debt issuance costs                                     |  |                 | 2,245    |   |                 |   | 1,413    |                  |  |   | 1,461    |  
|Provision for deferred and other taxes                                  |  |                 | (10,982  | ) |                 |   | 18,342   |                  |  |   | 16,678   |  
|Equity in loss of unconsolidated affiliate                              |  |                 | 3,083    |   |                 |   |         |                  |  |   |         |  
|Stock-based compensation                                                |  |                 | 17,351   |   |                 |   | 8,651    |                  |  |   |         |  
|Non-cash write-off of investment in affiliate                           |  |                 | 26,093   |   |                 |   |         |                  |  |   |         |  
|Non-cash write-off of debt discount and debt issuance costs             |  |                 | 12,430   |   |                 |   | 186      |                  |  |   | 1,790    |  
|Changes in assets and liabilities:                                      |  |                 |          |   |                 |   |          |                  |  |   |          |  
|Receivables                                                             |  |                 | (1,383   | ) |                 |   | (4,609   | )                |  |   | 1,789    |  
|Inventories                                                             |  |                 | (6,787   | ) |                 |   | (9,419   | )                |  |   | (1,103   | )
|Other assets                                                            |  |                 | (843     | ) |                 |   | 699      |                  |  |   | (7,014   | )
|Accounts payable                                                        |  |                 | 6,712    |   |                 |   | 9,085    |                  |  |   | 2,465    |  
|Accrued expenses                                                        |  |                 | (2,243   | ) |                 |   | 17,642   |                  |  |   | 1,026    |  
|Accrued salaries and employee benefits                                  |  |                 | 9,430    |   |                 |   | 8,797    |                  |  |   | 15,483   |  
|Deferred rent                                                           |  |                 | (1,995   | ) |                 |   | 72       |                  |  |   | 863      |  
|                                                                        |  |                 |          |   |                 |   |          |                  |  |   |          |  
|Net cash provided by operating activities                               |  |                 | 79,759   |   |                 |   | 133,526  |                  |  |   | 156,931  |  
|                                                                        |  |                 |          |   |                 |   |          |                  |  |   |          |  
|Cash flows from investing activities:                                   |  |                 |          |   |                 |   |          |                  |  |   |          |  
|Additions to fixed assets                                               |  |                 | (56,235  | ) |                 |   | (56,209  | )                |  |   | (95,870  | )
|Investment in affiliate                                                 |  |                 | (9,728   | ) |                 |   |         |                  |  |   |         |  
|Acquisitions of intangible assets                                       |  |                 |         |   |                 |   |         |                  |  |   | (3,087   | )
|Net (loans) repayments to/from employees                                |  |                 | (906     | ) |                 |   | 210      |                  |  |   | 253      |  
|Repayment of loan to affiliate                                          |  |                 | 6,545    |   |                 |   |         |                  |  |   |         |  
|                                                                        |  |                 |          |   |                 |   |          |                  |  |   |          |  
|Net cash used in investing activities                                   |  |                 | (60,324  | ) |                 |   | (55,999  | )                |  |   | (98,704  | )
|                                                                        |  |                 |          |   |                 |   |          |                  |  |   |          |  
|Cash flows from financing activities:                                   |  |                 |          |   |                 |   |          |                  |  |   |          |  
|Borrowings under long-term debt agreements                              |  |                 | 215,650  |   |                 |   |         |                  |  |   |         |  
|Repayment of long-term debt agreements                                  |  |                 | (210,150 | ) |                 |   | (32,000  | )                |  |   | (101,710 | )
|Debt issuance costs                                                     |  |                 | (1,210   | ) |                 |   | (1,465   | )                |  |   | (1,488   | )
|Repayment of capital lease and other obligations                        |  |                 | (5,678   | ) |                 |   | (4,715   | )                |  |   | (433     | )
|Net proceeds from the issuance of common stock                          |  |                 | 124      |   |                 |   | 273,144  |                  |  |   | 91       |  
|Repayment of redeemable preferred stock                                 |  |                 |         |   |                 |   | (239,769 | )                |  |   |         |  
|Costs of common stock issued by stockholders                            |  |                 |         |   |                 |   |         |                  |  |   | (1,423   | )
|                                                                        |  |                 |          |   |                 |   |          |                  |  |   |          |  
|Net cash used in financing activities                                   |  |                 | (1,264   | ) |                 |   | (4,805   | )                |  |   | (104,963 | )
|                                                                        |  |                 |          |   |                 |   |          |                  |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                    |  |                 | 18,171   |   |                 |   | 72,722   |                  |  |   | (46,736  | )
|Cash and cash equivalents at beginning of year                          |  |                 | 18,044   |   |                 |   | 36,215   |                  |  |   | 108,937  |  
|                                                                        |  |                 |          |   |                 |   |          |                  |  |   |          |  
|Cash and cash equivalents at end of year                                |  | $               | 36,215   |   |                 | $ | 108,937  |                  |  | $ | 62,201   |  
|                                                                        |  |                 |          |   |                 |   |          |                  |  |   |          |  
|Supplemental cash flow disclosures:                                     |  |                 |          |   |                 |   |          |                  |  |   |          |  
|Interest paid on debt                                                   |  | $               | 42,989   |   |                 | $ | 32,884   |                  |  | $ | 27,308   |  
|Income taxes paid                                                       |  | $               | 2,673    |   |                 | $ | 1,390    |                  |  | $ | 21,888   |  
|Supplemental disclosure of non-cash investing and financing activities: |  |                 |          |   |                 |   |          |                  |  |   |          |  
|Additions to capital leases                                             |  | $               |         |   |                 | $ | 1,101    |                  |  | $ |         |  



See accompanying notes
to consolidated financial statements.





F-6



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##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



For the years ended February 2, 2002, February 1, 2003 and January 31, 2004



1. Summary of Significant Accounting Policies



(a) Description of Business:



PETCO Animal
Supplies, Inc. (the Company or PETCO), a Delaware corporation, is a national specialty retailer of premium pet food, supplies and services with stores in 43 states and the District of Columbia.



(b) Basis of Presentation:



The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.



The preparation of 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. Actual results could differ from those estimates.



(c) Common Stock Split:



Prior to the
completion of the Companys initial public offering on February 27, 2002, the Company effected a 2-for-1 stock split of its common stock. All share information in the consolidated financial statements has been retroactively restated to reflect
the stock split for all periods presented.



(d) 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 fiscal years presented herein consisted of 52 weeks. All references to a fiscal year refer to the fiscal year ending on the Saturday closest to January 31 of the following year.



(e) Cash Equivalents:



The Company considers all liquid investments with original maturities of three months or less to be cash equivalents.



(f) Vendor Rebates and Allowances:



The Company adopted Emerging Issues Task Force, or EITF, Issue 02-16,
Accounting by a Customer (including a Reseller) for Cash Consideration Received from a Vendor,during the first quarter of fiscal 2003. EITF Issue 02-16 provides guidance on how a customer should account for cash consideration received
from a vendor. The transition provisions apply prospectively to arrangements with vendors entered into or modified subsequent to December 31, 2002, do not allow for prior period reclassification, and require all amounts received from vendors to be
accounted for as a reduction of the cost of the products purchased unless certain criteria are met to allow presentation as a reduction of selling, general and administrative expenses. In fiscal 2003 as a result of the adoption of EITF Issue 02-16,
substantially all vendor support, including cooperative advertising support, was initially deferred as a reduction of the cost of inventory purchased from each vendor, and the support was recognized as a reduction of cost of sales as the related
inventory was sold. For fiscal 2003, the adoption of EITF Issue 02-16 resulted in the reclassification of $24.2 million of vendor consideration from an offset to selling, general and administrative expenses to a $17.7 million reduction of cost of
sales and a $6.5 million deferral, reducing inventory, which will be recognized as a reduction of cost of sales in future periods.



F-7



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##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



For the years ended February 2, 2002, February 1, 2003 and January 31, 2004



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 $1,308 and $1,597 at February 1, 2003 and January 31, 2004, respectively.



In November 2003, the EITF reached a consensus on Issue 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. EITF Issue 03-10 provides guidance on the accounting for consideration received by a reseller in the form of a
reimbursement by the vendor for honoring the vendors sales incentives offered directly to consumers. The transition provisions apply prospectively to arrangements with vendors entered into or modified in fiscal periods beginning in the
Companys first fiscal quarter ending May 1, 2004. The adoption of EITF Issue 03-10 will result in certain vendors sales incentives being reflected as a reduction of both net sales and cost of sales and occupancy costs and will have no
effect on the Companys earnings or balance sheet. Fiscal 2003 financial statements presented for comparative purposes in fiscal 2004 will be reclassified to comply with EITF Issue 03-10.



(g) Inventories:



Inventories are stated at the lower of cost, determined by the first-in, first-out method, or market. 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.



(h) Fixed Assets:



Fixed assets are stated at cost less accumulated depreciation. Equipment
under capital leases is stated at the present value of minimum lease payments at the inception of the lease. Maintenance and repairs are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of
the assets, as follows:



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



(i) Debt Issuance Costs:



Debt issuance costs are amortized to interest expense
using the effective interest method over the life of the related debt. Accumulated amortization for debt issuance costs at February 1, 2003 and January 31, 2004 was $2,958 and $4,419, respectively.



(j) Goodwill 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. Through February 2, 2002, goodwill was amortized on a straight-line basis over useful lives ranging from three to fifteen years. As a result of the
adoption



F-8



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##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



For the years ended February 2, 2002, February 1, 2003 and January 31, 2004



of Statement of Financial Accounting Standards, or SFAS, No. 142, Goodwill and Other Intangible Assets, on February 3, 2002, the Company ceased
amortizing goodwill. During the second quarter of 2002, the Company completed the transitional impairment analysis of the goodwill required under SFAS No. 142 and recorded an impairment charge of $284. In connection with this analysis, all remaining
goodwill was allocated to the individual stores in operation at the time of acquisition. The Company performs its required 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, which is calculated based on the
present value of estimated future net cash flows. Impairment charges were not significant in either fiscal 2002 or 2003.



Non-compete agreements, which comprise substantially all of the Companys other intangible assets, have defined lives and are included in other
long-term assets in the accompanying consolidated balance sheets. Non-compete agreements had a carrying value of $273 and $2,817 and accumulated amortization of $1,757 and $920 at February 1, 2003 and January 31, 2004, respectively. Non-compete
agreements are amortized using the straight-line method over their estimated useful lives of two and five years.



The effect of the adoption of SFAS No. 142 on the reported net earnings (loss) for the periods presented is as follows:



|                                                                 |  |                 |         |   |                 |   |                 |  |   |       
|---------------------------------------------------------------- |  | --------------- | ------- | - | --------------- | - | --------------- |  | - | ------
|                                                                 |  | Years Ended    
|                                                                 |  | February 2,2002 |         |   | February 1,2003 |   | January 31,2004
|Net earnings (loss) available to common stockholders as reported |  | $               | (50,546 | ) |                 | $ | 11,654          |  | $ | 64,713
|Add back amortization of goodwill, net of tax                    |  |                 | 3,045   |   |                 |   |                |  |   |      
|                                                                 |  |                 |         |   |                 |   |                 |  |   |       
|Net earnings (loss) available to common stockholders as adjusted |  | $               | (47,501 | ) |                 | $ | 11,654          |  | $ | 64,713
|                                                                 |  |                 |         |   |                 |   |                 |  |   |       
|Basic net earnings (loss) per common share:                      |  |                 |         |   |                 |   |                 |  |   |       
|Net earnings (loss) as reported                                  |  | $               | (1.32   | ) |                 | $ | 0.21            |  | $ | 1.13  
|Add back amortization of goodwill                                |  |                 | 0.08    |   |                 |   |                |  |   |      
|                                                                 |  |                 |         |   |                 |   |                 |  |   |       
|Net earnings (loss) as adjusted                                  |  | $               | (1.24   | ) |                 | $ | 0.21            |  | $ | 1.13  
|                                                                 |  |                 |         |   |                 |   |                 |  |   |       
|Diluted net earnings (loss) per common share:                    |  |                 |         |   |                 |   |                 |  |   |       
|Net earnings (loss) as reported                                  |  | $               | (1.32   | ) |                 | $ | 0.20            |  | $ | 1.11  
|Add back amortization of goodwill                                |  |                 | 0.08    |   |                 |   |                |  |   |      
|                                                                 |  |                 |         |   |                 |   |                 |  |   |       
|Net earnings (loss) as adjusted                                  |  | $               | (1.24   | ) |                 | $ | 0.20            |  | $ | 1.11  
|                                                                 |  |                 |         |   |                 |   |                 |  |   |       



In addition, the
Company periodically 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 loss would be
measured as the amount by which the assets carrying value exceeds its fair value, and would be 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 $858, $150 and $736 during fiscal 2001, 2002 and 2003, respectively. These write-downs relate to store fixtures, equipment and leasehold improvements for planned store closures and are recorded in cost of
sales and occupancy costs in the accompanying statements of operations.



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PETCO ANIMAL SUPPLIES, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



For the years ended February 2, 2002, February 1, 2003 and January 31, 2004



(k) Accrued Expenses:



Accrued expenses consisted of the following at the balance sheet dates:



|                            |  |                 |        |                 |   |       
|--------------------------- |  | --------------- | ------ | --------------- | - | ------
|                            |  | February 1,2003 |        | January 31,2004
|Accrued insurance           |  | $               | 7,120  |                 | $ | 9,852 
|Accrued income taxes        |  |                 | 10,691 |                 |   | 6,786 
|Accrued sales taxes payable |  |                 | 12,227 |                 |   | 13,687
|Other accrued expenses      |  |                 | 35,053 |                 |   | 36,935
|                            |  |                 |        |                 |   |       
|                            |  | $               | 65,091 |                 | $ | 67,260
|                            |  |                 |        |                 |   |       



(l) Self-Insurance Accrual:



The Company maintains an accrual for self-insured workers
compensation costs, which is classified in accrued salaries and employee benefits in the accompanying consolidated balance sheets. The Company determines the adequacy of these accruals by periodically evaluating historical experience and trends
related to workers compensation claims and payments, information provided by the Companys insurance broker, and industry experience and trends. 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 accident and the final resolution of a claim and the possible effects of changes in the legal, social and economic
environments contribute to this variability. At February 1, 2003 and January 31, 2004, the Companys accrual for workers compensation costs was $15,135 and $26,472, respectively.



(m) Store Closing Costs:



The Company adopted SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, for exit or disposal activities initiated after
December 31, 2002. In accordance with SFAS No. 146, all costs associated with exit or disposal activities are recognized when they are incurred or when the Company ceases using a property. Prior to the adoption of this standard, the Company charged
costs associated with store closures to operations upon commitment to close a store within 12 months of the date of commitment. 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 statements of
operations. For fiscal 2001, 2002 and 2003, store closing costs charged to operations were $260, $2,109 and a net credit of $322, respectively. Total accrued store closing costs were $2,702 and $1,052 as of February 1, 2003 and January 31, 2004,
respectively, and are included in accrued expenses (short-term portion) and deferred rent and other liabilities (long-term portion).



(n) Fair Value of Financial Instruments:



Because of their short maturities, the carrying amounts for cash and cash equivalents, receivables, accounts payable, accrued expenses, and accrued
salaries and employee benefits approximate fair value. The estimated fair value of the senior subordinated notes was approximately $140 million at January 31, 2004, based upon prices recently paid for these instruments. The carrying amounts for
long-term debt and other obligations approximate fair value as the interest rates and terms are substantially similar to those that could be obtained currently for similar instruments.



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PETCO ANIMAL SUPPLIES, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



For the years ended February 2, 2002, February 1, 2003 and January 31, 2004



(o) 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. 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.



(p) Derivative Instruments and Hedging Activities:



SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet, and measure those instruments at fair value. Accounting for changes in
the fair value of a derivative depends on the intended use and resulting designation of the derivative. For derivatives designated as hedges, changes in the fair value are either offset against the change in fair value of the assets or liabilities
through earnings or recognized in other comprehensive income in the balance sheet. In December 2000, the Company entered into a $75.0 million interest rate collar agreement, or hedge, to limit its exposure to the interest rate risk associated with
variable rate debt. During fiscal 2001, the Company recorded $1,467, net of tax benefit of $868, to other comprehensive loss related to the decline in fair value of the derivative. During fiscal 2002, the Company recorded $1,467, net of tax expense
of $868, to other comprehensive income related to the increase in fair value of the derivative. The hedge expired in December 2002.



(q) Stock-Based Compensation:



The Company accounts for stock option plans in accordance with the provisions of Accounting Principles Board, or APB, Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations, and recognizes compensation expense if the current market price of the underlying stock exceeds the exercise price on the date of grant.



Had compensation costs for the Companys stock option plans been
determined based upon the fair value at the grant date for awards under these plans, consistent with the methodology prescribed under SFAS No. 123, Accounting for Stock-Based Compensation, the Companys net earnings (loss) would have
been as reflected in the following table. The weighted average fair value of the options granted during fiscal 2001, 2002 and 2003 was estimated as $0.56, $8.76 and $7.41, respectively, on the date of grant using the Black-Scholes option pricing
model with the following assumptions: no dividend yield, volatility of 57.5%, 44.3% and 44.3% for fiscal 2001, 2002 and 2003, respectively, risk-free interest rate of 3.7% for fiscal 2001, rates ranging from 2.6% to 4.3% for fiscal 2002, and 3.0%
for fiscal 2003, and an expected life of three years for fiscal 2001 and five years for fiscal 2002 and 2003.



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##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



For the years ended February 2, 2002, February 1, 2003 and January 31, 2004



|                                                                               |  |                 |         |   |                 |   |                 |  |   |       
|------------------------------------------------------------------------------ |  | --------------- | ------- | - | --------------- | - | --------------- |  | - | ------
|                                                                               |  | Years Ended    
|                                                                               |  | February 2,2002 |         |   | February 1,2003 |   | January 31,2004
|Net earnings (loss) available to common stockholders                           |  | $               | (50,546 | ) |                 | $ | 11,654          |  | $ | 64,713
|Stock-based compensation recorded using the intrinsic value method, net of tax |  |                 | 10,584  |   |                 |   | 5,277           |  |   |      
|                                                                               |  |                 |         |   |                 |   |                 |  |   |       
|Net earnings (loss) before stock-based compensation                            |  |                 | (39,962 | ) |                 |   | 16,931          |  |   | 64,713
|Stock-based compensation using the fair value method, net of tax               |  |                 | 2,045   |   |                 |   | 5,509           |  |   | 2,350 
|                                                                               |  |                 |         |   |                 |   |                 |  |   |       
|Pro-forma net earnings (loss) available to common stockholders                 |  |                 | (42,007 | ) |                 |   | 11,422          |  |   | 62,363
|                                                                               |  |                 |         |   |                 |   |                 |  |   |       
|Pro-forma basic earnings (loss) per common share                               |  |                 | (1.09   | ) |                 |   | 0.20            |  |   | 1.09  
|Pro-forma diluted earnings (loss) per common share                             |  |                 | (1.09   | ) |                 |   | 0.20            |  |   | 1.07  



In connection with
fixed plan stock option awards granted to employees in fiscal 2001, the Company recorded deferred compensation of $9,288 equal to the aggregate differences between the exercise prices of the options granted and the fair value of the underlying
stock. Deferred compensation was amortized over the vesting periods of the options. During fiscal 2001 and fiscal 2002, the Company recorded amortization in the amount of $849 and $8,439, respectively. For variable plan options, the Company recorded
stock-based compensation of $16,502 during fiscal 2001 based on changes in the fair value of the underlying stock. In connection with the Companys initial public offering of its common stock in fiscal 2002 (see Note 7), all outstanding options
prior to the initial public offering were modified and became fully vested. Total stock-based compensation for fiscal 2001 was $17,351 and is recorded in cost of sales and occupancy costs and stock-based compensation and other costs in the amounts
of $3,001 and $14,350, respectively, in the accompanying consolidated statements of operations. Total stock-based compensation for fiscal 2002 was $8,651 and is recorded in cost of sales and occupancy costs and stock-based compensation and other
costs in the amounts of $1,460 and $7,191, respectively, in the accompanying consolidated statements of operations. See Note 8 for a summary of stock options outstanding.



(r) Comprehensive Income:



SFAS No. 130, Reporting Comprehensive Income, requires that certain items of comprehensive income other than net earnings or loss be reported in
the financial statements. During fiscal 2001, the Company recorded $1,467, net of tax benefit of $868, to other comprehensive loss related to the decline in fair value of the Companys interest rate hedge. During fiscal 2002, the Company
recorded $1,467, net of tax expense of $868, to other comprehensive income related to the increase in fair value of the Companys interest rate hedge, which expired in December 2002.



(s) 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.



(t) 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, hiring and training costs for new employees, and stocking initial merchandise.



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##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



For the years ended February 2, 2002, February 1, 2003 and January 31, 2004



(u) Debt Retirement Costs:



Debt retirement costs consist of prepayment premiums, prepayment penalties, the write off of unamortized debt discounts and
debt issuance costs, and legal and closing costs associated with the extinguishment of debt. In fiscal 2003, the Company adopted SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections, which provides guidance on the classification of gains and losses from the extinguishment of debt and on the accounting for certain specified lease transactions. Upon the adoption of SFAS No. 145, the Company reclassified the fiscal
2001 and 2002 debt retirement costs from extraordinary losses on debt extinguishment to expenses from recurring operations in the accompanying consolidated statements of operations.



(v) Net Earnings (Loss) per Share:



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



Net earnings (loss) and weighted average common shares used to compute net earnings (loss) per common share, basic and diluted, are presented below:



|                                                     |  |                 |         |   |                 |   |                 |  |   |       
|---------------------------------------------------- |  | --------------- | ------- | - | --------------- | - | --------------- |  | - | ------
|                                                     |  | Years Ended    
|                                                     |  | February 2,2002 |         |   | February 1,2003 |   | January 31,2004
|Net earnings (loss) available to common stockholders |  | $               | (50,546 | ) |                 | $ | 11,654          |  | $ | 64,713
|                                                     |  |                 |         |   |                 |   |                 |  |   |       
|Common shares, basic                                 |  |                 | 38,429  |   |                 |   | 56,094          |  |   | 57,422
|Dilutive effect of stock options                     |  |                 |        |   |                 |   | 812             |  |   | 877   
|                                                     |  |                 |         |   |                 |   |                 |  |   |       
|Common shares, diluted                               |  |                 | 38,429  |   |                 |   | 56,906          |  |   | 58,299
|                                                     |  |                 |         |   |                 |   |                 |  |   |       



Warrants to purchase
2,132 shares of common stock were outstanding at February 2, 2002, but were not included in the computation of diluted earnings (loss) per common share because the conversion would have an antidilutive effect on diluted earnings (loss) per common
share. Options to purchase common shares that were outstanding but not included in the computation of diluted earnings (loss) per common share because the conversion would have an antidilutive effect were 1,355, 46 and 7 for fiscal 2001, 2002 and
2003, respectively.



(w) 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, 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 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.



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##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



For the years ended February 2, 2002, February 1, 2003 and January 31, 2004



(x) Future Accounting Requirements:



As discussed in Note 1(f), the Company will adopt EITF Issue 03-10 beginning in the Companys first fiscal quarter
ending May 1, 2004.



Financial Accounting Standards Board, or
FASB, Interpretation No. 46, or FIN 46, Consolidation of Variable Interest Entities, was issued in January 2003, and a revised interpretation of FIN 46, or FIN 46R, was issued in December 2003. FIN 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties. The provisions of FIN 46 are effective immediately for all arrangements entered into after January 31, 2003. Since January 31, 2003, the Company has no interest in any
entities it believes are variable interest entities for which the Company is the primary beneficiary. For all arrangements entered into after January 31, 2003, the Company is required to continue to apply FIN 46 through the end of fiscal 2003. The
Company is required to adopt the provisions of FIN 46R for those arrangements in the first quarter of fiscal 2004. For arrangements entered into prior to February 1, 2003, the Company is required to adopt the provisions of FIN 46R in the first
quarter of fiscal 2004. The Company has no interest in any entities it believes are variable interest entities for which the Company is the primary beneficiary and does not believe that the adoption of FIN 46R will have a material impact on its
consolidated financial position or results of operations.



(y)
Reclassifications:



Certain previously reported amounts
have been reclassified to conform with the current period presentation.



2.
Investment in Affiliate



The Company had a 72% limited
partnership interest in Canadian Petcetera Limited Partnership (the Partnership), a limited partnership that operated retail pet food and supply stores in Canada. On January 28, 2002, the Company terminated its relationship with the
Partnership and entered into a settlement agreement in connection with the resolution of a dispute with the other partners in the Partnership. In connection with the settlement agreement, the Company transferred all of its limited partnership
interest in the Partnership to an affiliate of the general partner and paid a settlement fee of $10.3 million. In conjunction with the termination of its relationship with the Partnership, the Company also recorded a write-off of $26.7 million in
fiscal 2001, consisting of $26.1 million in carrying value of its investment in the Partnership and $0.6 million of related assets. The Company accounted for its investment in the Partnership using the equity method as it did not exercise control
over the Partnership and recorded its proportionate share of earnings or loss according to the partnership agreement. The Company recorded a loss of $3,083 in fiscal 2001 for its share of the Partnerships losses, which is included in equity in
loss of unconsolidated affiliate in the accompanying consolidated statements of operations.



3. Long-Term Debt



In
October 2000, the Company obtained senior credit facilities consisting of $270 million in term loans and an $80 million revolving credit facility. In October 2001, the Company amended its senior credit facility to reduce the revolving credit
facility to $75 million and to restructure the term loans into a single $195 million term loan. In connection with the amendment in fiscal 2001, the Company recorded debt retirement costs of $1,295, consisting of the write-off of unamortized debt
issuance costs. In August 2002, the Company refinanced



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##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



For the years ended February 2, 2002, February 1, 2003 and January 31, 2004



its term loan facility so that the senior credit facility consisted of a $75 million revolving credit facility and a $193.5 million term loan facility, for a
total commitment of $268.5 million. On August 1, 2003, the Company made an early repayment of $50.0 million on the term loan from operating cash flows, incurring debt retirement costs of $1,572 related to the write off of unamortized debt issuance
costs. In connection with the repayment, the Company entered into an amendment of the senior credit facility that resulted in an immediate interest rate reduction of 0.5% on the term loan and more favorable credit terms.



At January 31, 2004, the senior credit facility consists of a $75.0 million
revolving credit facility and a $141.5 million term loan for a total commitment of $216.5 million. The senior credit facilities expire between October 2, 2006 and October 2, 2008. Borrowings under the senior credit facility are secured by
substantially all of the Companys assets and bear interest (1) in the case of the revolving credit facility, at the Companys option, at the agent banks base rate plus a margin of up to 2.25%, or LIBOR plus a margin of up to 3.25%,
based on the Companys leverage ratio at the time, and (2) in the case of the term loan, at the Companys option, at the agent banks base rate plus a fixed margin of 1.5%, or LIBOR plus a fixed margin of 2.5%. Amounts can be
withdrawn under the revolving credit facility for general business purposes. The Company incurs a fee of 2.0% on letters of credit issued under the revolving credit facility and a fee of 0.5% on the unused commitment under the revolving credit
facility, which is reduced for any letters of credit. The Company also incurs a fee of $150 per year for the entire credit facility. The credit agreement contains certain affirmative and negative covenants related to, among other things,
indebtedness, interest and fixed charges coverage and consolidated net worth.



At January 31, 2004, the Company was in full compliance with all of the covenants, and the outstanding balance of the Companys term loan facility was $140.8 million, including a current portion of $1.4 million.
In addition, there were no borrowings on the Companys revolving credit facility at January 31, 2004, which has $55.0 million of available credit. The interest rate at January 31, 2004 on the borrowings under the term loan facility was 3.67%.
Annual maturities of the long-term debt are $1,420, $1,420, $1,420, $34,931 and $101,599 in fiscal 2004, 2005, 2006, 2007 and 2008, respectively.



At January 31, 2004, the Company had outstanding $20.0 million in letters of credit used for general business purposes, which reduce the availability
under the revolving credit facility.



4. Senior Subordinated Notes



At February 3, 2001, the Company had $120 million in
principal amount of senior subordinated notes maturing on October 1, 2010. Interest on the senior subordinated notes accrued at a rate of 13% per annum. In connection with the issuance of the senior subordinated notes, the purchaser received series
A and series B redeemable preferred stock, with a fair value of $9,421, and warrants for the purchase of 2,132 shares of common stock of the Company at an exercise price of $0.001 per share, with a fair value of $1,066. The fair value of the
preferred stock and warrants was reflected as a discount to the senior subordinated notes and was being amortized to interest expense over ten years. The warrants were exercised in connection with the Companys initial public offering (see Note
7). In October 2001, these senior subordinated notes were redeemed in full and the Company recorded debt retirement costs totaling $19,535, consisting of a $8,400 prepayment penalty, the write-off of $1,677 in unamortized debt issuance costs and the
write-off of $9,458 in unamortized debt discount.



In October
2001, the Company issued $200 million in principal amount of senior subordinated notes maturing on November 1, 2011. Interest on the senior subordinated notes accrues at a rate of 10.75% per annum and is payable semi-annually. The Company may redeem
the senior subordinated notes at its option at any time after November 1, 2006, in whole or in part, based upon an agreed upon schedule of redemption prices.



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##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



For the years ended February 2, 2002, February 1, 2003 and January 31, 2004



In March 2002, the Company repurchased $30.0 million in aggregate principal amount of its 10.75%
senior subordinated notes, and the Company recorded debt retirement costs totaling $3,336, consisting of a $3,150 prepayment premium and the write-off of $186 in unamortized debt issuance costs. In January 2004, the Company repurchased $50.0 million
in aggregate principal amount of its 10.75% senior subordinated notes. The Company recorded debt retirement costs totaling $10,617, consisting of a $10.0 million prepayment premium and the write-off of unamortized debt issuance costs, legal fees and
closing fees totaling $617.



5. Lease Commitments and Other Obligations



The Company has $1,101 in fixed assets financed through
capital leases at February 1, 2003 and January 31, 2004. Accumulated amortization related to these financed assets was $87 and $454 at February 1, 2003 and January 31, 2004, respectively.



The Company leases warehouse and store facilities and equipment under operating leases. These operating leases generally
have terms from five to twenty years. Certain store leases include additional contingent rental payments ranging from 2% to 6% of store revenues above defined levels. Contingent rentals during fiscal 2001, 2002 and 2003 were $86, $143 and $156,
respectively.



At January 31, 2004, future minimum lease
payments under noncancelable operating leases and capital leases and other obligations were as follows:



|                                                                 |  |                                   |       |                 |   |          
|---------------------------------------------------------------- |  | --------------------------------- | ----- | --------------- | - | ---------
|Years                                                            |  | CapitalLeases andOtherObligations |       | OperatingLeases
|2004                                                             |  | $                                 | 522   |                 | $ | 155,793  
|2005                                                             |  |                                   | 387   |                 |   | 148,889  
|2006                                                             |  |                                   | 1,756 |                 |   | 137,580  
|2007                                                             |  |                                   |      |                 |   | 125,685  
|2008                                                             |  |                                   |      |                 |   | 117,147  
|Thereafter                                                       |  |                                   |      |                 |   | 448,565  
|                                                                 |  |                                   |       |                 |   |          
|Total minimum payments                                           |  | $                                 | 2,665 |                 | $ | 1,133,659
|                                                                 |  |                                   |       |                 |   |          
|Less amount representing interest                                |  |                                   | 57    |                 |   |          
|                                                                 |  |                                   |       |                 |   |          
|Present value of net minimum capital lease and other obligations |  |                                   | 2,608 |                 |   |          
|Less current portion of capital lease and other obligations      |  |                                   | 500   |                 |   |          
|                                                                 |  |                                   |       |                 |   |          
|Capital lease and other obligations, excluding current portion   |  | $                                 | 2,108 |                 |   |          
|                                                                 |  |                                   |       |                 |   |          



Rent expense under
operating leases, which is recorded on a straight-line basis over the term of the lease, for fiscal 2001, 2002 and 2003 was $115,906, $129,804 and $145,129, respectively.



6. Preferred Stock



The authorized number of shares of preferred stock at February 1, 2003 and January 31, 2004 was 5,000 with a par value of $.01 per share. During fiscal
2000, the Board of Directors authorized the issuance of two series of redeemable preferred stock. In October 2000, the Company issued 111 shares of its series A senior redeemable exchangeable cumulative preferred stock and also issued 78 shares of
its series B junior redeemable cumulative preferred stock. The Company redeemed, in full, all of the outstanding shares of series A and series B



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##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



For the years ended February 2, 2002, February 1, 2003 and January 31, 2004



preferred stock in connection with the initial public offering discussed in Note 7. The liquidation preferences at redemption, including accumulated
dividends and a redemption premium of 6%, were $226.2 million and $13.6 million, respectively.



7. Public Offerings



On
February 27, 2002, the Company completed an initial public offering of 14,500 shares of common stock for net proceeds of approximately $254.8 million, after deducting the underwriting discount and estimated offering expenses. On March 14, 2002, the
Company received additional net proceeds of approximately $17.7 million from the sale of 1,000 additional shares of common stock pursuant to the exercise of the underwriters over-allotment option. The Company used approximately $239.8 million
of the net proceeds of its initial public offering to redeem in full all of the Companys then outstanding shares of series A and series B preferred stock. In connection with the initial public offering, the Company also amended and restated
its stockholders agreement and its securityholders agreement, terminated its management services agreement and used approximately $32.7 million of the net proceeds of the initial public offering, plus approximately $1.8 million in cash on-hand, to
repurchase $30.0 million in aggregate principal amount of its 10.75% senior subordinated notes due 2011 at 110.5% of their face amount, plus accrued and unpaid interest through the repurchase date. Concurrent with the initial public offering,
warrants to purchase 2,132 shares of common stock were exercised and all outstanding options prior to the initial public offering became fully vested.



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.



8. Equity



(a) Common Stock:



The
authorized number of common shares at February 3, 2001 was 50,000 with a par value of $0.001 per share. On February 21, 2002, the authorized number of common shares was increased to 75,000, and on February 27, 2002, the authorized number of common
shares was increased to 250,000.



The senior 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. In addition, the Delaware general corporation law provides that dividends are
only payable out of surplus or current net profits.



(b) Stock Options:



In February 1994, the Companys stockholders
approved the 1994 Stock Option Plan (1994 Company Plan), which provides for the granting of stock options, stock appreciation rights or restricted stock with respect to shares of common stock to executives and other key employees. Stock
options are exercisable for up to ten years following the date of grant. As of January 31, 2004, there were 570 options outstanding under the 1994 Company Plan, and no further grants will be made.



In February 2002, the Companys board of directors and stockholders
adopted the 2002 Incentive Award Plan (the Incentive Plan), which provides for the granting of stock-based compensation awards, including stock



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##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



For the years ended February 2, 2002, February 1, 2003 and January 31, 2004



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. Generally, the aggregate share limit under the Incentive Plan is equal to the sum of (1) 1,115,006 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 under the Incentive Plan to the Companys independent directors, the aggregate share limit under the Incentive Plan is equal to the sum of (1) 55,750 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 31, 2004, options to purchase 787 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.



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



|                                |  |        |   |  |                                 |              |                               |   |      
|------------------------------- |  | ------ | - |  | ------------------------------- | ------------ | ----------------------------- | - | -----
|                                |  | Shares |   |  | Option Exercise Price Per Share |              | WeightedAverageExercise Price
|Outstanding at February 3, 2001 |  | 1,451  |   |  | $                               | 0.10-$0.50   |                               | $ | 0.24 
|Granted                         |  | 882    |   |  | $                               | 0.50-$4.45   |                               | $ | 1.33 
|Exercised                       |  | (923   | ) |  | $                               | 0.10-$0.50   |                               | $ | 0.13 
|Cancelled                       |  | (55    | ) |  | $                               | 0.10-$0.10   |                               | $ | 0.10 
|                                |  |        |   |  |                                 |              |                               |   |      
|Outstanding at February 2, 2002 |  | 1,355  |   |  | $                               | 0.10-$4.45   |                               | $ | 1.03 
|Granted                         |  | 680    |   |  | $                               | 19.00-$25.09 |                               | $ | 19.78
|Exercised                       |  | (639   | ) |  | $                               | 0.10-$4.45   |                               | $ | 1.02 
|Cancelled                       |  | (127   | ) |  | $                               | 0.50-$19.00  |                               | $ | 10.28
|                                |  |        |   |  |                                 |              |                               |   |      
|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
|                                |  |        |   |  |                                 |              |                               |   |      



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##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



For the years ended February 2, 2002, February 1, 2003 and January 31, 2004



(c) Stock Options Outstanding:



The following table summarizes information about the options outstanding under the Companys stock option plans at
January 31, 2004:



|                         |  |                     |  |                                                 |  |                              |       |                   |     |                              |   |      
|------------------------ |  | ------------------- |  | ----------------------------------------------- |  | ---------------------------- | ----- | ----------------- | --- | ---------------------------- | - | -----
|                         |  | Options Outstanding |  | Options Exercisable                            
|Range of Exercise Prices |  | NumberOutstanding   |  | WeightedAverageRemainingContractualLife (Years) |  | WeightedAverageExercisePrice |       | NumberExercisable |     | WeightedAverageExercisePrice
|$0.10-$0.50              |  | 158                 |  | 6.84                                            |  | $                            | 0.50  |                   | 158 |                              | $ | 0.50 
|0.61                     |  | 336                 |  | 7.56                                            |  |                              | 0.61  |                   | 336 |                              |   | 0.61 
|4.45-16.85               |  | 79                  |  | 7.99                                            |  |                              | 4.92  |                   | 79  |                              |   | 4.92 
|16.96                    |  | 982                 |  | 9.11                                            |  |                              | 16.96 |                   |    |                              |   |     
|19.00                    |  | 448                 |  | 8.06                                            |  |                              | 19.00 |                   | 15  |                              |   | 19.00
|20.56-31.48              |  | 155                 |  | 8.81                                            |  |                              | 24.86 |                   | 36  |                              |   | 22.87
|                         |  |                     |  |                                                 |  |                              |       |                   |     |                              |   |      
|$0.10-$31.48             |  | 2,158               |  | 8.42                                            |  | $                            | 13.76 |                   | 624 |                              | $ | 2.85 
|                         |  |                     |  |                                                 |  |                              |       |                   |     |                              |   |      



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



9. Income Taxes



Income taxes (benefit)
consists of the following:



|                       |  |                 |         |   |                 |   |                 |  |   |       
|---------------------- |  | --------------- | ------- | - | --------------- | - | --------------- |  | - | ------
|                       |  | Years Ended    
|                       |  | February 2,2002 |         |   | February 1,2003 |   | January 31,2004
|Current:               |  |                 |         |   |                 |   |                 |  |   |       
|Federal                |  | $               | (1,616  | ) |                 | $ | 3,866           |  | $ | 14,205
|State                  |  |                 | (230    | ) |                 |   | 2,003           |  |   | 4,355 
|                       |  |                 |         |   |                 |   |                 |  |   |       
|                       |  |                 | (1,846  | ) |                 |   | 5,869           |  |   | 18,560
|                       |  |                 |         |   |                 |   |                 |  |   |       
|Deferred:              |  |                 |         |   |                 |   |                 |  |   |       
|Federal                |  |                 | (7,135  | ) |                 |   | 16,129          |  |   | 14,991
|State                  |  |                 | (1,122  | ) |                 |   | 1,847           |  |   | 1,105 
|                       |  |                 |         |   |                 |   |                 |  |   |       
|                       |  |                 | (8,257  | ) |                 |   | 17,976          |  |   | 16,096
|                       |  |                 |         |   |                 |   |                 |  |   |       
|Income taxes (benefit) |  | $               | (10,103 | ) |                 | $ | 23,845          |  | $ | 34,656
|                       |  |                 |         |   |                 |   |                 |  |   |       



F-19



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##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



For the years ended February 2, 2002, February 1, 2003 and January 31, 2004



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



|                                        |  |                 |         |   |                 |   |        |                 |  |   |        |  
|--------------------------------------- |  | --------------- | ------- | - | --------------- | - | ------ | --------------- |  | - | ------ | -
|                                        |  | Years Ended     |        
|                                        |  | February 2,2002 |         |   | February 1,2003 |   |        | January 31,2004 | 
|Income taxes at federal statutory rate  |  | $               | (11,516 | ) |                 | $ | 19,595 |                 |  | $ | 34,779 |  
|Non-deductible expenses                 |  |                 | 2,735   |   |                 |   | 1,957  |                 |  |   | 270    |  
|State taxes, net of federal tax benefit |  |                 | (879    | ) |                 |   | 2,239  |                 |  |   | 2,603  |  
|Change in federal valuation allowance   |  |                 | (153    | ) |                 |   | (4,542 | )               |  |   | (580   | )
|Net operating losses                    |  |                 |        |   |                 |   | 4,844  |                 |  |   | (3,379 | )
|Other                                   |  |                 | (290    | ) |                 |   | (248   | )               |  |   | 963    |  
|                                        |  |                 |         |   |                 |   |        |                 |  |   |        |  
|                                        |  | $               | (10,103 | ) |                 | $ | 23,845 |                 |  | $ | 34,656 |  
|                                        |  |                 |         |   |                 |   |        |                 |  |   |        |  



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



|                                            |  |                 |        |   |                 |   |        |                 |  |   |        |  
|------------------------------------------- |  | --------------- | ------ | - | --------------- | - | ------ | --------------- |  | - | ------ | -
|                                            |  | Years Ended     |       
|                                            |  | February 2,2002 |        |   | February 1,2003 |   |        | January 31,2004 | 
|Inventory                                   |  | $               | (409   | ) |                 | $ | 904    |                 |  | $ | (2,200 | )
|Bad debts                                   |  |                 | (33    | ) |                 |   | (63    | )               |  |   | (107   | )
|Deferred rent                               |  |                 | (357   | ) |                 |   | (350   | )               |  |   | (354   | )
|Depreciation                                |  |                 | (768   | ) |                 |   | 6,944  |                 |  |   | 8,824  |  
|Accrued expenses                            |  |                 |       |   |                 |   | 9,453  |                 |  |   | 219    |  
|Accrued fringe benefits                     |  |                 | (2,979 | ) |                 |   | (5,545 | )               |  |   | (3,889 | )
|Intangible assets                           |  |                 | (1,257 | ) |                 |   | 2,055  |                 |  |   | 1,997  |  
|Store closing costs                         |  |                 | 901    |   |                 |   | (102   | )               |  |   | 654    |  
|Assets related to Internet investment       |  |                 | (26    | ) |                 |   | (1,027 | )               |  |   | 825    |  
|Benefit of net operating loss carryforwards |  |                 | (2,836 | ) |                 |   | 8,923  |                 |  |   | 6,984  |  
|Stock-based compensation                    |  |                 | (1,217 | ) |                 |   | 487    |                 |  |   | 27     |  
|Debt issuance costs                         |  |                 | 1,150  |   |                 |   | 121    |                 |  |   | 129    |  
|Alternative minimum tax credit              |  |                 | (604   | ) |                 |   | 179    |                 |  |   | 3,663  |  
|Change in valuation allowance               |  |                 | (153   | ) |                 |   | (4,542 | )               |  |   | (747   | )
|Other                                       |  |                 | (535   | ) |                 |   | 1,407  |                 |  |   | 71     |  
|                                            |  |                 |        |   |                 |   |        |                 |  |   |        |  
|                                            |  | $               | (9,123 | ) |                 | $ | 18,844 |                 |  | $ | 16,096 |  
|                                            |  |                 |        |   |                 |   |        |                 |  |   |        |  



F-20



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##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



For the years ended February 2, 2002, February 1, 2003 and January 31, 2004



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 follow:



|                                      |  |                 |         |   |                 |   |         |  
|------------------------------------- |  | --------------- | ------- | - | --------------- | - | ------- | -
|                                      |  | February 1,2003 |         |   | January 31,2004 |  
|Deferred tax assets:                  |  |                 |         |   |                 |   |         |  
|Inventory                             |  | $               | 3,077   |   |                 | $ | 5,277   |  
|Bad debts                             |  |                 | 515     |   |                 |   | 622     |  
|Deferred rent                         |  |                 | 5,837   |   |                 |   | 6,191   |  
|Accrued fringe benefits               |  |                 | 11,882  |   |                 |   | 15,771  |  
|Store closing costs                   |  |                 | 1,064   |   |                 |   | 410     |  
|Assets related to Internet investment |  |                 | 9,679   |   |                 |   | 8,854   |  
|Net operating loss carryforwards      |  |                 | 7,814   |   |                 |   | 830     |  
|Stock-based compensation              |  |                 | 730     |   |                 |   | 703     |  
|Debt issuance costs                   |  |                 | 893     |   |                 |   | 764     |  
|Alternative minimum tax credit        |  |                 | 3,695   |   |                 |   | 32      |  
|                                      |  |                 |         |   |                 |   |         |  
|Total deferred tax assets             |  |                 | 45,186  |   |                 |   | 39,454  |  
|Valuation allowance                   |  |                 | (9,550  | ) |                 |   | (8,803  | )
|                                      |  |                 |         |   |                 |   |         |  
|Net deferred tax assets               |  |                 | 35,636  |   |                 |   | 30,651  |  
|                                      |  |                 |         |   |                 |   |         |  
|Deferred tax liabilities:             |  |                 |         |   |                 |   |         |  
|Depreciation                          |  |                 | (22,549 | ) |                 |   | (31,373 | )
|Intangible assets                     |  |                 | (2,070  | ) |                 |   | (4,067  | )
|Accrued expenses                      |  |                 | (9,453  | ) |                 |   | (9,672  | )
|Other                                 |  |                 | (340    | ) |                 |   | (411    | )
|                                      |  |                 |         |   |                 |   |         |  
|Total deferred tax liabilities        |  |                 | (34,412 | ) |                 |   | (45,523 | )
|                                      |  |                 |         |   |                 |   |         |  
|Net deferred tax assets (liabilities) |  | $               | 1,224   |   |                 | $ | (14,872 | )
|                                      |  |                 |         |   |                 |   |         |  



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



|                                 |  |                 |         |   |                 |   |         |  
|-------------------------------- |  | --------------- | ------- | - | --------------- | - | ------- | -
|                                 |  | February 1,2003 |         |   | January 31,2004 |  
|CurrentDeferred tax assets      |  | $               | 14,492  |   |                 | $ | 12,047  |  
|Long-termDeferred tax liability |  |                 | (13,268 | ) |                 |   | (26,919 | )
|                                 |  |                 |         |   |                 |   |         |  
|                                 |  | $               | 1,224   |   |                 | $ | (14,872 | )
|                                 |  |                 |         |   |                 |   |         |  



The valuation
allowance of $9,550 and $8,803 at February 1, 2003 and January 31, 2004, respectively, relates primarily to the capital loss arising from the Companys divestiture of an Internet investment in fiscal 2000. The decrease in the valuation
allowance at January 31, 2004 relates primarily to the reclassification and utilization of deferred tax assets on the balance sheet. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that
all or some portion 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.



F-21



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##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



For the years ended February 2, 2002, February 1, 2003 and January 31, 2004



At January 31, 2004, the Company has available net loss carryforwards of $15,560 for state income tax
purposes, which begin expiring in 2005.



10. Employee Savings 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 $1,304 in fiscal 2001, $1,351 in fiscal 2002 and $1,364 in fiscal 2003.



11. Related Party Transactions



In October 2000, the Company entered into a management services agreement
with two entities that were sponsors of the Companys merger and recapitalization transaction and became the Companys two largest common stockholders. Under the terms of this agreement, the Company paid management fees in an aggregate
amount of $3,120 and $260 in fiscal 2001 and 2002, respectively, to these two related parties. In February 2002, the Company terminated the management services agreement and paid a termination fee of $12.5 million that was recorded in fiscal 2002.



The Company issued 13% senior subordinated notes due October
2010 to a related party in fiscal 2000 and redeemed them in fiscal 2001 (see Note 4). The related party syndicated a portion of these senior subordinated notes. Interest expense incurred on the senior subordinated notes, primarily with the related
party, including amortization of the associated discount, was $11,952 in fiscal 2001.



During fiscal 2000 and 2001, the Company made loans totaling $981 to a number of officers and other members of management to fund the exercise of vested stock options and to pay certain taxes in connection with the
exercise of these options. The loans are evidenced by secured promissory notes that bear interest at rates ranging from 6.00% to 6.22%, compounded annually. As of February 1, 2003 and January 31, 2004, the total outstanding balance of these loans,
including accrued interest, was $781 and $527, respectively. The remaining unpaid loans mature in fiscal 2004.



In February 2002, the Company redeemed all of the then outstanding shares of series A and B preferred stock, including approximately $110.8 million in
preferred stock from each of the Companys two largest common stockholders, each of whom has two representatives serving on the Companys Board of Directors, and approximately $0.1 million in preferred stock from an individual director of
the Company.



12. Contingencies



In July 2001, the Company received a copy of a complaint filed in the
Superior Court of California for the County of Los Angeles alleging violations of the California Labor Code and the Business and Professions Code. The purported class of plaintiffs alleged that the Company improperly classified its salaried store
managers and assistant store managers as exempt employees not entitled to overtime pay for work in excess of 40 hours per week. The relief sought included compensatory damages, penalties, preliminary and permanent injunctions requiring the Company
to pay overtime compensation under California law, prejudgment interest, costs and attorneys fees and such other relief as the court deemed proper. In November 2001, the case was transferred to the Superior Court of California for the County
of San Diego. In December 2002, the Company announced its intention to settle all claims related to this lawsuit. While the Company denies the allegations underlying the



F-22



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##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



For the years ended February 2, 2002, February 1, 2003 and January 31, 2004



lawsuit, the Company agreed to the settlement to avoid possible disruption to its business from protracted litigation. In fiscal 2002, the Company recognized
litigation settlement expense of $3.5 million for the settlement, which received final court approval on July 31, 2003.



In June 2002, allegations were made in a complaint filed in the San Francisco Superior Court by the San Francisco City Attorneys office to the
effect that certain associates have not properly cared for companion animals for sale in the Companys two San Francisco stores. The complaint, which has been subsequently transferred to the Santa Clara Superior Court, seeks damages, penalties
and an injunction against the sale of companion animals in the Companys San Francisco stores. The complaint and related news reports have caused negative publicity and subsequently certain other California counties have indicated that they are
reviewing the Companys animal care policies. The Company takes seriously any allegations regarding the proper care of companion animals and has taken steps to reiterate to all its associates the importance of proper care for all companion
animals in all of the Companys stores. The Company is responding to the complaint and is defending it vigorously. The complaint and any similar actions which could be filed in the future, could cause negative publicity which could have a
material adverse effect on the Companys results of operations.



The District Attorneys of various California counties, through the San Diego and Los Angeles District Attorneys, have informed the Company that they are investigating certain alleged weights and measures violations. The investigation
specifically concerns whether checkout price scanners used in the Companys stores identified prices that in some instances did not match the posted prices for certain products, and whether the sale tags regarding those products were
misleading. No legal action has been filed against the Company with respect to this investigation. The Company is working cooperatively with the District Attorneys to reach a satisfactory resolution of this matter, and does not believe that the
outcome of the matter will have a material impact on the Companys results of operations or financial condition in any future period. From time to time, the Company also receives inquiries or notices from other jurisdictions or regulatory
authorities with respect to similar alleged weights and measures issues or violations, which the Company responds to in the ordinary course of business.



In April 2003, three alleged applicants for employment instituted an action against over 100 retailers, including the Company, in the Superior Court of
California for the County of Los Angeles. The complaint in the action was filed individually and on behalf of a purported class. The complaint alleges that the individual plaintiffs and the purported class members sought employment with the other
retailers, or the Company, and that the written employment application asked, in violation of the California Labor Code and Unfair Business Practices Act, about convictions for certain marijuana offenses and about convictions that resulted in the
defendant being sent to a diversion program. In December 2003, the court granted the Companys request to dismiss the action due to certain defects regarding parties named in the initial complaint. Shortly thereafter, the three plaintiffs filed
lawsuits against each retailer separately, but to date the Company has not been formally served with a complaint. Following formal receipt of the complaint, the Company intends to vigorously defend the action, and does not believe that the outcome
of the matter will have a material impact on the Companys results of operations or financial condition in any future period.



In October 2003, the Company was served with a Civil Investigative Demand from the United States Federal Trade Commission, or FTC, seeking information and
documents relating to the Companys e-commerce website, petco.com, and more particularly the Companys policies and practices regarding the protection of personal information furnished by customers to the website. The request stems from an
incident in late June 2003 in which a self-proclaimed hacker purportedly obtained unauthorized access to a portion of the Companys website. The Company has cooperated with the FTCs inquiry by providing documents and information, and has
taken and is taking additional steps to insure that its e-commerce customers privacy is maintained. At the present



F-23



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##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



For the years ended February 2, 2002, February 1, 2003 and January 31, 2004



time, the Company is unable to determine whether the FTC will initiate any enforcement action against the Company or the financial impact any such action
might entail.



The Company has recorded accruals for estimated
losses related to certain of the above matters. The Company is also involved in other routine litigation arising in the ordinary course of its business. While the results of such other litigation cannot be predicted with certainty, the Company
believes that the final outcome of such matters will not have a material adverse effect on the Companys consolidated financial position or results of operations.



13. Supplemental Guarantor Condensed Consolidating Financial Statements



The Company has outstanding $120 million in principal amount of 10.75%
senior subordinated notes due 2011 in which certain of its subsidiaries (the guarantor subsidiaries) serve as guarantors on a full and unconditional basis. Certain other subsidiaries (the nonguarantor subsidiaries) did not guarantee such debt.



The following tables present the condensed consolidating
balance sheets of PETCO Animal Supplies, Inc. as a parent company, its guarantor subsidiaries and its nonguarantor subsidiaries as of February 1, 2003 and January 31, 2004 and the related condensed consolidating statements of operations and of cash
flows for each of the years in the three-year period ended January 31, 2004.



F-24



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##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND

PARENT COMPANY BALANCE SHEET



February 1, 2003



(in
thousands)



|                                                               |  |                                                  |         |   |                       |   |          |                           |  |                                  |   |  |                                           |          |   |  |   |         |  
|-------------------------------------------------------------- |  | ------------------------------------------------ | ------- | - | --------------------- | - | -------- | ------------------------- |  | -------------------------------- | - |  | ----------------------------------------- | -------- | - |  | - | ------- | -
|                                                               |  | PETCO AnimalSupplies, Inc.ParentCompanyGuarantor |         |   | GuarantorSubsidiaries |   |          | Non-GuarantorSubsidiaries |  | ReclassificationsandEliminations |   |  | PETCO AnimalSupplies, Inc.AndSubsidiaries |         
|ASSETS                                                         |  |                                                  |         |   |                       |   |          |                           |  |                                  |   |  |                                           |          |   |  |   |         |  
|Current assets:                                                |  |                                                  |         |   |                       |   |          |                           |  |                                  |   |  |                                           |          |   |  |   |         |  
|Cash and cash equivalents                                      |  | $                                                | 108,174 |   |                       | $ | 763      |                           |  | $                                |  |  | $                                         |         |   |  | $ | 108,937 |  
|Receivables                                                    |  |                                                  | 3,579   |   |                       |   | 10,724   |                           |  |                                  |  |  |                                           |         |   |  |   | 14,303  |  
|Inventories                                                    |  |                                                  | 128,837 |   |                       |   | 9,573    |                           |  |                                  |  |  |                                           |         |   |  |   | 138,410 |  
|Deferred tax assets                                            |  |                                                  | 14,492  |   |                       |   |         |                           |  |                                  |  |  |                                           |         |   |  |   | 14,492  |  
|Other                                                          |  |                                                  | 7,413   |   |                       |   | 46       |                           |  |                                  |  |  |                                           |         |   |  |   | 7,459   |  
|                                                               |  |                                                  |         |   |                       |   |          |                           |  |                                  |   |  |                                           |          |   |  |   |         |  
|Total current assets                                           |  |                                                  | 262,495 |   |                       |   | 21,106   |                           |  |                                  |  |  |                                           |         |   |  |   | 283,601 |  
|Fixed assets, net                                              |  |                                                  | 196,614 |   |                       |   | 21,828   |                           |  |                                  |  |  |                                           |         |   |  |   | 218,442 |  
|Debt issuance costs                                            |  |                                                  | 5,724   |   |                       |   |         |                           |  |                                  |  |  |                                           |         |   |  |   | 5,724   |  
|Goodwill                                                       |  |                                                  |        |   |                       |   | 40,644   |                           |  |                                  |  |  |                                           |         |   |  |   | 40,644  |  
|Intercompany investments and advances                          |  |                                                  | 213,635 |   |                       |   | 58,792   |                           |  |                                  |  |  |                                           | (272,427 | ) |  |   |        |  
|Other assets                                                   |  |                                                  | 6,444   |   |                       |   |         |                           |  |                                  |  |  |                                           |         |   |  |   | 6,444   |  
|                                                               |  |                                                  |         |   |                       |   |          |                           |  |                                  |   |  |                                           |          |   |  |   |         |  
|                                                               |  | $                                                | 684,912 |   |                       | $ | 142,370  |                           |  | $                                |  |  | $                                         | (272,427 | ) |  | $ | 554,855 |  
|                                                               |  |                                                  |         |   |                       |   |          |                           |  |                                  |   |  |                                           |          |   |  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                 |  |                                                  |         |   |                       |   |          |                           |  |                                  |   |  |                                           |          |   |  |   |         |  
|Current liabilities:                                           |  |                                                  |         |   |                       |   |          |                           |  |                                  |   |  |                                           |          |   |  |   |         |  
|Accounts payable                                               |  | $                                                | (5,023  | ) |                       | $ | 66,331   |                           |  | $                                |  |  | $                                         |         |   |  | $ | 61,308  |  
|Intercompany payables                                          |  |                                                  | 203,606 |   |                       |   | (203,606 | )                         |  |                                  |  |  |                                           |         |   |  |   |        |  
|Accrued expenses                                               |  |                                                  | 58,839  |   |                       |   | 6,252    |                           |  |                                  |  |  |                                           |         |   |  |   | 65,091  |  
|Accrued salaries and employee benefits                         |  |                                                  | 41,325  |   |                       |   | 415      |                           |  |                                  |  |  |                                           |         |   |  |   | 41,740  |  
|Current portion of long-term debt                              |  |                                                  | 2,000   |   |                       |   |         |                           |  |                                  |  |  |                                           |         |   |  |   | 2,000   |  
|Current portion of capital lease and other obligations         |  |                                                  | 411     |   |                       |   |         |                           |  |                                  |  |  |                                           |         |   |  |   | 411     |  
|                                                               |  |                                                  |         |   |                       |   |          |                           |  |                                  |   |  |                                           |          |   |  |   |         |  
|Total current liabilities                                      |  |                                                  | 301,158 |   |                       |   | (130,608 | )                         |  |                                  |  |  |                                           |         |   |  |   | 170,550 |  
|Long-term debt, excluding current portion                      |  |                                                  | 190,500 |   |                       |   |         |                           |  |                                  |  |  |                                           |         |   |  |   | 190,500 |  
|Senior subordinated notes payable                              |  |                                                  | 170,000 |   |                       |   |         |                           |  |                                  |  |  |                                           |         |   |  |   | 170,000 |  
|Capital lease and other obligations, excluding current portion |  |                                                  | 2,630   |   |                       |   |         |                           |  |                                  |  |  |                                           |         |   |  |   | 2,630   |  
|Deferred tax liability                                         |  |                                                  | 13,268  |   |                       |   |         |                           |  |                                  |  |  |                                           |         |   |  |   | 13,268  |  
|Deferred rent and other liabilities                            |  |                                                  | 18,439  |   |                       |   | 551      |                           |  |                                  |  |  |                                           |         |   |  |   | 18,990  |  
|                                                               |  |                                                  |         |   |                       |   |          |                           |  |                                  |   |  |                                           |          |   |  |   |         |  
|Total liabilities                                              |  |                                                  | 695,995 |   |                       |   | (130,057 | )                         |  |                                  |  |  |                                           |         |   |  |   | 565,938 |  
|Stockholders equity (deficit)                                 |  |                                                  | (11,083 | ) |                       |   | 272,427  |                           |  |                                  |  |  |                                           | (272,427 | ) |  |   | (11,083 | )
|                                                               |  |                                                  |         |   |                       |   |          |                           |  |                                  |   |  |                                           |          |   |  |   |         |  
|                                                               |  | $                                                | 684,912 |   |                       | $ | 142,370  |                           |  | $                                |  |  | $                                         | (272,427 | ) |  | $ | 554,855 |  
|                                                               |  |                                                  |         |   |                       |   |          |                           |  |                                  |   |  |                                           |          |   |  |   |         |  



F-25



---

##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND

PARENT COMPANY BALANCE SHEET



January 31, 2004



(in
thousands)



|                                                               |  |                                                  |         |   |                       |   |          |                           |  |                                  |   |  |                                           |          |   |  |   |        
|-------------------------------------------------------------- |  | ------------------------------------------------ | ------- | - | --------------------- | - | -------- | ------------------------- |  | -------------------------------- | - |  | ----------------------------------------- | -------- | - |  | - | -------
|                                                               |  | PETCO AnimalSupplies, Inc.ParentCompanyGuarantor |         |   | GuarantorSubsidiaries |   |          | Non-GuarantorSubsidiaries |  | ReclassificationsandEliminations |   |  | PETCO AnimalSupplies, Inc.AndSubsidiaries
|ASSETS                                                         |  |                                                  |         |   |                       |   |          |                           |  |                                  |   |  |                                           |          |   |  |   |        
|Current assets:                                                |  |                                                  |         |   |                       |   |          |                           |  |                                  |   |  |                                           |          |   |  |   |        
|Cash and cash equivalents                                      |  | $                                                | 61,428  |   |                       | $ | 773      |                           |  | $                                |  |  | $                                         |         |   |  | $ | 62,201 
|Receivables                                                    |  |                                                  | 78      |   |                       |   | 12,436   |                           |  |                                  |  |  |                                           |         |   |  |   | 12,514 
|Inventories                                                    |  |                                                  | 129,787 |   |                       |   | 9,726    |                           |  |                                  |  |  |                                           |         |   |  |   | 139,513
|Deferred tax assets                                            |  |                                                  | 12,047  |   |                       |   |         |                           |  |                                  |  |  |                                           |         |   |  |   | 12,047 
|Other                                                          |  |                                                  | 10,024  |   |                       |   | 2,883    |                           |  |                                  |  |  |                                           |         |   |  |   | 12,907 
|                                                               |  |                                                  |         |   |                       |   |          |                           |  |                                  |   |  |                                           |          |   |  |   |        
|Total current assets                                           |  |                                                  | 213,364 |   |                       |   | 25,818   |                           |  |                                  |  |  |                                           |         |   |  |   | 239,182
|Fixed assets, net                                              |  |                                                  | 234,118 |   |                       |   | 22,229   |                           |  |                                  |  |  |                                           |         |   |  |   | 256,347
|Debt issuance costs                                            |  |                                                  | 4,251   |   |                       |   |         |                           |  |                                  |  |  |                                           |         |   |  |   | 4,251  
|Goodwill                                                       |  |                                                  |        |   |                       |   | 40,289   |                           |  |                                  |  |  |                                           |         |   |  |   | 40,289 
|Intercompany investments and advances                          |  |                                                  | 266,219 |   |                       |   | 70,176   |                           |  |                                  |  |  |                                           | (336,395 | ) |  |   |       
|Other assets                                                   |  |                                                  | 8,137   |   |                       |   | 3,656    |                           |  |                                  |  |  |                                           |         |   |  |   | 11,793 
|                                                               |  |                                                  |         |   |                       |   |          |                           |  |                                  |   |  |                                           |          |   |  |   |        
|                                                               |  | $                                                | 726,089 |   |                       | $ | 162,168  |                           |  | $                                |  |  | $                                         | (336,395 | ) |  | $ | 551,862
|                                                               |  |                                                  |         |   |                       |   |          |                           |  |                                  |   |  |                                           |          |   |  |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY                           |  |                                                  |         |   |                       |   |          |                           |  |                                  |   |  |                                           |          |   |  |   |        
|Current liabilities:                                           |  |                                                  |         |   |                       |   |          |                           |  |                                  |   |  |                                           |          |   |  |   |        
|Accounts payable                                               |  | $                                                | (2,929  | ) |                       | $ | 66,702   |                           |  | $                                |  |  | $                                         |         |   |  | $ | 63,773 
|Intercompany payables                                          |  |                                                  | 251,372 |   |                       |   | (251,372 | )                         |  |                                  |  |  |                                           |         |   |  |   |       
|Accrued expenses                                               |  |                                                  | 58,548  |   |                       |   | 8,712    |                           |  |                                  |  |  |                                           |         |   |  |   | 67,260 
|Accrued salaries and employee benefits                         |  |                                                  | 56,167  |   |                       |   | 1,056    |                           |  |                                  |  |  |                                           |         |   |  |   | 57,223 
|Current portion of long-term debt                              |  |                                                  | 1,420   |   |                       |   |         |                           |  |                                  |  |  |                                           |         |   |  |   | 1,420  
|Current portion of capital lease and other obligations         |  |                                                  | 500     |   |                       |   |         |                           |  |                                  |  |  |                                           |         |   |  |   | 500    
|                                                               |  |                                                  |         |   |                       |   |          |                           |  |                                  |   |  |                                           |          |   |  |   |        
|Total current liabilities                                      |  |                                                  | 365,078 |   |                       |   | (174,902 | )                         |  |                                  |  |  |                                           |         |   |  |   | 190,176
|Long-term debt, excluding current portion                      |  |                                                  | 139,370 |   |                       |   |         |                           |  |                                  |  |  |                                           |         |   |  |   | 139,370
|Senior subordinated notes payable                              |  |                                                  | 120,000 |   |                       |   |         |                           |  |                                  |  |  |                                           |         |   |  |   | 120,000
|Capital lease and other obligations, excluding current portion |  |                                                  | 2,108   |   |                       |   |         |                           |  |                                  |  |  |                                           |         |   |  |   | 2,108  
|Deferred tax liability                                         |  |                                                  | 26,919  |   |                       |   |         |                           |  |                                  |  |  |                                           |         |   |  |   | 26,919 
|Deferred rent and other liabilities                            |  |                                                  | 19,481  |   |                       |   | 675      |                           |  |                                  |  |  |                                           |         |   |  |   | 20,156 
|                                                               |  |                                                  |         |   |                       |   |          |                           |  |                                  |   |  |                                           |          |   |  |   |        
|Total liabilities                                              |  |                                                  | 672,956 |   |                       |   | (174,227 | )                         |  |                                  |  |  |                                           |         |   |  |   | 498,729
|Stockholders equity                                           |  |                                                  | 53,133  |   |                       |   | 336,395  |                           |  |                                  |  |  |                                           | (336,395 | ) |  |   | 53,133 
|                                                               |  |                                                  |         |   |                       |   |          |                           |  |                                  |   |  |                                           |          |   |  |   |        
|                                                               |  | $                                                | 726,089 |   |                       | $ | 162,168  |                           |  | $                                |  |  | $                                         | (336,395 | ) |  | $ | 551,862
|                                                               |  |                                                  |         |   |                       |   |          |                           |  |                                  |   |  |                                           |          |   |  |   |        



F-26



---

##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND

PARENT COMPANY STATEMENT OF OPERATIONS



For the year ended February 2, 2002



(in thousands)



|                                                                                   |  |                                                 |           |   |                       |   |                           |  |   |                                  |   |  |                                          |          |   |  |   |           |  
|---------------------------------------------------------------------------------- |  | ----------------------------------------------- | --------- | - | --------------------- | - | ------------------------- |  | - | -------------------------------- | - |  | ---------------------------------------- | -------- | - |  | - | --------- | -
|                                                                                   |  | PETCOAnimalSupplies, Inc.ParentCompanyGuarantor |           |   | GuarantorSubsidiaries |   | Non-GuarantorSubsidiaries |  |   | ReclassificationsandEliminations |   |  | PETCOAnimalSupplies, Inc.AndSubsidiaries |         
|Net sales                                                                          |  | $                                               | 1,194,022 |   |                       | $ | 872,846                   |  | $ |                                 |   |  | $                                        | (765,919 | ) |  | $ | 1,300,949 |  
|Cost of sales and occupancy costs                                                  |  |                                                 | 851,978   |   |                       |   | 736,078                   |  |   |                                 |   |  |                                          | (678,870 | ) |  |   | 909,186   |  
|                                                                                   |  |                                                 |           |   |                       |   |                           |  |   |                                  |   |  |                                          |          |   |  |   |           |  
|Gross profit                                                                       |  |                                                 | 342,044   |   |                       |   | 136,768                   |  |   |                                 |   |  |                                          | (87,049  | ) |  |   | 391,763   |  
|Selling, general and administrative expenses                                       |  |                                                 | 292,129   |   |                       |   | 99,786                    |  |   | 101                              |   |  |                                          | (87,049  | ) |  |   | 304,967   |  
|Management fees and termination costs                                              |  |                                                 | 3,120     |   |                       |   |                          |  |   |                                 |   |  |                                          |         |   |  |   | 3,120     |  
|Stock-based compensation and other costs                                           |  |                                                 | 14,350    |   |                       |   |                          |  |   |                                 |   |  |                                          |         |   |  |   | 14,350    |  
|Write-off of Canadian investment                                                   |  |                                                 | 8,942     |   |                       |   |                          |  |   | 28,093                           |   |  |                                          |         |   |  |   | 37,035    |  
|Other                                                                              |  |                                                 | 445       |   |                       |   |                          |  |   |                                 |   |  |                                          |         |   |  |   | 445       |  
|                                                                                   |  |                                                 |           |   |                       |   |                           |  |   |                                  |   |  |                                          |          |   |  |   |           |  
|Operating income (loss)                                                            |  |                                                 | 23,058    |   |                       |   | 36,982                    |  |   | (28,194                          | ) |  |                                          |         |   |  |   | 31,846    |  
|Interest income                                                                    |  |                                                 | (612      | ) |                       |   |                          |  |   |                                 |   |  |                                          |         |   |  |   | (612      | )
|Interest expense                                                                   |  |                                                 | 41,447    |   |                       |   |                          |  |   | 2                                |   |  |                                          |         |   |  |   | 41,449    |  
|Debt retirement costs                                                              |  |                                                 | 20,830    |   |                       |   |                          |  |   |                                 |   |  |                                          |         |   |  |   | 20,830    |  
|                                                                                   |  |                                                 |           |   |                       |   |                           |  |   |                                  |   |  |                                          |          |   |  |   |           |  
|Earnings (loss) before equity in loss of unconsolidated affiliate and income taxes |  |                                                 | (38,607   | ) |                       |   | 36,982                    |  |   | (28,196                          | ) |  |                                          |         |   |  |   | (29,821   | )
|Equity in loss of unconsolidated affiliate                                         |  |                                                 |          |   |                       |   |                          |  |   | (3,083                           | ) |  |                                          |         |   |  |   | (3,083    | )
|                                                                                   |  |                                                 |           |   |                       |   |                           |  |   |                                  |   |  |                                          |          |   |  |   |           |  
|Earnings (loss) before income taxes                                                |  |                                                 | (38,607   | ) |                       |   | 36,982                    |  |   | (31,279                          | ) |  |                                          |         |   |  |   | (32,904   | )
|Income tax benefit                                                                 |  |                                                 | (10,103   | ) |                       |   |                          |  |   |                                 |   |  |                                          |         |   |  |   | (10,103   | )
|                                                                                   |  |                                                 |           |   |                       |   |                           |  |   |                                  |   |  |                                          |          |   |  |   |           |  
|Earnings (loss) before equity in earnings of subsidiaries                          |  |                                                 | (28,504   | ) |                       |   | 36,982                    |  |   | (31,279                          | ) |  |                                          |         |   |  |   | (22,801   | )
|Equity in earnings of subsidiaries                                                 |  |                                                 | 5,703     |   |                       |   |                          |  |   |                                 |   |  |                                          | (5,703   | ) |  |   |          |  
|                                                                                   |  |                                                 |           |   |                       |   |                           |  |   |                                  |   |  |                                          |          |   |  |   |           |  
|Net earnings (loss)                                                                |  | $                                               | (22,801   | ) |                       | $ | 36,982                    |  | $ | (31,279                          | ) |  | $                                        | (5,703   | ) |  | $ | (22,801   | )
|                                                                                   |  |                                                 |           |   |                       |   |                           |  |   |                                  |   |  |                                          |          |   |  |   |           |  



F-27



---

##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND

PARENT COMPANY STATEMENT OF OPERATIONS



For the year ended February 1, 2003



(in thousands)



|                                                          |  |                                                  |           |   |                       |   |                           |  |                                  |   |  |                                           |          |   |  |   |           |  
|--------------------------------------------------------- |  | ------------------------------------------------ | --------- | - | --------------------- | - | ------------------------- |  | -------------------------------- | - |  | ----------------------------------------- | -------- | - |  | - | --------- | -
|                                                          |  | PETCO AnimalSupplies, Inc.ParentCompanyGuarantor |           |   | GuarantorSubsidiaries |   | Non-GuarantorSubsidiaries |  | ReclassificationsandEliminations |   |  | PETCO AnimalSupplies, Inc.AndSubsidiaries |         
|Net sales                                                 |  | $                                                | 1,358,130 |   |                       | $ | 966,906                   |  | $                                |  |  | $                                         | (848,402 | ) |  | $ | 1,476,634 |  
|Cost of sales and occupancy costs                         |  |                                                  | 953,807   |   |                       |   | 815,013                   |  |                                  |  |  |                                           | (752,571 | ) |  |   | 1,016,249 |  
|                                                          |  |                                                  |           |   |                       |   |                           |  |                                  |   |  |                                           |          |   |  |   |           |  
|Gross profit                                              |  |                                                  | 404,323   |   |                       |   | 151,893                   |  |                                  |  |  |                                           | (95,831  | ) |  |   | 460,385   |  
|Selling, general and administrative expenses              |  |                                                  | 332,433   |   |                       |   | 107,150                   |  |                                  |  |  |                                           | (95,831  | ) |  |   | 343,752   |  
|Management fees and termination costs                     |  |                                                  | 12,760    |   |                       |   |                          |  |                                  |  |  |                                           |         |   |  |   | 12,760    |  
|Stock-based compensation and other costs                  |  |                                                  | 8,388     |   |                       |   |                          |  |                                  |  |  |                                           |         |   |  |   | 8,388     |  
|Litigation settlement                                     |  |                                                  | 3,497     |   |                       |   |                          |  |                                  |  |  |                                           |         |   |  |   | 3,497     |  
|                                                          |  |                                                  |           |   |                       |   |                           |  |                                  |   |  |                                           |          |   |  |   |           |  
|Operating income                                          |  |                                                  | 47,245    |   |                       |   | 44,743                    |  |                                  |  |  |                                           |         |   |  |   | 91,988    |  
|Interest income                                           |  |                                                  | (801      | ) |                       |   |                          |  |                                  |  |  |                                           |         |   |  |   | (801      | )
|Interest expense                                          |  |                                                  | 33,467    |   |                       |   |                          |  |                                  |  |  |                                           |         |   |  |   | 33,467    |  
|Debt retirement costs                                     |  |                                                  | 3,336     |   |                       |   |                          |  |                                  |  |  |                                           |         |   |  |   | 3,336     |  
|                                                          |  |                                                  |           |   |                       |   |                           |  |                                  |   |  |                                           |          |   |  |   |           |  
|Earnings before income taxes                              |  |                                                  | 11,243    |   |                       |   | 44,743                    |  |                                  |  |  |                                           |         |   |  |   | 55,986    |  
|Income taxes                                              |  |                                                  | 23,845    |   |                       |   |                          |  |                                  |  |  |                                           |         |   |  |   | 23,845    |  
|                                                          |  |                                                  |           |   |                       |   |                           |  |                                  |   |  |                                           |          |   |  |   |           |  
|Earnings (loss) before equity in earnings of subsidiaries |  |                                                  | (12,602   | ) |                       |   | 44,743                    |  |                                  |  |  |                                           |         |   |  |   | 32,141    |  
|Equity in earnings of subsidiaries                        |  |                                                  | 44,743    |   |                       |   |                          |  |                                  |  |  |                                           | (44,743  | ) |  |   |          |  
|                                                          |  |                                                  |           |   |                       |   |                           |  |                                  |   |  |                                           |          |   |  |   |           |  
|Net earnings                                              |  | $                                                | 32,141    |   |                       | $ | 44,743                    |  | $                                |  |  | $                                         | (44,743  | ) |  | $ | 32,141    |  
|                                                          |  |                                                  |           |   |                       |   |                           |  |                                  |   |  |                                           |          |   |  |   |           |  



F-28



---

##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND

PARENT COMPANY STATEMENT OF OPERATIONS



For the year ended January 31, 2004



(in thousands)



|                                                   |  |                                                  |           |   |                       |   |                           |  |                                  |   |  |                                           |          |   |  |   |           |  
|-------------------------------------------------- |  | ------------------------------------------------ | --------- | - | --------------------- | - | ------------------------- |  | -------------------------------- | - |  | ----------------------------------------- | -------- | - |  | - | --------- | -
|                                                   |  | PETCO AnimalSupplies, Inc.ParentCompanyGuarantor |           |   | GuarantorSubsidiaries |   | Non-GuarantorSubsidiaries |  | ReclassificationsandEliminations |   |  | PETCO AnimalSupplies, Inc.AndSubsidiaries |         
|Net sales                                          |  | $                                                | 1,529,931 |   |                       | $ | 1,087,757                 |  | $                                |  |  | $                                         | (963,550 | ) |  | $ | 1,654,138 |  
|Cost of sales and occupancy costs                  |  |                                                  | 1,055,513 |   |                       |   | 884,572                   |  |                                  |  |  |                                           | (835,436 | ) |  |   | 1,104,649 |  
|                                                   |  |                                                  |           |   |                       |   |                           |  |                                  |   |  |                                           |          |   |  |   |           |  
|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 income                                    |  |                                                  | (1,389    | ) |                       |   |                          |  |                                  |  |  |                                           |         |   |  |   | (1,389    | )
|Interest expense                                   |  |                                                  | 27,504    |   |                       |   |                          |  |                                  |  |  |                                           |         |   |  |   | 27,504    |  
|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    |  
|                                                   |  |                                                  |           |   |                       |   |                           |  |                                  |   |  |                                           |          |   |  |   |           |  



F-29



---

##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND

PARENT COMPANY STATEMENT OF CASH FLOWS



For the year ended February 2, 2002



(in thousands)



|                                                                                          |  |                                                 |          |   |                       |   |         |                           |  |   |                                  |   |  |                                          |        |   |  |   |          |  
|----------------------------------------------------------------------------------------- |  | ----------------------------------------------- | -------- | - | --------------------- | - | ------- | ------------------------- |  | - | -------------------------------- | - |  | ---------------------------------------- | ------ | - |  | - | -------- | -
|                                                                                          |  | PETCOAnimalSupplies, Inc.ParentCompanyGuarantor |          |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  |   | ReclassificationsandEliminations |   |  | PETCOAnimalSupplies, Inc.andSubsidiaries |       
|Cash flows from operating activities:                                                     |  |                                                 |          |   |                       |   |         |                           |  |   |                                  |   |  |                                          |        |   |  |   |          |  
|Net earnings (loss)                                                                       |  | $                                               | (22,801  | ) |                       | $ | 36,982  |                           |  | $ | (31,279                          | ) |  | $                                        | (5,703 | ) |  | $ | (22,801  | )
|Adjustments to reconcile net earnings (loss) to net cash provided by operating activities |  |                                                 | 89,746   |   |                       |   | (33,896 | )                         |  |   | 41,007                           |   |  |                                          | 5,703  |   |  |   | 102,560  |  
|                                                                                          |  |                                                 |          |   |                       |   |         |                           |  |   |                                  |   |  |                                          |        |   |  |   |          |  
|Net cash provided by operating activities                                                 |  |                                                 | 66,945   |   |                       |   | 3,086   |                           |  |   | 9,728                            |   |  |                                          |       |   |  |   | 79,759   |  
|                                                                                          |  |                                                 |          |   |                       |   |         |                           |  |   |                                  |   |  |                                          |        |   |  |   |          |  
|Cash flows from investing activities:                                                     |  |                                                 |          |   |                       |   |         |                           |  |   |                                  |   |  |                                          |        |   |  |   |          |  
|Additions to fixed assets                                                                 |  |                                                 | (52,424  | ) |                       |   | (3,811  | )                         |  |   |                                 |   |  |                                          |       |   |  |   | (56,235  | )
|Investment in affiliate                                                                   |  |                                                 |         |   |                       |   |        |                           |  |   | (9,728                           | ) |  |                                          |       |   |  |   | (9,728   | )
|Loans to employees                                                                        |  |                                                 | (906     | ) |                       |   |        |                           |  |   |                                 |   |  |                                          |       |   |  |   | (906     | )
|Repayment of loan to affiliate                                                            |  |                                                 | 6,545    |   |                       |   |        |                           |  |   |                                 |   |  |                                          |       |   |  |   | 6,545    |  
|                                                                                          |  |                                                 |          |   |                       |   |         |                           |  |   |                                  |   |  |                                          |        |   |  |   |          |  
|Net cash used in investing activities                                                     |  |                                                 | (46,785  | ) |                       |   | (3,811  | )                         |  |   | (9,728                           | ) |  |                                          |       |   |  |   | (60,324  | )
|                                                                                          |  |                                                 |          |   |                       |   |         |                           |  |   |                                  |   |  |                                          |        |   |  |   |          |  
|Cash flows from financing activities:                                                     |  |                                                 |          |   |                       |   |         |                           |  |   |                                  |   |  |                                          |        |   |  |   |          |  
|Borrowings under long-term debt agreements                                                |  |                                                 | 215,650  |   |                       |   |        |                           |  |   |                                 |   |  |                                          |       |   |  |   | 215,650  |  
|Repayment of long term debt agreements                                                    |  |                                                 | (210,150 | ) |                       |   |        |                           |  |   |                                 |   |  |                                          |       |   |  |   | (210,150 | )
|Debt issuance costs                                                                       |  |                                                 | (1,210   | ) |                       |   |        |                           |  |   |                                 |   |  |                                          |       |   |  |   | (1,210   | )
|Repayments of capital lease and other obligations                                         |  |                                                 | (5,678   | ) |                       |   |        |                           |  |   |                                 |   |  |                                          |       |   |  |   | (5,678   | )
|Net proceeds from the issuance of common stock                                            |  |                                                 | 124      |   |                       |   |        |                           |  |   |                                 |   |  |                                          |       |   |  |   | 124      |  
|                                                                                          |  |                                                 |          |   |                       |   |         |                           |  |   |                                  |   |  |                                          |        |   |  |   |          |  
|Net cash used in financing activities                                                     |  |                                                 | (1,264   | ) |                       |   |        |                           |  |   |                                 |   |  |                                          |       |   |  |   | (1,264   | )
|                                                                                          |  |                                                 |          |   |                       |   |         |                           |  |   |                                  |   |  |                                          |        |   |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                                      |  |                                                 | 18,896   |   |                       |   | (725    | )                         |  |   |                                 |   |  |                                          |       |   |  |   | 18,171   |  
|Cash and cash equivalents at beginning of year                                            |  |                                                 | 17,104   |   |                       |   | 940     |                           |  |   |                                 |   |  |                                          |       |   |  |   | 18,044   |  
|                                                                                          |  |                                                 |          |   |                       |   |         |                           |  |   |                                  |   |  |                                          |        |   |  |   |          |  
|Cash and cash equivalents at end of year                                                  |  | $                                               | 36,000   |   |                       | $ | 215     |                           |  | $ |                                 |   |  | $                                        |       |   |  | $ | 36,215   |  
|                                                                                          |  |                                                 |          |   |                       |   |         |                           |  |   |                                  |   |  |                                          |        |   |  |   |          |  



F-30



---

##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR

AND PARENT COMPANY STATEMENT OF CASH FLOWS



For the year ended February 1, 2003



(in thousands)



|                                                                                   |  |                                                 |          |   |                       |   |         |                           |  |                                  |   |  |                                          |         |   |  |   |          |  
|---------------------------------------------------------------------------------- |  | ----------------------------------------------- | -------- | - | --------------------- | - | ------- | ------------------------- |  | -------------------------------- | - |  | ---------------------------------------- | ------- | - |  | - | -------- | -
|                                                                                   |  | PETCOAnimalSupplies, Inc.ParentCompanyGuarantor |          |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  | ReclassificationsandEliminations |   |  | PETCOAnimalSupplies, Inc.andSubsidiaries |        
|Cash flows from operating activities:                                              |  |                                                 |          |   |                       |   |         |                           |  |                                  |   |  |                                          |         |   |  |   |          |  
|Net earnings                                                                       |  | $                                               | 32,141   |   |                       | $ | 44,743  |                           |  | $                                |  |  | $                                        | (44,743 | ) |  | $ | 32,141   |  
|Adjustments to reconcile net earnings to net cash provided by operating activities |  |                                                 | 97,555   |   |                       |   | (40,913 | )                         |  |                                  |  |  |                                          | 44,743  |   |  |   | 101,385  |  
|                                                                                   |  |                                                 |          |   |                       |   |         |                           |  |                                  |   |  |                                          |         |   |  |   |          |  
|Net cash provided by operating activities                                          |  |                                                 | 129,696  |   |                       |   | 3,830   |                           |  |                                  |  |  |                                          |        |   |  |   | 133,526  |  
|                                                                                   |  |                                                 |          |   |                       |   |         |                           |  |                                  |   |  |                                          |         |   |  |   |          |  
|Cash flows from investing activities:                                              |  |                                                 |          |   |                       |   |         |                           |  |                                  |   |  |                                          |         |   |  |   |          |  
|Additions to fixed assets                                                          |  |                                                 | (52,927  | ) |                       |   | (3,282  | )                         |  |                                  |  |  |                                          |        |   |  |   | (56,209  | )
|Repayments of employee loans                                                       |  |                                                 | 210      |   |                       |   |        |                           |  |                                  |  |  |                                          |        |   |  |   | 210      |  
|                                                                                   |  |                                                 |          |   |                       |   |         |                           |  |                                  |   |  |                                          |         |   |  |   |          |  
|Net cash used in investing activities                                              |  |                                                 | (52,717  | ) |                       |   | (3,282  | )                         |  |                                  |  |  |                                          |        |   |  |   | (55,999  | )
|                                                                                   |  |                                                 |          |   |                       |   |         |                           |  |                                  |   |  |                                          |         |   |  |   |          |  
|Cash flows from financing activities:                                              |  |                                                 |          |   |                       |   |         |                           |  |                                  |   |  |                                          |         |   |  |   |          |  
|Repayment of long term debt agreements                                             |  |                                                 | (32,000  | ) |                       |   |        |                           |  |                                  |  |  |                                          |        |   |  |   | (32,000  | )
|Debt issuance costs                                                                |  |                                                 | (1,465   | ) |                       |   |        |                           |  |                                  |  |  |                                          |        |   |  |   | (1,465   | )
|Repayments of capital lease and other obligations                                  |  |                                                 | (4,715   | ) |                       |   |        |                           |  |                                  |  |  |                                          |        |   |  |   | (4,715   | )
|Net proceeds from the issuance of common stock                                     |  |                                                 | 273,144  |   |                       |   |        |                           |  |                                  |  |  |                                          |        |   |  |   | 273,144  |  
|Repayment of redeemable preferred stock                                            |  |                                                 | (239,769 | ) |                       |   |        |                           |  |                                  |  |  |                                          |        |   |  |   | (239,769 | )
|                                                                                   |  |                                                 |          |   |                       |   |         |                           |  |                                  |   |  |                                          |         |   |  |   |          |  
|Net cash used in financing activities                                              |  |                                                 | (4,805   | ) |                       |   |        |                           |  |                                  |  |  |                                          |        |   |  |   | (4,805   | )
|                                                                                   |  |                                                 |          |   |                       |   |         |                           |  |                                  |   |  |                                          |         |   |  |   |          |  
|Net increase in cash and cash equivalents                                          |  |                                                 | 72,174   |   |                       |   | 548     |                           |  |                                  |  |  |                                          |        |   |  |   | 72,722   |  
|Cash and cash equivalents at beginning of year                                     |  |                                                 | 36,000   |   |                       |   | 215     |                           |  |                                  |  |  |                                          |        |   |  |   | 36,215   |  
|                                                                                   |  |                                                 |          |   |                       |   |         |                           |  |                                  |   |  |                                          |         |   |  |   |          |  
|Cash and cash equivalents at end of year                                           |  | $                                               | 108,174  |   |                       | $ | 763     |                           |  | $                                |  |  | $                                        |        |   |  | $ | 108,937  |  
|                                                                                   |  |                                                 |          |   |                       |   |         |                           |  |                                  |   |  |                                          |         |   |  |   |          |  



F-31



---

##### Table of Contents

PETCO ANIMAL SUPPLIES, INC.



CONDENSED CONSOLIDATING GUARANTOR, NON-GUARANTOR AND

PARENT COMPANY STATEMENT OF CASH FLOWS



For the year ended January 31, 2004



(in thousands)



|                                                                                   |  |                                                 |          |   |                       |   |         |                           |  |                                  |   |  |                                          |         |   |  |   |          |  
|---------------------------------------------------------------------------------- |  | ----------------------------------------------- | -------- | - | --------------------- | - | ------- | ------------------------- |  | -------------------------------- | - |  | ---------------------------------------- | ------- | - |  | - | -------- | -
|                                                                                   |  | PETCOAnimalSupplies, Inc.ParentCompanyGuarantor |          |   | GuarantorSubsidiaries |   |         | Non-GuarantorSubsidiaries |  | ReclassificationsandEliminations |   |  | PETCOAnimalSupplies, Inc.andSubsidiaries |        
|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  | )
|Acquisitions of intangible assets                                                  |  |                                                 |         |   |                       |   | (3,087  | )                         |  |                                  |  |  |                                          |        |   |  |   | (3,087   | )
|Repayments of employee loans                                                       |  |                                                 | 253      |   |                       |   |        |                           |  |                                  |  |  |                                          |        |   |  |   | 253      |  
|                                                                                   |  |                                                 |          |   |                       |   |         |                           |  |                                  |   |  |                                          |         |   |  |   |          |  
|Net cash used in investing activities                                              |  |                                                 | (91,156  | ) |                       |   | (7,548  | )                         |  |                                  |  |  |                                          |        |   |  |   | (98,704  | )
|                                                                                   |  |                                                 |          |   |                       |   |         |                           |  |                                  |   |  |                                          |         |   |  |   |          |  
|Cash flows from financing activities:                                              |  |                                                 |          |   |                       |   |         |                           |  |                                  |   |  |                                          |         |   |  |   |          |  
|Repayment of long term debt agreements                                             |  |                                                 | (101,710 | ) |                       |   |        |                           |  |                                  |  |  |                                          |        |   |  |   | (101,710 | )
|Debt issuance costs                                                                |  |                                                 | (1,488   | ) |                       |   |        |                           |  |                                  |  |  |                                          |        |   |  |   | (1,488   | )
|Repayments of capital lease and other obligations                                  |  |                                                 | (433     | ) |                       |   |        |                           |  |                                  |  |  |                                          |        |   |  |   | (433     | )
|Net proceeds from the issuance of common stock                                     |  |                                                 | 91       |   |                       |   |        |                           |  |                                  |  |  |                                          |        |   |  |   | 91       |  
|Costs of common stock issued 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-32



---

##### Table of Contents

Exhibit Index



|              |  |                                                                                                                                                                                                                                                                                                                                                                                                  
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Description                                                                                                                                                                                                                                                                                                                                                                              
|              | 
|3.1(1)        |  | Third Amended and Restated Certificate of Incorporation of PETCO Animal Supplies, Inc.                                                                                                                                                                                                                                                                                                           
|              | 
|3.2(1)        |  | Amended and Restated Bylaws of PETCO Animal Supplies, Inc.                                                                                                                                                                                                                                                                                                                                       
|              | 
|4.1(2)        |  | Indenture, dated as of October 26, 2001, by and among PETCO, certain subsidiaries of PETCO and U.S. Bank N.A., as trustee.                                                                                                                                                                                                                                                                       
|              | 
|4.2(2)        |  | Exchange and Registration Rights Agreement, dated as of October 26, 2001, by and between PETCO, certain subsidiaries of PETCO and Goldman Sachs & Co., as initial
purchaser.                                                                                                                                                                                                                     
|              | 
|4.3(3)        |  | Form of Specimen Common Stock Certificate.                                                                                                                                                                                                                                                                                                                                                       
|              | 
|4.4(2)        |  | Amended and Restated Stockholders Agreement, dated as of February 19, 2002, by and among PETCO and certain stockholders of PETCO.                                                                                                                                                                                                                                                                
|              | 
|4.5(2)        |  | Amended and Restated Securityholders Agreement, dated as of February 19, 2002, by and among PETCO and certain securityholders of PETCO.                                                                                                                                                                                                                                                          
|              | 
|10.1(2)       |  | Form of Amended and Restated Credit Agreement, dated as of October 26, 2001, by and among PETCO, Goldman Sachs Credit Partners L.P., as joint lead arranger, joint book-runner and sole
syndication agent, Wells Fargo Bank National Association, as joint lead arranger, joint book-runner and sole administrative agent, and the lenders party thereto, as amended.                            
|              | 
|10.2(4)       |  | Second Amendment dated as of July 31, 2002 to Amended and Restated Credit Agreement, dated as of October 26, 2001, by and among PETCO, Goldman Sachs Credit Partners L.P., as joint lead
arranger, joint book-runner and sole syndication agent, Wells Fargo Bank National Association, as joint lead arranger, joint book-runner and sole administrative agent, and the lenders party thereto.  
|              | 
|10.3(7)       |  | Third Amendment dated as of February 3, 2003 to Amended and Restated Credit Agreement, dated as of October 26, 2001, by and among PETCO, Goldman Sachs Credit Partners L.P., as joint lead
arranger, joint book-runner and sole syndication agent, Wells Fargo Bank National Association, as joint lead arranger, joint book-runner and sole administrative agent, and the lenders party thereto.
|              | 
|10.4(2)       |  | Distribution Center Lease, dated as of February 20, 1998, by and between PETCO and Industrial Developments International, Inc. for 3801 Rock Creek Boulevard, Joliet,
Illinois.                                                                                                                                                                                                                  
|              | 
|10.5(2)       |  | Distribution Center Lease, dated as of November 24, 1997, by and between PETCO and Opus West Corporation for 4345 Parkhurst Street, Mira Loma, California.                                                                                                                                                                                                                                       
|              | 
|10.6(2)       |  | Management Services Agreement, dated as of October, 2, 2000, by and among PETCO, Leonard Green & Partners, L.P. and TPG GenPar III, L.P.                                                                                                                                                                                                                                                         
|              | 
|10.7(2)       |  | Amended and Restated Employment Agreement, dated as of October 2, 2000, by and between PETCO and Brian K. Devine.                                                                                                                                                                                                                                                                                
|              | 
|10.8(2)       |  | Employment Agreement, dated as of October 2, 2000, by and between PETCO and Bruce C. Hall.                                                                                                                                                                                                                                                                                                       
|              | 
|10.9(2)       |  | Employment Agreement, dated as of October 2, 2000, by and between PETCO and James M. Myers.                                                                                                                                                                                                                                                                                                      
|              | 
|10.10(2)      |  | Form of Indemnification Agreement between PETCO and certain officers and directors.                                                                                                                                                                                                                                                                                                              
|              | 
|10.11(2)      |  | Form of Retention Agreement for executive officers.                                                                                                                                                                                                                                                                                                                                              
|              | 
|10.12(2)      |  | Form of Retention Agreement for non-executive officers.                                                                                                                                                                                                                                                                                                                                          
|              | 
|10.13(5)      |  | PETCO Animal Supplies 401(k) plan.                                                                                                                                                                                                                                                                                                                                                               
|              | 
|10.14(2)      |  | PETCO Flexible Benefit Plan, amended and restated effective July 1, 1998.                                                                                                                                                                                                                                                                                                                        



---

##### Table of Contents

|              |  |                                                                                                                                                                       
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Description                                                                                                                                                   
|              | 
|10.15(2)      |  | 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.        
|              | 
|10.16(2)      |  | Form of PETCO Animal Supplies, Inc. Non-qualified Stock Option Agreement.                                                                                             
|              | 
|10.17(2)      |  | Form of PETCO Animal Supplies, Inc. Incentive Stock Option Agreement.                                                                                                 
|              | 
|10.18(2)      |  | Form of PETCO Animal Supplies, Inc. Restricted Stock Agreement.                                                                                                       
|              | 
|10.19(2)      |  | Agreement and Plan of Merger, dated as of May 17, 2000, by and between PETCO and BD Recapitalization Corp.                                                            
|              | 
|10.20(2)      |  | First Amendment to Agreement and Plan of Merger, dated as of September 14, 2000, by and between PETCO and BD Recapitalization Corp.                                   
|              | 
|10.21(2)      |  | Standard Industrial/Commercial Lease, dated as of February 28, 2001, by and between PETCO and Carol Canyon Properties, LLC for 8945 Rehco Road, San Diego, California.
|              | 
|10.22(2)      |  | PETCO Animal Supplies Deferred Compensation Plan.                                                                                                                     
|              | 
|10.23(2)      |  | 2002 Incentive Award Plan of PETCO Animal Supplies, Inc.                                                                                                              
|              | 
|10.24(3)      |  | Consulting Agreement, effective as of November 29, 2001, by and between PETCO and Brian K. Devine.                                                                    
|              | 
|10.25(3)      |  | Supplemental Executive Retirement Program, effective as of November 29, 2001, by and between PETCO and Brian K. Devine.                                               
|              | 
|10.26(6)      |  | Distribution Center Lease, dated as of May 30, 2002, by and between PETCO and South Middlesex Development Company, LLC for 24 Englehard drive, Monroe, New Jersey.    
|              | 
|10.27(8)      |  | Fourth Amendment to Amended and Restated Credit Agreement.                                                                                                            
|              | 
|10.28(8)      |  | Fifth Amendment to Amended and Restated Credit Agreement.                                                                                                             
|              | 
|21.1(2)       |  | Subsidiaries of PETCO.                                                                                                                                                
|              | 
|23.1*         |  | Consent of KPMG LLP, Independent Auditors.                                                                                                                            
|              | 
|31.1*         |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.                                                                                                    
|              | 
|31.2*         |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.                                                                                                    
|              | 
|32.1*         |  | Section 1350 Certifications.                                                                                                                                          

---

|* | Filed herewith
|- | --------------

|(1) | Incorporated by reference to PETCOs Registration Statement on Form S-4, as amended (File No. 333-84474).
|--- | ---------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to PETCOs Registration Statement on Form S-1, as amended (File No. 333-75830).
|--- | ---------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to PETCOs Annual Report on Form 10-K for the fiscal year ended February 2, 2002, as amended.
|--- | -----------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference to PETCOs Quarterly Report on Form 10-Q for the quarterly period ended August 3, 2002.
|--- | -----------------------------------------------------------------------------------------------------------------

|(5) | Incorporated by reference to PETCOs Registrations Statement on Form S-8 (File No. 333-100397).
|--- | -----------------------------------------------------------------------------------------------

|(6) | Incorporated by reference to PETCOs Quarterly Report on Form 10-Q for the quarterly period ended May 4, 2002.
|--- | --------------------------------------------------------------------------------------------------------------

|(7) | Incorporated by reference to PETCOs Annual Report on Form 10-K for the fiscal year ended February 1, 2003, as amended.
|--- | -----------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated by reference to PETCOs Quarterly Report on Form 10-Q for the quarterly period ended August 2, 2003.
|--- | -----------------------------------------------------------------------------------------------------------------

|
|