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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended February 3, 2007

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from                      to

Commission
File 0-28784



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HOT TOPIC, INC.

(Exact name of Registrant as specified in its charter)



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|                                                              |  |                                 
|------------------------------------------------------------- |  | --------------------------------
|California                                                    |  | 77-0198182                      
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification )
|                                                              | 
|18305 E. San Jose Ave.City of Industry, California            |  | 91748                           
|(Address of principal executive offices)                      |  | (Zip Code)                      

Registrants telephone number, including area code: (626) 839-4681

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



|                           |  |                                     
|-------------------------- |  | ------------------------------------
|Title of Each Class        |  | Name of Exchange on Which
Registered
|Common Stock, no par value |  | Nasdaq Stock Market                 

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

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

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

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

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

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

Large accelerated filer  x            Accelerated filer ̈Non-accelerated filer ̈

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

The aggregate market value of Common Stock held by non-affiliates of the Registrant as of July 28, 2006
was approximately $643,026,978 based on the closing price on that date of the Registrants Common Stock on the Nasdaq Stock Market. All outstanding shares of voting stock, except for shares held by executive officers and members of the Board of
Directors and their affiliates are deemed to be held by non-affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of the Registrants Common Stock was 44,230,948 as of March 26, 2007.

Documents Incorporated By Reference

Certain portions of the Registrants Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 14, 2007 to be filed with the Securities and Exchange Commission (the SEC) no later than 120
days after February 3, 2007, are incorporated by reference into Part III of this Form 10-K (Items 10 through 14).



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HOT TOPIC, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE

YEAR ENDED FEBRUARY 3, 2007

TABLE OF CONTENTS



|         |  |                                                                                                              |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|         |  |                                                                                                              |  | Page
|         |  | PART I                                                                                                       |  |     
|Item 1.  |  | Business                                                                                                     |  | 1   
|Item 1A. |  | Risk Factors                                                                                                 |  | 14  
|Item 1B. |  | Unresolved Staff Comments                                                                                    |  | 22  
|Item 2.  |  | Properties                                                                                                   |  | 22  
|Item 3.  |  | Legal Proceedings                                                                                            |  | 22  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 23  
|         |  |                                                                                                             
|         |  | PART II                                                                                                      |  |     
|Item 5.  |  | Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities |  | 24  
|Item 6.  |  | Selected Financial Data                                                                                      |  | 26  
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 27  
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 37  
|Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 37  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 37  
|Item 9A. |  | Controls and Procedures                                                                                      |  | 37  
|Item 9B. |  | Other Information                                                                                            |  | 39  
|         |  |                                                                                                             
|         |  | PART III                                                                                                     |  |     
|Item 10. |  | Directors, Executive Officers and Corporate Governance                                                       |  | 40  
|Item 11. |  | Executive Compensation                                                                                       |  | 40  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters               |  | 40  
|Item 13. |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 40  
|Item 14. |  | Principal Accountant Fees and Services                                                                       |  | 40  
|         |  |                                                                                                             
|         |  | PART IV                                                                                                      |  |     
|Item 15. |  | Exhibits and Financial Statement Schedules                                                                   |  | 41  



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Cautionary Statement Regarding Forward-Looking Disclosure

This report contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the
Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements include, for example, statements regarding our expectations, beliefs, intentions or strategies regarding the future, such
as the extent and timing of future revenues and expenses and customer demand, other expected financial results and information, new store openings and new store concepts. All forward-looking statements included in this report are based on
information available to us as of the date of this report. We will not necessarily update any forward-looking statements. Forward-looking statements involve known or unknown risks, uncertainties and other factors, which may cause our actual results,
performance or achievements, or industry results to be different from any future results, performance or achievements expressed or implied. Risks, uncertainties and other factors related to us are located, among other places, in Part I,
Item 1A under the caption Risk Factors and in Part II, Item 7 under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations.

PART I



|ITEM1. | BUSINESS
|------ | --------

General

We are a mall-based specialty retailer operating the Hot Topic and Torrid concepts. Hot Topic stores sell a selection of music/pop culture-licensed and
music/pop culture-influenced apparel, accessories and gift items for young men and women principally between the ages of 12 and 22. Torrid stores sell apparel, lingerie, shoes and accessories designed for various lifestyles for plus-size females
between the ages of 15 and 29. We were incorporated in California in 1988. We opened our first Hot Topic store in 1989 and our first Torrid store in 2001. At the end of fiscal 2006 (the fiscal year ended February 3, 2007), we operated 694 Hot
Topic stores throughout the United States and Puerto Rico, and 131 Torrid stores in 34 states. We also sell merchandise on two websites, www.hottopic.com and www.torrid.com, which reflect the Hot Topic and Torrid store concepts and carry merchandise
similar to that sold in the respective stores. Throughout this report, the terms our, we and us refer to Hot Topic, Inc. and its subsidiaries.

During 2006, we opened 34 new Hot Topic and 12 new Torrid stores, expanded or relocated 22 Hot Topic stores and closed four stores. In fiscal 2007
(ending February 2, 2008), we are planning to open approximately 15 new Hot Topic stores and approximately 20 new Torrid stores, remodel or relocate approximately 60 to 80 stores and close approximately 12 stores.

Our Markets

We developed Hot Topic and Torrid in
each case after recognizing a large but specialized market not widely serviced by national retail chains.

The music-licensed apparel
industry essentially began in the 1960s with bootleggers selling tee shirts at concert venues. Over the years, artists began to realize the commercial potential of licensing their likenesses and logos to tee shirt manufacturers and others who
produced assorted merchandise.

The music industry and music merchandise industry have been significantly impacted by the availability and
accessibility of Internet and digital technology and the continuing success of MTV, Fuse, and other music television networks. This is in stark contrast to past decades when the vinyl record cover and a few magazines of modest circulation were the
primary source of young peoples information about their music and favorite bands. Todays media enable fans not only to listen to the latest music and artists 24 hours a day, but also to experience a full sight and sound package of
appearance and attitude.

As a result of todays media reach, both emerging and well-known artists and the fashions they inspire are
much more visible. We believe that this increased visibility has contributed to a rise in demand for music/pop



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culture-licensed and music/pop culture-influenced apparel and accessories. We believe teenagers throughout the United States have similar fashion
preferences, largely as a result of the nationwide influence of the Internet, MTV and other music television networks, music distribution (including through the rapidly growing avenue provided by digital music and downloads), movies, and
television programs.

Hot Topics target customers are young men and women between the ages of 12 and 22, who are passionate about
music, music videos, pop culture trends, and music-inspired fashion. We believe our music/pop culture-influenced merchandise appeals to teenagers from diverse socio-economic backgrounds and that our customers are broadly representative of the
teenage population in the United States. Teenagers represent both a growing part of the United States population and an increasing source of purchasing power. The U.S. Census Bureau estimates that by 2008 there are likely to be more teenagers in the
United States than at any other time in history.

The annual plus-size apparel market is estimated to have reached $32 billion in 2006, up
a total of 50% in the past five years, according to market research firm Mintel. It is estimated that plus-size represents one of the fastest growing categories in womens retail. We developed the Torrid concept based upon feedback from
plus-size Hot Topic customers who wanted more selection through a store that catered explicitly to plus-size customers. We concluded there were a significant number of young women consumers who were plus-size and unable to find and buy a broad
enough selection of fashion forward clothes in comparison to their smaller sized friends. We launched Torrid in the first half of fiscal 2001, with the opening of six locations across the country, and a website, www.torrid.com. Our Torrid store
target customers are plus-size females aged 15 to 29, who are primarily influenced by fashion trends and by pop culture. We believe our Torrid store assortment allows young customers wearing sizes 12 to 26 to match the style, excitement, and
selection available at other non-plus-size junior retailers.

Hot Topic Business Strategy

Our goal for Hot Topic stores is to be a leading retailer of music/pop culture-licensed and music/pop culture-influenced apparel, accessories, and gift
items for young men and women. Elements of Hot Topics business strategy include:



| |  |  | Focus on Unique Music/Pop Culture-Oriented Merchandise
| | - |  | ------------------------------------------------------

We believe that fashions and products associated with popular music artists and pop culture trends have a significant influence on teenagers. We have developed a unique strategy focused exclusively on offering
music/pop culture-licensed and music/pop culture-influenced merchandise in the mall environment. Accordingly, we believe we are well positioned to capitalize on the growing teenage population and demand for music/pop culture-influenced merchandise.



| |  |  | Offer Everything About The Music and Pop Culture
| | - |  | --------------------------------------------------

Our Hot Topic stores are designed to serve as a headquarters for music/pop culture-licensed and music/pop culture-influenced apparel, accessories and gift
items. Hot Topics slogan, Everything About The Music and its ability to relate and understand relevant pop culture trends are reflected in its broad assortment of products. We believe Hot Topics selection of music/pop
culture-licensed merchandise is the most extensive assortment available in a single mall store. We complement licensed merchandise with a unique and eclectic assortment of music/pop culture-influenced apparel and accessories, and respond to changes
in trends and demand by introducing new items and categories. We believe that we have a history of being the first to offer the latest music/pop culture fashions, which has made Hot Topic a destination store for teenagers.



| |  |  | Promote Music-Inspired Culture
| | - |  | ------------------------------

We are committed to the music-inspired lifestyles of our customers, and have built a culture throughout the organization that reflects a passion for music. We diligently track alternative and rock music trends by regularly monitoring new
music through various websites, music video releases and radio station airplay, visiting nightclubs around the country, and attending concerts. We also actively solicit feedback from our associates and customers. We believe these activities allow us
to react quickly to emerging trends, and provide a competitive advantage over retailers who do not devote the time and resources necessary to anticipate these trends.



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| |  |  | Listen to the Customer
| | - |  | ----------------------

We do not dictate fashion trends, but rather seek to identify new music, recording artists and pop culture trends at their early stages, and react accordingly to keep our in-store product assortment current with those trends. We have
developed a disciplined approach to buying and a dynamic inventory planning and allocation process to support our merchandise strategy. We regularly test new merchandise in select Hot Topic stores before chain-wide distribution. We also order a
majority of our merchandise not more than 60 to 90 days before delivery, allowing us to react quickly to emerging trends. We are also aggressive in taking prompt markdowns to maintain a fresh merchandise mix. By actively managing the mix of
categories and products in Hot Topic stores, we believe we are able to capitalize on emerging trends and minimize our dependence on any one particular merchandise category. We believe this approach to managing Hot Topics merchandise mix has
contributed to strong merchandise margins and markdown rates that are typically lower than industry average.



| |  |  | Emphasize Customer Service and the In-Store Experience
| | - |  | ------------------------------------------------------

Our associates are trained to provide a value-added, non-intrusive customer experience. Sales associates are encouraged to greet customers, provide information about new music/fashion trends and suggest merchandise
that meets the customers lifestyle and music preferences. We provide our teenage customers the same level of respect and attention that is afforded to adult customers at other retail stores, while also providing friendly and informed customer
service for parents. We believe that a high level of employee product knowledge and a commitment to music/fashion create credibility and differentiate Hot Topic from other teenage-focused retailers.

We also seek to create an exciting and compelling shopping environment focusing on the lifestyles of our core customer. Hot Topic stores are designed
with a modern theme that incorporates dense merchandising and utilizes a professional sound system playing alternative music to create a fun, high-energy store that teens will consider their place to shop with friends. We believe this
atmosphere enhances Hot Topics image as a source for music/pop culture-inspired fashion while encouraging customers to shop in our stores for longer periods of time.

Torrid Business Strategy

Our goal for Torrid stores is to become the leading specialty retailer of
fashion forward plus-size young womens apparel and accessories. Elements of Torrids business strategy include:



| |  |  | Focus on Current Fashion Trends
| | - |  | -------------------------------

Our Torrid merchandising team focuses on providing a fashion forward merchandise assortment that reflects the influence of cutting-edge fashion trends and pop culture. These influences provide the inspiration for hip, trendy apparel and
accessories that our plus-size customer relates to. We believe that Torrid is the first mall concept to offer a complete store assortment of fashion forward apparel for plus-size young women.



| |  |  | Listen to the Customer
| | - |  | ----------------------

Torrid buyers actively solicit customer feedback through frequent visits to store locations, in-store comment cards, email, and postings on our Internet website, www.torrid.com. We use this input to interpret current fashion trends and pop
culture influences as we develop the fashion forward merchandise assortments that are the Torrid brand. We test new trends and styles frequently to gauge customer response.



| |  |  | Emphasize Customer Service and the In-Store Experience
| | - |  | ------------------------------------------------------

We provide training and coaching for Torrid store associates that emphasize one-on-one service for our customers. We reward sales associates through a program called diva dollars for selling multiple
items. We believe that many plus-size customers have been unable to find sufficient quantities and selections of fashionable apparel in line with current trends. Because of this, we focus on suggesting outfits and ensuring the correct fit.

Through our focus on customer service and leading-edge fashion, we seek to create a compelling shopping environment that the young
plus-size customer is looking for. We believe that the warm greeting, extensive fashion offerings, and helpful customer service by our team members create a welcoming and exciting store environment that will be attractive to, and preferred by, the
Torrid customer.



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Store Locations

As of February 3, 2007, we operated 694 Hot Topic stores throughout the United States and Puerto Rico and 131 Torrid stores in 34 states in both metropolitan and middle markets. The following chart shows, as of
February 3, 2007, the number of Hot Topic and Torrid stores operated in each state in which those stores are located:

Hot Topic,
Inc.

Stores By State

Open as of 2/3/07



|               |  |                  |  |               |  |              
|-------------- |  | ---------------- |  | ------------- |  | -------------
|               |  | Hot Topic Stores |  | Torrid Stores |  | Total Company
|Alabama        |  | 7                |  |               |  | 7            
|Alaska         |  | 3                |  |               |  | 3            
|Arizona        |  | 15               |  | 5             |  | 20           
|Arkansas       |  | 6                |  |               |  | 6            
|California     |  | 80               |  | 40            |  | 120          
|Colorado       |  | 15               |  | 1             |  | 16           
|Connecticut    |  | 9                |  | 3             |  | 12           
|Delaware       |  | 2                |  |               |  | 2            
|Florida        |  | 41               |  | 4             |  | 45           
|Georgia        |  | 15               |  | 3             |  | 18           
|Hawaii         |  | 5                |  |               |  | 5            
|Idaho          |  | 4                |  | 1             |  | 5            
|Illinois       |  | 22               |  | 8             |  | 30           
|Indiana        |  | 15               |  | 2             |  | 17           
|Iowa           |  | 10               |  | 1             |  | 11           
|Kansas         |  | 7                |  |               |  | 7            
|Kentucky       |  | 9                |  | 1             |  | 10           
|Louisiana      |  | 8                |  |               |  | 8            
|Maine          |  | 3                |  |               |  | 3            
|Maryland       |  | 15               |  | 3             |  | 18           
|Massachusetts  |  | 19               |  | 3             |  | 22           
|Michigan       |  | 23               |  | 2             |  | 25           
|Minnesota      |  | 11               |  | 1             |  | 12           
|Mississippi    |  | 4                |  |               |  | 4            
|Missouri       |  | 15               |  | 3             |  | 18           
|Montana        |  | 4                |  |               |  | 4            
|Nebraska       |  | 4                |  | 1             |  | 5            
|Nevada         |  | 7                |  | 2             |  | 9            
|New Hampshire  |  | 5                |  | 1             |  | 6            
|New Jersey     |  | 18               |  | 5             |  | 23           
|New Mexico     |  | 7                |  | 1             |  | 8            
|New York       |  | 33               |  | 6             |  | 39           
|North Carolina |  | 15               |  | 3             |  | 18           
|North Dakota   |  | 4                |  |               |  | 4            
|Ohio           |  | 27               |  | 5             |  | 32           
|Oklahoma       |  | 8                |  |               |  | 8            
|Oregon         |  | 7                |  | 3             |  | 10           
|Pennsylvania   |  | 36               |  | 5             |  | 41           
|Rhode Island   |  | 1                |  |               |  | 1            
|South Carolina |  | 8                |  | 1             |  | 9            
|South Dakota   |  | 2                |  | 1             |  | 3            
|Tennessee      |  | 14               |  | 2             |  | 16           
|Texas          |  | 56               |  | 6             |  | 62           
|Utah           |  | 9                |  | 2             |  | 11           
|Vermont        |  | 2                |  |               |  | 2            
|Virginia       |  | 20               |  | 2             |  | 22           
|Washington     |  | 19               |  | 2             |  | 21           
|West Virginia  |  | 5                |  |               |  | 5            
|Wisconsin      |  | 12               |  | 2             |  | 14           
|Wyoming        |  | 1                |  |               |  | 1            
|Puerto Rico    |  | 7                |  |               |  | 7            
|               |  |                  | 
|Total          |  | 694              |  | 131           |  | 825          



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Real Estate Strategy

We have remodeled our store designs several times in the companys history. During fiscal 2006, 15 of the new and remodeled Hot Topic stores were opened with a new store design, which looks lighter and more like
a street store than our most recent store designs. We plan to open all new Hot Topic stores in fiscal 2007 in this new store design. In addition, we plan to remodel, or relocate to another location within the mall, approximately 60 to 80 Hot Topic
stores in order to convert them from their current designs to our new store design. We are optimistic this remodel and relocation strategy will result in improved store sales, as well as provide a potential stimulus for increased customer and brand
awareness.

Our expansion strategy is to open stores primarily in shopping malls and selected entertainment centers in both new and
existing markets throughout the United States and Puerto Rico. We opened 34 new Hot Topic stores and 12 new Torrid stores in fiscal 2006, and we also expanded or relocated 22 existing Hot Topic stores. During fiscal 2007, we plan to open
approximately 15 new Hot Topic stores and approximately 20 new Torrid stores and we expect to expand or relocate approximately 60 to 80 stores.

We evaluate potential Hot Topic and Torrid store locations based on a variety of criteria relevant to our merchandising strategy, including: the sales of the mall and anchor stores, sales of teenage-oriented and plus-size stores, age
demographics in the trade area, median family income and other economic factors. With respect to potential remodels or relocations within malls where we have an existing store, we look also at historical sales at the existing store, and the
attractiveness of various design features and locations within the mall. We have a real estate committee that meets regularly to evaluate and select store locations, and consider store remodels and relocations. We generally seek potential store
sites between 1,500 square feet and 2,000 square feet for Hot Topic stores, and between 2,200 square feet and 2,600 square feet for Torrid stores. Our Hot Topic stores currently average approximately 1,700 square feet and our Torrid stores currently
average approximately 2,500 square feet.

The following table and chart provide recent history of our store expansion:



|                                                  |  |                    |   |  |      |  |      |   |  |      |   |  |      |  
|------------------------------------------------- |  | ------------------ | - |  | ---- |  | ---- | - |  | ---- | - |  | ---- | -
|                                                  |  | Fiscal Year        |  
|                                                  |  | 2002               |   |  | 2003 |  | 2004 |   |  | 2005 |   |  | 2006 |  
|                                                  |  | (Number of Stores) |  
|Stores at beginning of year                       |  | 352                |   |  | 445  |  | 554  |   |  | 668  |   |  | 783  |  
|                                                  |  |                    |   |  |     
|Hot Topic stores opened                           |  | 74                 |   |  | 84   |  | 91   |   |  | 71   |   |  | 34   |  
|Hot Topic stores closed*                          |  | (2                 | ) |  |     |  | (1   | ) |  |     |   |  | (3   | )
|Torrid stores opened                              |  | 21                 |   |  | 25   |  | 24   |   |  | 46   |   |  | 12   |  
|Torrid stores closed**                            |  |                   |   |  |     |  |     |   |  | (2   | ) |  | (1   | )
|                                                  |  |                    |   |  |      |  |      |   |  |      |   |  |      |  
|Stores at end of year                             |  | 445                |   |  | 554  |  | 668  |   |  | 783  |   |  | 825  |  
|                                                  |  |                    |   |  |      |  |      |   |  |      |   |  |      |  
|Hot Topic and Torrid stores expanded or relocated |  | 8                  |   |  | 4    |  | 10   |   |  | 17   |   |  | 22   |  
|                                                  |  |                    |   |  |      |  |      |   |  |      |   |  |      |  

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|* | Our Hot Topic stores in Salt Lake City, UT and Brooklyn Center, MN closed in the first quarter of 2006. Our Hot Topic store in Memphis, TN closed in the fourth quarter of
2006.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** | Our Torrid store located in Lake Grove, NY closed the third quarter of 2006.
|-- | ----------------------------------------------------------------------------

Store-Level Economics

During fiscal 2006, we achieved average store net sales, including Internet,
of approximately $0.9 million ($500 per average square foot). Internet sales were $31.0 million as of February 3, 2007. We cannot guarantee that these results will continue or that future average store-level sales will not vary from historical
results.

Hot Topic Merchandising

Our
Hot Topic stores serve as a focal point for music/pop culture-licensed and music/pop culture-influenced apparel, accessories and gift items. Music/pop culture-licensed merchandise includes tee shirts, hats, posters,



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stickers, patches, postcards, books, novelty accessories, compact discs and DVDs. Music/pop culture-influenced merchandise includes womens and
mens apparel and accessories, such as woven and knit tops, skirts, pants, shorts, jackets, shoes, costume jewelry, body jewelry, sunglasses, cosmetics, leather accessories, and gift items. Approximately half of Hot Topics products are
music/pop culture-licensed and the other half are music/pop culture-influenced. A key strategy of our Hot Topic stores is to offer a diverse product assortment. We have more than 25 distinct merchandise categories or departments. Over
180 different licensed band tee shirts are represented in Hot Topic stores from current artists such as AFI, Fall Out Boy, My Chemical Romance, Panic at the Disco, HIM, Red Jumpsuit Apparatus, Slipknot, and ICP, to classic rock artists such as The
Ramones, Nirvana, Bob Marley, The Rolling Stones, Metallica and Led Zeppelin. New items and categories are regularly tested to stay current with customer demand and new product trends.

Our Hot Topic merchandising staff consists of a Chief Merchandising Officer, Divisional Merchandise Managers, and a staff of buyers and assistant buyers
who manage the various product categories. The merchandising staff reflects our culture in that their decisions and actions are influenced by music and pop culture. In determining which merchandise to buy, the merchants spend considerable time
viewing music videos, reviewing industry music sales, monitoring alternative radio station air play, consulting with sales associates (to draw from their different experiences and perspectives), reviewing customer requests, attending trade shows and
reading music and fashion industry periodicals and monitoring music websites. In addition, the merchandising staff regularly visits nightclubs and attends concerts and other events that attract young people.

Our Hot Topic stores have several lines of private label merchandise to complement and supplement current product offerings. We believe that Hot Topic
brands play an important part in differentiating our stores from those of our competitors and provide us with higher margin opportunities as compared to other merchandise. Our proprietary brands include Morbid Metals (body jewelry) and Morbid
Threads (mens and womens apparel and hosiery). Some shoes are also sold under the Hot Topic label.

To reduce fashion risk and
maintain the ability to respond quickly to emerging trends, Hot Topic buyers commit to a majority of the merchandise not more than 60 to 90 days in advance of delivery. We also often begin with smaller test purchases prior to chain-wide
distribution. We regularly monitor store sales by merchandise theme, classification, individual items, color and size to determine types and quantities of products to purchase, to detect products and trends that are emerging or declining, and to
manage the product mix in our stores by responding to the spending patterns of our customers. We also maintain good and interactive relationships with our vendors because we understand the importance of facilitating a quick response.

Torrid Merchandising

Our Torrid stores serve as a
destination for current trends in fashion apparel and accessories for plus-size young women. We believe that our Torrid customer wants to wear the same types of merchandise as her smaller-sized peers. Torrid apparel is sized 12-26. Torrid
merchandise includes both casual and dressy offerings with particular emphasis on jeans, novelty tee shirts, fashion tops, pants, jackets, and dresses. We also carry hosiery, shoes, intimate apparel, and fashion accessories. As appropriate, our
merchandise is specifically proportioned for plus-size customers. A broad selection of merchandise comes from established branded vendors, including Dickies, Paris Blues, Z Cavaricchi, LEI, Baby Phat, Fine, and Hot Kiss as well as more fashion
forward vendors, such as Tripp. Our own Torrid brand is a vital and growing portion of our merchandise mix. Torrid buyers work closely with vendor partners to monitor and maintain our unique apparel fit specifications for young women. Likewise, we
strategically share certain research on current fashion trends and customer input with key vendors so that we can maintain high standards of quality and fashion leadership. We believe that our brand mix gives our Torrid customer an opportunity to
buy the same or similar hottest styles and brands as her non-plus-size counterparts.

Torrids President and Chief Merchandising
Officer manages a buying team, a product development team, sourcing team, and a fit and quality assurance team. Customer and store associate feedback influences our



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merchandising decisions. The merchandising team spends considerable time on fashion research from a variety of international sources that are relevant to our
young, fashion forward customer. This process includes retail research in the United States and international fashion hot spots, entertainment and pop culture venues, and trade shows.

Torrid merchandise is purchased from established branded vendors as well as private label vendors. Private label vendors provide the customer with
unique, fashion forward merchandise, often at more competitive prices than branded merchandise. Private label merchandise also often provides Torrid with higher margin opportunities as compared to other merchandise. In order to reduce fashion risk
and maintain the ability to respond quickly to emerging trends, Torrid buyers commit to a majority of the merchandise not more than 120 days, and many times less than 75 days, in advance of delivery. We often begin with small purchases for testing.

Planning and Allocation of Merchandise

Planning and allocation of our inventory is done at the store, merchandise classification and SKU levels, using integrated third-party software. Most merchandise is ordered in bulk and then allocated to each store based on store inventory
plans and SKU performance using JDAs Advanced Allocation software. Buyers and inventory analysts determine SKU reorder quantities by using a proprietary automated software program which considers sales history, projected sales, planned
inventories by store, store demographics, geographic preferences, store openings and planned markdown dates.

We have two distribution
centers. One is located at our headquarters in City of Industry, California and the other is in LaVergne, Tennessee, near Nashville. We purchased the Tennessee distribution center in fiscal 2005 to ship Hot Topic merchandise primarily to our stores
in the eastern half of the United States. The two distribution centers will allow us to accommodate our anticipated growth for the foreseeable future.

All merchandise is delivered to our distribution centers, where it is inspected, allocated, picked, prepared and boxed for shipment to our stores. We ship merchandise to stores each weekday, providing our Hot Topic
and Torrid stores with a steady flow of new and reordered merchandise. Minimal back stock is maintained in our distribution centers and stores, so that most of our merchandise is available for sale on the selling floors of our stores. No single
vendor accounted for more than 5.7% of our merchandise purchases during fiscal 2006.

Hot Topic and Torrid Store Operations

Hot Topic and Torrid each have a Vice President of Store Operations who leads a divisional operations team. Supporting the Vice President of each division
are regional directors who oversee multiple districts, and district managers who typically oversee six to nine stores. A store manager and two or three assistant managers manage individual stores. In addition to managers and assistant managers, a
typical store has approximately six to ten part-time sales associates, depending on the season.

We have established training and operating
procedures to assist field management in the supervision and training of all associates. We have also designed a store manager training program, which is used to train new managers.

At Hot Topic, we strive to create a store environment that customers will consider their place to shop with friends. We seek to hire sales
associates who are like our customers  energetic people who are knowledgeable and passionate about music and pop culture-inspired fashion. Additionally, in return for feedback on fashion and other trends, we reimburse Hot Topic store
associates for the cost of attending concerts. They are also encouraged to directly communicate customer feedback as well as their own merchandise and product ideas to the buyers and management. Our culture and our direct interaction with and
respect for sales associates are significant factors in producing associate retention rates that we believe are higher than the industry average.

At Torrid, we create a store environment that is fun, friendly and focused on fashion. We understand the importance of focusing on the preferences and opinions of our target customers. We seek to hire associates who



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are passionate about fashion and understand and appreciate the plus-size customer. We provide our sales associates with information on trends and key looks
for each season. We also provide coaching and training on fit and quality, which are especially important to our Torrid customers.

The
primary goal of the sales associate position is to provide superior and informed customer service in order to maximize sales and minimize inventory shrinkage. Store management receives daily store sales and category results so that performance can
be measured against set goals. Postage-paid report cards are provided in all stores for customers to grade performance and make recommendations to us. We train associates to greet each customer, to inform the customer about new music and
fashion trends and to suggest merchandise that matches the customers lifestyle, music and fashion forward preferences and/or trends. We believe that our associates high level of product knowledge and customer service differentiates us
from other specialty retailers.

District managers, along with all members of the store teams, have a base pay rate and may qualify to
receive certain bonus payouts. All of our employees who meet certain eligibility criteria may participate in our Employee Stock Purchase Plan. We believe that our continued success is dependent in part on our ability to attract, retain and motivate
qualified associates. In particular, the success of our growth will be dependent on our ability to promote and/or recruit talented district and store managers.

Marketing and Promotion

We generally open stores in high traffic malls in areas of high teenage and young adult population.
We actively solicit and encourage customer feedback, both to generate enthusiasm and passion for our offerings as well as allow us to quickly respond to customer needs, which in turn helps us to remain current in merchandising our stores.

We sell gift cards at our stores and at our Internet sites www.hottopic.com and www.torrid.com as a convenient alternative for gift giving
by our customers. Gift cards are sold in U.S. currency up to $500, and the cards have no expiration date. Gift card styles and colors are sometimes changed and are designed to appeal to customer preferences. Gift cards can be redeemed for
merchandise at any Hot Topic or Torrid store location for any amount up to the then-current value. Unused amounts remain on the card until redeemed by the customer. Customers may add to outstanding amounts on their existing gift cards at our stores.



| |  |  | Hot Topic Marketing and Promotion
| | - |  | ---------------------------------

We rely on our customers, associates, store design and exciting music to attract new customers to our Hot Topic stores. To further promote Hot Topic stores, we sponsor various music events and conduct periodic contests. Our sponsorship
activities have included concert tours such as Ozzfest, the Vans Warped Tour, the Take Action Tour, and the Taste of Chaos tour.

In fiscal
2004, we established the Hot Topic Foundation. The Foundations objective is to support programs and organizations that specifically focus on encouraging and educating young people in music and the arts. The Foundation has been funded through
donations from our employees, our company, and our customers. As of February 3, 2007, $2,447,000 had been raised for the benefit of the Foundation. We are pleased with the meaningful contributions the Foundation has made to school music
programs and other initiatives, and we believe these activities have a positive influence on young people.



| |  |  | Torrid Marketing and Promotion
| | - |  | ------------------------------

We seek to make a strong connection to young plus-size women and build our Torrid brand through our fashion forward marketing message. To support this, we advertise in premier fashion magazines with national distribution. In key market
areas we also support our Torrid brand message with outdoor advertising and appropriate local and national public relations efforts. We also conduct activities to increase awareness of and interest in our brand, our mission and our objectives, such
as local and regional model search contests, where we solicit involvement of our existing customers and future customers.



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Our Torrid guest loyalty program, divastyle®, offers us the chance to communicate directly and often with our most frequent and
highest spending Torrid customers. As of fiscal 2006 year end, we had over 500,000 sign ups and over 100,000 full divastyle® members. These program members are rewarded throughout the year with special offers and promotions and a newsletter that provides fashion information
and updates on new products and current trends available at Torrid.

Internet Sales

Total Internet sales increased by 26% in fiscal 2006 compared to fiscal 2005 and contributed approximately 4.1% of total sales in fiscal 2006. We believe
our websites www.hottopic.com and www.torrid.com provide a convenient and expanded shopping experience for our customers. In addition, we sell Hot Topic and Torrid gift cards via these Internet sites.



| |  |  | Hot Topic Internet Sales
| | - |  | ------------------------

Hot
Topic Internet sales from www.hottopic.com increased by 10% in fiscal 2006 compared to fiscal 2005. In addition to our broad selection of merchandise for sale, including some Internet-only items, our Hot Topic website offers content such as tour
dates, contests, job postings, store locations, and community features such as band reviews and advice columns.

In early 2007, we launched
a redesigned website, which provides a new look and feel to visitors to hottopic.com. We are optimistic that the redesigned site will spark increased interest in our site, perhaps to a wide range of potential customers; and we hope it will
contribute to continued increased Internet sales.



| |  |  | Torrid Internet Sales
| | - |  | ---------------------

Torrid
Internet sales in fiscal 2006 increased by 76% compared to fiscal 2005. As we continue to grow our Torrid store concept, we believe that www.torrid.com will provide an increasingly important portal for plus-size customers who do not yet have
convenient access to a Torrid store. To accommodate this trend and increase Internet sales, we continue to be heavily focused in 2006 on developing our Torrid Internet business.

In addition to our broad selection of merchandise for sale, including some Internet-only items, our Torrid website offers content such as special events,
contests, job postings, store locations, and community features such as a posting board and editorials on topics of interest to our Torrid customers.

Information Technology

Our information systems provide integration of store, merchandising, distribution, financial, and
human resources records and data. Software licensed from Escalate Retail Systems (formerly known as GE Retail Systems) is used for SKU and classification inventory tracking, purchase order management, open-to-buy, merchandise distribution, automated
ticket making, and sales audit. Our integrated financial systems are licensed from Lawson Software and are used for general ledger, accounts payable, HRIS, payroll, and asset management. Sales are updated daily in the merchandising reporting systems
by polling sales information from each stores point-of-sale, or POS, terminals. Our POS system, using software licensed from SAP, consists of registers providing price look-up, time and attendance, email and credit card/check/gift card
authorization. Through automated nightly two-way electronic communication with each store, sales information and payroll hours are uploaded to the host system. The host system downloads price changes, performs system maintenance and provides
software updates to the stores. We evaluate information obtained through nightly polling to implement merchandising decisions, including product purchasing/reorders, markdowns and allocation of merchandise on a daily basis. In June 2004, we
implemented a new warehouse management system in our California distribution center, which is licensed from Manhattan Associates. We expanded this system to include our Tennessee distribution center in May 2005.



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Our wide area network, or WAN, is used to connect all store locations with real-time email and several
Intranet applications. In addition, this technology has improved operating efficiency in areas such as credit card and gift card authorization, store-to-store transfer, product lookup, product location and several other applications to eliminate
paper distribution and paperwork.

In 2006 we moved the Hot Topic Internet fulfillment and backstock inventory operations to the Tennessee
distribution center from the California distribution center. We also replaced our proprietary e-commerce platform for hottopic.com with a packaged application from Escalate Retail Systems.

While we believe our enhancements to existing systems and additions of new systems will continue to support our continuing growth, we will strive to make
further enhancements and add more systems as necessary.

Trademarks

We have registered on the Principal Register of the United States Patent and Trademark Office our retail store service marks Hot Topic®,Torrid®, divastyle®, and the stylized Torrid Flaming Heart in various forms. We have also registered various trademarks for merchandise such as Morbid Make-Up®, Morbid Scents®, Morbid Metals®, Morbid Threads®, Hot Topic®, Torrid®, MT:2®, Hot Topic
Rock®, and general marks such as our slogan
Everything About the Music®. Each federal
registration is renewable indefinitely if the mark is in use at the time of the renewal. We have several trademark applications on file with the USPTO, for which we hope to obtain registration in the future, such as our stylized HT logo,
Music=Life, Rock the Arts, and Neighborhood Noise. In addition, we have common law rights to certain trademarks, service marks and trade names used in our business from time to time. We are unaware of the use of any of our marks raising any claims
of infringement or other challenges to our right to use our marks in the United States. We also have additional registrations and pending applications in foreign jurisdictions. All trademarks, trade names and service marks of the third parties
referenced in this report and in our stores are the property of their respective owners.

Hot Topic Competition

We compete with other retailers for vendors, customers, suitable retail locations and qualified associates. Our Hot Topic stores currently compete with
street alternative and vintage clothing stores located primarily in metropolitan areas and with other mall-based teenage-focused retailers such as Abercrombie & Fitch, Aeropostale, American Eagle Outfitters, Anchor Blue (Millers Outpost),
Charlotte Russe Inc., Claires Stores, Inc., Forever 21, H&M, Old Navy (a division of Gap Inc.), Pacific Sunwear of California, Inc., Spencer Gifts, Inc., The Buckle, Wet Seal, Inc., Urban Outfitters, Inc., and Zumiez, Inc.; and, to a
lesser extent, with music stores. Some of our competitors are larger and have substantially greater financial, marketing and other resources than us. The principal factors of competition are merchandise selection, connection to the music industry,
customer service, store location and price.

Torrid Competition

Based on direct customer research we have conducted, we believe that plus-size female teens and young women have historically shopped for apparel at department stores, discount stores such as Target, and specialty
stores such as Lane Bryant. Though a source of competition, we believe such stores generally target more mature customers, which is also reflected in their store environments. We are not aware of other exclusively mall-based chains that are
specifically targeting younger plus-size fashion forward customers. Our Torrid stores compete with traditional department stores, local specialty stores and junior teen retailers that offer a combination of junior and plus-sizes, such as Charming
Shoppes, Inc., Deb Shops and Old Navy (a division of Gap Inc.). Our Torrid stores also compete with traditional plus-size catalogs and websites, as well as Delias Corp. and Alloy, Inc., which carry both junior and junior plus-sizes. Many
companies compete for the junior customers and additional competitors may enter into the plus-size female market.



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Employees

We employed approximately 2,762 full-time and 7,032 part-time employees, which we refer to as associates, as of February 3, 2007. Of our 9,794 associates, approximately 875 were headquarters and distribution center personnel and the
remainder were field management and store associates. The number of part-time associates changes with seasonal needs. None of our associates are covered by collective bargaining agreements. We believe that our relationships with our associates are
good.

Executive Officers and Key Employees

Our executive officers and key employees and their ages on February 3, 2007 are as follows:



|                     |  |     |  |                                                                       
|-------------------- |  | --- |  | ----------------------------------------------------------------------
|Name                 |  | Age |  | Position                                                              
|Elizabeth McLaughlin |  | 46  |  | Chief Executive Officer and Director                                  
|Gerald Cook          |  | 54  |  | President, Hot Topic, Inc.                                            
|Christopher Daniel   |  | 49  |  | President, Torrid                                                     
|James McGinty        |  | 44  |  | Chief Financial Officer                                               
|Tom Beauchamp        |  | 54  |  | Senior Vice President and Chief Information Officer                   
|Maria Comfort        |  | 48  |  | Senior Vice President and Chief Merchandising Officer, Hot Topic, Inc.
|Robin Elledge        |  | 48  |  | Senior Vice President, Human Resources                                
|Christopher Kearns   |  | 40  |  | Senior Vice President, General Counsel and Secretary                  
|Bill Bellerose       |  | 49  |  | Vice President, Distribution and Logistics                            
|Kelly McGuire Diehl  |  | 40  |  | Vice President, Employee Relations and Training                       
|Ed Gusman            |  | 48  |  | Vice President, Hot Topic Store Operations                            
|Elizabeth Haynes     |  | 42  |  | Vice President, Torrid Planning and Allocation                        
|Tricia Higgins       |  | 39  |  | Vice President, Internet                                              
|Jerome Khan          |  | 40  |  | Vice President, Hot Topic Planning and Allocation                     
|Darrell Kinsley      |  | 44  |  | Vice President, Store Design and Visual Merchandising                 
|John Neppl           |  | 50  |  | Vice President, Real Estate and Construction                          
|Lori Smith           |  | 51  |  | Vice President, Torrid Store Operations                               
|Mike Yoshida         |  | 53  |  | Vice President, Finance                                               

Elizabeth McLaughlin has served as Chief Executive Officer and on the Board of Directors
since 2000. From 1996 through 2000, Ms. McLaughlin served as Senior Vice President and General Merchandise Manager. From 1993 through 1996, Ms. McLaughlin was our Vice President, Operations. Prior to joining us, Ms. McLaughlin held
various positions with Millers Outpost and The Broadway. Ms. McLaughlin holds a B.A. degree in Economics from the University of California at Irvine. Ms. McLaughlin is a Director of Noodles & Company, a privately held quick casual
restaurant concept. She is also a member of the Board of Visitors for the Anderson School at UCLA.

Gerald Cook has been President,
Hot Topic Inc. since November 2005. From September 2003 to October 2005, he was President of the Hot Topic division. From February 2001 to September 2003, he was Chief Operating Officer. From February 1999 until joining us, he was the President and
Chief Operating Officer of Travel 2000, Inc. From 1995 to 1998, Mr. Cook was Senior Vice President, Operations for The Bombay Company, Inc. and from 1989 to 1995, Mr. Cook was the Vice President, Stores and the Vice President, General
Merchandising Manager of Womans World Stores. Prior to 1989, he held management positions with Barnes & Noble/B Dalton, The Gap Stores and the Limited, Inc. Mr. Cook holds a B.S. degree in Business Administration from the
University of Minnesota.

Christopher Daniel has served as President of our Torrid division since November 2006. From September 2006
to November 2006, he was Senior Vice President, Chief Merchandising Officer for Torrid and from October 2004 to August 2006, he was Vice President, General Merchandise Manager for Torrid. From September 1996 until September 2004, he was the Vice
President of Design and Product Development for



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Mervyns, a division of Target Corporation. Prior to that, Mr. Daniel held management positions in merchandising and product development with
Structure, a division of Limited, Inc., Charming Shoppes, and Dayton-Hudson. Mr. Daniel holds a B.A. degree in English Literature from the University of Richmond in Richmond, Virginia.

James McGintyhas served as Chief Financial Officer since February 2001. Mr. McGinty joined us in August 2000 as Vice President, Finance and
was promoted to Chief Financial Officer in February 2001. From July 1996 to July 2000, Mr. McGinty was Vice President-Controller at Victorias Secret Stores, the leading brand and largest specialty retailer division of the Limited, Inc.
From 1984 to 1996, he held various financial and accounting positions within the Structure and Express divisions of The Limited, Inc. Mr. McGinty holds a B.S. degree in Accounting from Miami University in Oxford, Ohio.

Tom Beauchamp joined us as Senior Vice President and Chief Information Officer in June 2004. From October 2001 until joining us, he was Chief
Information Officer for CMI Marketing, a provider of loyalty marketing programs. From January 2000 until June of 2001, Mr. Beauchamp was Chief Information Officer of Columbia House. From June 1999 through January 2001, he was Senior Vice
President, Chief Information Officer for Oxford Health Plans. From March 1996 through June 1999, he was Senior Vice President, Chief Information Officer for Woolworth Corporation. Prior to 1996, Mr. Beauchamp held management positions with
Montgomery Ward, Limited, Inc., Millers Outpost, and The Broadway.

Maria Comfortjoined us in August 2005 as Senior Vice President
and Chief Merchandising Officer. Before joining us, Ms. Comfort served as Executive Vice President, General Merchandise Manager for Lillie Rubin stores, a division of Cache Inc. since April 2004. Prior to that, Ms. Comfort was Vice
President and General Merchandise Manager for Lillie Rubin stores from May 2002 to April 2004. From 1999 until 2002, Ms. Comfort served as Executive Vice President for Giorgio Armani. From June 1997 to 1999, Ms. Comfort served as President
of 9 & Co., a division of Nine West Group, Inc., a womens apparel company. Ms. Comfort has a B.A. degree in Mathematics from City College of New York, and has completed graduate level mathematics and management courses at Tel Aviv
University and Columbia University.

Robin Elledge joined us as Senior Vice President, Human Resources in January 2006. From October
1995 to December 2005, Ms. Elledge held various human resources management positions with IHOP Corp., including most recently Vice President, Human Resources. From March 1981 to October 1995, Ms. Elledge held various human resources
positions with Ormco Corporation International, Crocker National Bank, and Kraft, Inc. Ms. Elledge has a B.A. degree in Psychology from the Claremont Colleges and an M.B.A. from the University of Southern California.

Christopher Kearns joined us as Senior Vice President, General Counsel and Secretary in April 2004. Prior to that, Mr. Kearns was an attorney
in private practice, most recently as a Partner with the law firm Cooley Godward LLP, which he joined in 1996. Mr. Kearns holds a B.A. degree in History and a specialization in Business Administration from UCLA, and a J.D. with honors from the
University of California, Hastings College of the Law.

Bill Bellerose joined us in March 2006 as Vice President, Distribution and
Logistics. From 2004 to 2006, Mr. Bellerose served as AVP/Logistics Director at The Marmaxx Group along with acting President of Marshalls Inc. of Nevada and NBC Forth Realty Inc. From 2000 to 2004, Mr. Bellerose served as General Manager
at Toys R Us Inc. Mr. Bellerose served as General Manager at Kmart from 1998 to 2000. From 1980 to 1998, Mr. Bellerose held various director positions with Ross Stores, Byrons/Uptons, Inc. and Millers Outpost.
Mr. Bellerose attended Mount San Antonio College and Barry University.

Kelly McGuire Diehl has served as Vice President of
Employee Relations and Training since April 2006. Ms. McGuire Diehl joined us in June 2004 as the Director of Employee Relations and was promoted to Vice President of Employee Relations and Training in April 2006. Ms. McGuire Diehl was the
Director of Human



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Resources at VariAsian, Inc., a joint venture start-up fast casual restaurant concept, from June 2003 to April 2004. From 1989 to 2003, Ms. McGuire
Diehl held various human resource management positions at Nestlé USA, Inc. Ms. McGuire Diehl has a B.S. in Communications from Texas Christian University.

Ed Gusman has served as Vice President, Hot Topic Store Operations since January 2005. From January 2004 to January 2005, Mr. Gusman was Senior Regional Director for the Eastern United States. From March
2001 to December 2003, Mr. Gusman was the Regional Director for the Southeast. From September 1999 to February 2001, he was the district manager for Urban Outfitters for the Mid Atlantic, Southeast. From May 1994 to August 1999, Mr. Gusman
was a regional director for Zany Brainy, heading up its expansion on the West Coast. From 1990 to 1994, he was regional director for Brentanos, Waldenbooks Super Store. Prior to that, he held various management positions with Waldenbooks.

Elizabeth Haynes has served as the Vice President of Planning and Allocation for Torrid since December 2006. From May 2004 to
December 2006, Ms. Haynes was the Director of Planning and Allocation for Torrid. From April 2001 to May 2004, she served as Director of Planning and Allocation, Accessories for Hot Topic. Ms. Haynes has held various planning and
allocation positions with the company since 1997. Prior to her career at Hot Topic, Ms. Haynes held planning and allocation positions at The Broadway. Ms. Haynes has a B.S. degree in Business Administration from the University of Phoenix.

Tricia Higgins has served as Vice President, Internet since March 2006. From October 2004 to March 2006, she was Vice President,
Distribution and from February 2004 to October 2004, she was Vice President, Internet. Before her promotion to Vice President, Internet, she held the position of Director, Internet beginning in June 2002. Prior to joining us, she was Director,
Contact Center Operations for Cooking.com. From 1997 to August 2000, Ms. Higgins was Director, Retail Operations for the Williams-Sonoma, Pottery Barn and Hold Everything divisions of Williams-Sonoma, Inc. From 1994 to July 1997, she held
various positions with The Disney Stores, Inc. in Retail Operations and New Business Development. Ms. Higgins holds a B.A. degree in Psychology from Indiana University.

Jerome Kahn joined us in September 2006 as Vice President of Planning and Allocation. Most recently, Mr. Kahn was the Vice President of
Planning and Allocation of Pure Beauty. Mr. Kahn was the Senior Vice President of Planning and Allocation at Ann Taylor from April 2004 to July 2005. From July 1994 to April 2004, Mr. Kahn held various planning and allocation management
positions with Victorias Secret Beauty and Bath and Body Works, which are divisions of The Limited, Inc. Mr. Kahn has a B.A. in Marketing from Cape Town, South Africa.

Darrell Kinsley has served as Vice President, Store Design and Visual Merchandising, since January 2005. From February 2000 through December 2004,
Mr. Kinsley was Vice President, Hot Topic Store Operations. From June 1998 through February 2000, Mr. Kinsley was Regional Director for the western United States. From February 1997 through June 1998, he was Regional Director for the
eastern United States. Mr. Kinsley joined us in February 1995 as the District Manager for the eastern United States and was responsible for our expansion into the East Coast. Mr. Kinsley holds a business management leadership certificate
from the Anderson School of Business at the University of California, Los Angeles.

John Neppl joined us in October 2001 as Vice
President, Real Estate and Construction. From January 1995 to September 2001, Mr. Neppl served as Vice-President of Real Estate and Construction for Eastern Mountain Sports, Inc., a specialty retailer based in New Hampshire. Mr. Neppl
served as Director of Real Estate at Millers Outpost/Anchor Blue from October 1987 to December 1994. Mr. Neppl held various financial positions with Mervyns department stores, a division of Target Corporation, from October 1978 to
September 1987. Mr. Neppl received a B.S. degree in Accounting from Villanova University.

Lori Smith joined us in December
2005 as Vice President, Torrid Store Operations. From April 2005 to December 2005, Ms. Smith served as Senior Vice President, Consumer Leadership Associate, at Bank of



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America. From May 2004 to April 2005, Ms. Smith served as Director of Store Operations at Organized Living. From March 2002 to February 2003,
Ms. Smith served as Regional Director at Limited Brands, Inc. From September 1997 to March 2002, Ms. Smith served as Regional Sales Manager, Banana Republic. Prior to that Ms. Smith spent over 20 years in varying senior management
roles, including store operations, at retail organizations such as, Gap Inc., Millers Outpost, May Department Stores, and Carter Hawley, Hale, Inc.

Mike Yoshida joined us in August 2005 as Vice President, Finance. From December 1998 to August 2005, Mr. Yoshida served as Senior Director of Finance and Controller at Bristol Farms. Mr. Yoshida served as CFO, Vice
President Finance at Farmers Market from May 1995 to December 1998. From 1984 to 1995, Mr. Yoshida held various accounting and finance management positions with Ralphs Grocery Co., MTC Video Post Production, and Irvine Ranch Farmers Market.
Mr. Yoshida received his B.S. degree in Accounting from the University of Southern California and M.B.A. from the California State University, Los Angeles and is a Certified Public Accountant.

Compliance with Environmental Regulations

To our
knowledge, compliance with federal, state and local provisions enacted or adopted for protection of the environment has had no material effect upon our operations.

Internet Website

We make available free of charge through our investor relations website at
http://investorrelations.hottopic.com, 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) or 15(d) of the Exchange Act, as
soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. We also make available our Standards of Business Ethics at that website.

ITEM1A. RISK FACTORS

Before deciding to invest in Hot
Topic, Inc. or to engage in any other transaction involving securities of Hot Topic, Inc., readers should carefully consider the risks described below, in addition to the other information contained in this Annual Report on Form 10-K and in other
filings with the SEC, including our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. The risks described below are not the only risks we face. Additional risks that are not presently known to us or that we currently deem immaterial
may also affect our business. If any of these known or unknown risks actually occur, our business, financial condition and results of operations could be seriously harmed, and our stock price could decline.

Our growth strategy could create challenges we may not be able to adequately meet.

Our net sales have grown appreciably during the past several years, primarily as a result of the opening of new stores and, to a lesser extent, the
introduction of new products. We intend to continue to pursue our growth strategy for the foreseeable future, and evolve our existing business as we grow; our future operating results will depend largely upon our ability to open and operate stores
successfully and to profitably manage a larger business.

We currently anticipate opening approximately 35 stores, consisting of
approximately 15 Hot Topic and approximately 20 Torrid stores, during fiscal 2007. We also plan to remodel or relocate approximately 60 to 80 existing stores during the fiscal year for broader implementation of our new Hot Topic store design and
plan to close 12 stores in fiscal 2007.

Operation of a greater number of new stores, moving or expanding store locations and expansion
into new markets may present competitive and merchandising challenges that are different from those currently



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encountered by us in our existing stores and markets. There can be no assurance that our expansion will not adversely affect the individual financial
performance of our existing stores or our overall results of operations. Similarly, there can be no assurance that remodeling or relocating existing stores will not adversely affect either the individual financial performance of the store prior to
the change, or our overall results of operations. Further, there can be no assurance that we will successfully achieve our remodel or expansion targets or, if achieved, that planned remodel or expansion will result in profitable operations. Finally,
as the number of stores increases, we may face risks associated with market saturation of our products and concepts.

This growth
strategy requires improving our operations, and we may not be able to do this sufficiently to effectively prevent negative impact on our operations and financial results.

In order to manage our planned real estate strategy, among other things, we will need to locate suitable store sites, negotiate acceptable lease terms,
obtain or maintain adequate capital resources on acceptable terms, source sufficient levels of inventory, hire and train store managers and sales associates, integrate new stores into our existing operations, and maintain adequate distribution
center space and information technology and other operations systems. Our recent opening of a second distribution center in Tennessee was designed to address some of our growth challenges, but achieving and maintaining operating efficiencies in
multiple distribution centers is subject to numerous risks and uncertainties.

We also need to continually evaluate the adequacy of our
management information and distribution systems. Implementing new systems and changes made to existing systems could present challenges we do not anticipate and could impact our business. We cannot anticipate all of the changing demands that our
expanding operations will impose on our business, systems and procedures, and our failure to adapt to such changing demands could have a material adverse effect on our results of operations and financial condition. Our failure to timely implement
initiatives necessary to support our expanding operations could also materially impact our business.

Expanding our operations to
include an increasing number of Torrid stores and any other new concepts presents risks we have faced with the Hot Topic concept but also new risks due to differences in concept objectives and strategies.

Torrid is our first significant new venture, and the nature of the Torrid business differs in certain respects from that of the Hot Topic business. Our
ability to expand into new concepts, and in particular our Torrid concept has not been fully tested; and starting and operating new concepts presents new and challenging risks and uncertainties. Specifically, the operation of Torrid stores and the
sale of Torrid merchandise over the Internet are subject to numerous risks, including unanticipated operational problems; lack of experience; lack of customer acceptance; new vendor relationships; competition from existing and new retailers; and
diversion of managements attention from the Hot Topic concept. The Torrid concept involves implementation of a retail apparel concept which is subject to most of the same risks as the Hot Topic concept, as well as additional risks inherent in
a concept that concentrates on apparel and fashion, including risks of difficulty in merchandising, uncertainty of customer acceptance, fluctuations in fashion trends and customer tastes, extreme competition with a less differentiated product
offering, and attendant markdown risks. We may not be able to generate continued customer interest in Torrid stores and products, and the Torrid concept may not be able to support the store or Internet sales format. There can be no assurance that
the Torrid stores or website, or any future concept, will achieve sales and profitability levels that justify our investment.

The
success of our business depends on establishing and maintaining good relationships with mall operators and developers, and problems with those relationships could make it more difficult for us to expand to certain sites or offer certain products.

Any restrictions on our ability to expand to new store sites, remodel or relocate stores where we feel it necessary or to offer a broad
assortment of merchandise could have a material adverse effect on our business, results of operations and financial condition. If our relations with mall operators or developers become strained,



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or we otherwise encounter difficulties in leasing desired store sites, we may not grow as planned and may not reach certain revenue levels and other
operating targets. Risks associated with these relationships are more acute given recent consolidation in that industry, and we have seen certain increases in expenses as a result of such consolidation that could continue.

Our comparable store sales are subject to fluctuation resulting from factors within and outside our control, and lower than expected comparable store
sales could impact our business and our stock price.

A variety of factors affects our comparable store sales including, among others,
the timing of new music releases and music/pop culture-related products; music and fashion trends; the general retail sales environment and the effect of the overall economic environment; our ability to efficiently source and distribute products;
changes in our merchandise mix; ability to attain exclusivity and certain pop culture related licenses; competition from other retailers; opening of new stores in existing markets and our ability to execute our business strategy efficiently. Our
comparable store sales results have fluctuated significantly in the past and we believe that such fluctuations will continue. The following table shows our comparable store sales results for recent periods:



|            |  |      |    |  |      |    |  |      |    |  |      |  
|----------- |  | ---- | -- |  | ---- | -- |  | ---- | -- |  | ---- | -
|Fiscal Year |  | 2006 |    |  | 2005 |    |  | 2004 |    |  | 2003 |  
|Total Year  |  | (6.6 | )% |  | (3.4 | )% |  | (2.9 | )% |  | 7.4  | %
|            |  |      |    | 
|1st Quarter |  | (9.6 | )% |  | 0.9  | %  |  | 4.0  | %  |  | 2.6  | %
|2nd Quarter |  | (5.5 | )% |  | (3.5 | )% |  | (2.1 | )% |  | 5.2  | %
|3rd Quarter |  | (6.8 | )% |  | (6.2 | )% |  | (4.2 | )% |  | 10.8 | %
|4th Quarter |  | (5.3 | )% |  | (3.8 | )% |  | (6.0 | )% |  | 8.5  | %

Past comparable store sales results are not an indicator of future results, and there can be no
assurance that our comparable store sales results will not decrease in the future. Changes in our comparable store sales results, or continued negative comparable store sales, could cause our stock price to fluctuate substantially.

Our success relies on popularity with young people of music, pop culture, and fashion trends, and we may not be able to react to trends in a way to
prevent declining popularity and sales of our products.

Our financial performance is largely dependent upon the continued popularity of
alternative and rock music, the Internet and digital music, music videos, and MTV and other music television networks among teenagers and college-age adults; the emergence of new artists and the success of music releases and music/pop
culture-related products; the continuance of a significant level of teenage spending on music/pop culture-licensed and music/pop culture-influenced products; and our ability to anticipate and keep pace with the music, fashion and merchandise
preferences of our customers. The popularity of particular types of music, artists, styles, trends and brands is subject to change. Our failure to anticipate, identify and react appropriately to changing trends could lead to, among other things,
excess inventories and higher markdowns, which could have a material adverse effect on our results of operations and financial condition, and on our image with customers. There can be no assurance that our new products will be met with the same
level of acceptance as in the past or that the failure of any new products will not have an adverse material effect on our business, results of operations and financial condition.

Economic conditions could change in ways that reduce our sales or increase our expenses.

Certain economic conditions affect the level of consumer spending on merchandise we offer, including, among others, employment levels, salary and wage
levels, interest rates, taxation, and consumer confidence in future economic conditions. We are also dependent upon the continued popularity of malls as a shopping destination, the ability of mall anchor tenants and other attractions to generate
customer traffic, and the development of new malls. A slowdown in the United States economy or an uncertain economic outlook could lower consumer spending levels and cause a decrease in mall traffic or new mall development, each of which would
adversely affect our growth, sales results and financial performance.



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Recording impairment charges for certain underperforming Hot Topic and Torrid stores may negatively
impact our future financial condition or results of operations, and closing stores might not have positive impact.

We recorded $3.4
million and $1.7 million in impairment charges during fiscal 2006 and 2005, respectively, based on the review of certain underperforming stores. There can be no assurance that we will not incur future impairment charges for underperforming stores
which could have a significant negative impact on our operating results. In addition, we closed four stores during fiscal 2006, consisting of three Hot Topic and one Torrid store. Although the stores closed in 2006 had been underperforming as
compared with our other Hot Topic and Torrid stores, there is no assurance these store closures will have a significant positive impact on our operating results. We also expect to close additional stores in the future, which also could adversely
affect our operating results.

Changes in laws, including employment laws and laws related to our merchandise, could make conducting our
business more expensive or change the way we do business.

In addition to increased regulatory compliance requirements, changes in laws
could make ordinary conduct of our business more expensive or require us to change the way we do business. For example, changes in federal and state minimum wage laws could raise the wage requirements for certain of our associates, which would
likely cause us to reexamine our entire wage structure for stores. Other laws related to employee benefits and treatment of employees could also negatively impact us such as by increasing benefits costs like medical expenses. Moreover, changes in
product safety or other consumer protection laws could lead to increased costs to us for certain merchandise, or additional labor costs associated with readying merchandise for sale. It is often difficult for us to plan and prepare for potential
changes to applicable laws.

Timing and seasonal issues could negatively impact our financial performance for given periods.

Our quarterly results of operations may fluctuate materially depending on, among other things, the timing of store openings and related
pre-opening and other startup expenses, net sales contributed by new stores, increases or decreases in comparable store sales, releases of new music and music/pop culture-related products, shifts in timing of certain holidays, changes in our
merchandise mix and overall economic and political conditions.

Our business is also subject to seasonal influences, with heavier
concentrations of sales during the back-to-school, Halloween and holiday (defined as the week of Thanksgiving through the first few days of January) seasons, and other periods when schools are not in session. The holiday season has historically been
our single most important selling season. We believe that the importance of the summer vacation and back-to-school seasons (which affect operating results in the second and third quarters) and to a lesser extent, the spring break season (which
affects operating results in the first quarter) as well as Halloween (which affects operating results in the third quarter), all reduce our dependence on the holiday selling season, but this will not always be the case to the same degree. As is the
case with many retailers of apparel, accessories and related merchandise, we typically experience lower net sales in the first fiscal quarter relative to other quarters.

We have many important vendor relationships, and our ability to get merchandise could be hurt by changes in those relationships and events harmful to our vendors could impact our results of operations.

Our financial performance depends on our ability to purchase desired merchandise in sufficient quantities at competitive prices.
Although we have many sources of merchandise, substantially all of our music/pop culture-licensed products are available only from vendors that have exclusive license rights. In addition, small, specialized vendors, some of which create unique
products primarily for us, supply certain of our products. Our smaller vendors generally have limited resources, production capacities and operating histories, and some of our vendors have restricted the distribution of their merchandise in the
past. We generally have no long-term purchase contracts or other contractual assurances of continued supply, pricing or access to new products. There can be no assurance that we will be able to acquire desired merchandise in sufficient quantities on
acceptable terms in the future. Any inability to acquire suitable merchandise, or the loss of one or more key vendors, may have a material adverse effect on our business, results of operations and financial condition.



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Technology and other risks associated with our Internet sales could hinder our overall financial
performance.

We sell merchandise over the Internet through the websites www.hottopic.com and www.torrid.com. Our Internet operations
are subject to numerous risks and pose risks to our overall business, including, among other things: hiring; retention and training of personnel to conduct the Internet operations; diversion of sales from our stores; rapid technological change and
the need to invest in additional computer hardware and software to support sales; liability for online content; failure of computer hardware and software, including computer viruses, telecommunication failures, online security breaches and similar
disruptions; governmental regulation; and credit card fraud. There can be no assurance that our Internet operations will achieve sales and profitability levels that justify our investment in them.

System security risk issues could disrupt our internal operations or information technology services provided to customers, and any such disruption
could harm our revenue, increase our expenses, and harm our reputation and stock price.

Experienced computer programmers and hackers,
or even internal users, may be able to penetrate our network security and misappropriate our confidential information or that of third parties, create system disruptions or cause shutdowns. As a result, we could incur significant expenses addressing
problems created by security breaches of our network. Moreover, we could incur significant expenses in connection with system failures. In addition, sophisticated hardware and operating system software and applications that we procure from third
parties may contain defects in design or manufacture, including bugs and other problems that could unexpectedly interfere with the operation of the system. The costs to us to eliminate or alleviate security problems, viruses, and bugs
could be significant, and the efforts to address these problems could result in interruptions, delays or cessation of service that may impede our sales, distribution or other critical functions.

We have made and plan to continue to make significant changes to information systems and software used in operation of our business, and we may not be
able to effectively adopt changes in a way to prevent failures in our operations or negative impact on our financial performance and reporting.

Over the past several years, we have made improvements to existing hardware and software systems, as well as implemented new systems. For example, we have invested approximately $6 million to enhance the functionality of our current
Escalate software and to implement new financial and human resources systems software from Lawson Software. In addition, we have invested approximately $10 million in the implementation of a new warehouse management software system, a new Internet
order management software system, and a new customer loyalty software system. We expect to significantly increase our reliance on these systems in fiscal 2007. If these information systems and software do not work effectively, we may experience
delays or failures in our operations. These delays or failures could adversely impact the promptness and accuracy of our merchandise distribution, transaction processing, financial accounting and reporting and ability to properly forecast earnings
and cash requirements. To manage growth of our operations and personnel, we will need to continue to improve our operational and financial systems, transaction processing, and procedures and controls, and in doing so, we could incur substantial
additional expenses.

Loss of key people or an inability to hire necessary and significant personnel could hurt our business.

Our financial performance depends largely on the efforts and abilities of senior management, especially Elizabeth McLaughlin, our Chief
Executive Officer, who has been with us since 1993. However, the sudden loss of Ms. McLaughlins services or the services of other members of our management team could have a material adverse effect on our business, results of operations
and financial condition. Furthermore, there can be no assurance that Ms. McLaughlin and our existing management team will be able to manage our growth or that we will be able to attract and retain additional qualified personnel as needed in the
future.



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Decreased effectiveness of stock-based compensation could adversely affect our ability to attract and
retain employees.

We have historically used stock options as a component of our total employee compensation program in order to align
employees interests with the interests of our shareholders, encourage employee retention, and provide competitive compensation and benefit packages. In recent periods, our employee stock options have had exercise prices in excess of Hot
Topics stock price, which reduces their value to employees and could affect our ability to retain present, or attract prospective employees. There are other forms of stock-based compensation available to us, but these are similarly less
attractive when a companys stock price is declining. In addition, in accordance with Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) 123R, Share-Based Payment
(SFAS 123R), we began recording expenses for stock-based payments, including stock options, in the first quarter of fiscal 2006. As a result, we now incur increased compensation costs associated with our stock-based compensation
programs. Moreover, difficulties relating to obtaining shareholder approval of equity compensation plans could make it harder or more expensive for us to grant stock-based payments to employees in the future. Like other companies, we review our
equity compensation strategy in light of regulatory and competitive environments, and we may decide to reduce the total number of options granted, or the form of stock awards, to employees, or reduce the number of employees who receive stock-based
payments. Due to this change in our stock-based compensation strategy, we may find it difficult to attract, retain and motivate employees, and any such difficulty could materially adversely affect our business.

Our reliance on United Parcel Service, temporary employees and other mechanics of shipping of our merchandise creates distribution risks and
uncertainties that could hurt our sales and business.

We rely upon United Parcel Service (or any other shipping company we may elect to
use) for our product shipments, including shipments to and from a significant number of our stores. Our reliance on this source for shipments is subject to risks, including employee strikes and inclement weather, associated with United Parcel
Services ability to provide delivery services that adequately meet our shipping needs. We are also dependent upon temporary associates to adequately staff our distribution centers; particularly during busy periods such as the holiday season
and while multiple stores are opening. There can be no assurance that we will continue to receive adequate assistance from our temporary associates, or that there will continue to be sufficient sources of temporary associates. We began operation of
our second distribution center in Tennessee during the second quarter of 2005, and as a result we also now face risks and uncertainties associated with achieving and maintaining operating efficiencies in two distribution centers that are located
approximately 2,000 miles apart. Additionally, certain products are imported and subject to delivery delays based on availability and port capacity.

There is a risk we could acquire merchandise without full rights to sell it, which could lead to disputes or litigation and hurt our financial performance and stock price.

We purchase licensed merchandise from a number of suppliers who hold manufacturing and distribution rights under the terms of certain licenses. We
generally rely upon vendors representations concerning manufacturing and distribution rights and do not independently verify whether these vendors legally hold adequate rights to licensed properties they are manufacturing or distributing. If
we acquire unlicensed merchandise, we could be obligated to remove such merchandise from our stores, incur costs associated with destruction of merchandise if the distributor is unwilling or unable to reimburse us, and be subject to liability under
various civil and criminal causes of action, including actions to recover unpaid royalties and other damages. Any of these results could have a material adverse effect on our business, results of operations and financial condition.

We face intense competition, and an inability to adequately address it, or the success of our competitors, could limit or prevent our business growth
and success.

The retail apparel and accessory industry is highly competitive. We compete with other retailers for vendors, teenage and
young adult customers, suitable store locations and qualified associates and management



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personnel. Our Hot Topic stores currently compete with street alternative stores located primarily in metropolitan areas; with other mall-based
teenage-focused retailers such as Abercrombie & Fitch, Aeropostale, American Eagle Outfitters, Anchor Blue, Charlotte Russe Inc., Claires Stores, Inc., Forever 21, Pacific Sunwear of California, Inc., Spencer Gifts, Inc., H&M, The
Buckle, Wet Seal, Inc., Urban Outfitters, Inc., and Zumiez, Inc.; and, to a lesser extent, with music stores and mail order catalogs and websites. Torrid has additional competitors, such as Alloy, Inc., Charming Shoppes, Deb Shops, Delias
Corp., Old Navy (a division of Gap Inc.), and plus-size departments in department stores and discount stores as well as numerous potential competitors who may begin or increase efforts to market and sell products competitive with Torrid products.
Some of our competitors are larger and may have greater financial, marketing and other resources. Direct competition with these and other retailers may increase significantly in the future, which could require us, among other things, to lower our
prices. Increased competition could have a material adverse effect on our business, results of operations and financial condition.

War,
terrorism and other catastrophes could negatively impact our customers, places where we do business, and our expenses, all of which could hurt our business.

The effects of war or acts of terrorism could have a material adverse effect on our business, operating results and financial condition. The continued threat of terrorism and heightened security and military action in
response to this threat, or any future acts of terrorism, may cause further disruptions and create further uncertainties. To the extent that such disruptions or uncertainties negatively impact shopping patterns and/or mall traffic, or adversely
affect consumer confidence or the economy in general, our business, operating results and financial condition could be materially and adversely affected.

Our principal executive offices, a distribution center and a significant number of our stores are located in California. If we experience a sustained disruption in energy supplies, or if electricity and gas costs in
California fluctuate dramatically, our results of operations could be materially and adversely affected. California is also subject to natural disasters such as earthquakes and floods. A significant natural disaster or other catastrophic event
affecting our facilities could have a material adverse impact on our business, financial condition and operating results.

There are
numerous risks that could cause our stock price to fluctuate substantially.

Our common stock is quoted on the Nasdaq Stock Market,
which has experienced and is likely to experience in the future significant price and volume fluctuations, which could adversely affect our stock price without regard to our financial performance. In addition, we believe that factors such as
quarterly fluctuations in our financial results and comparable store sales; announcements by other apparel, accessory and gift item retailers; the trading volume of our stock; changes in estimates of our performance by securities analysts; overall
economic and political conditions; the condition of the financial markets; and other events or factors outside of our control could cause our stock price to fluctuate substantially.

Our charter documents and other circumstances could prevent a takeover or cause dilution of our existing shareholders, which could be detrimental to
existing shareholders and hinder business success.

Our Articles of Incorporation and Bylaws contain provisions that may have the effect
of delaying, deterring or preventing a takeover of Hot Topic, Inc. For instance, our Articles of Incorporation include certain fair price provisions generally prohibiting business combinations with controlling or significant shareholders
unless certain minimum price or procedural requirements are satisfied, and our Bylaws prohibit shareholder action by written consent. Additionally, our Board of Directors has the authority to issue, without shareholder approval, up to 10,000,000
shares of blank check preferred stock having such rights, preferences and privileges as designated by the Board of Directors. The issuance of these shares could have a dilutive effect on certain shareholders, and potentially prohibit a
takeover of Hot Topic, Inc. by requiring the preferred shareholders to approve such a transaction.



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We also have a significant number of authorized and unissued shares of our common stock available under
our Articles of Incorporation. These shares provide us with the flexibility to issue our common stock for future business and financial purposes including stock splits, raising capital and providing equity incentives to employees, officers and
directors. However, the issuance of these shares could result in dilution to our shareholders.

We incur costs associated with
regulatory compliance, and this cost could be significant.

There are numerous regulatory requirements for public companies, including
the provisions of the Sarbanes-Oxley Act of 2002. With regard to the Sarbanes-Oxley Act, we have and will continue to incur significant expense as we continue to address the implications of applicable rules and our operations relative thereto, and
as we work to respond to and comply with applicable requirements. Section 404 requires management to report on, and our independent auditors to attest to, our internal controls. Compliance with these rules could also result in continued
diversion of managements time and attention, which could be disruptive to normal business operations.

There are other regulations
and standards associated with our business operations. For example, an independent standards-setting organization working with credit card companies has developed regulations concerning payment card account security throughout the
transaction process, called the Payment Card Industry (PCI) Data Security Standard. All merchants and service providers that store, process and transmit payment card data are required to comply with the regulations as a condition to accepting
credit cards. The organization is expected to start levying fines on companies that are non-compliant, and though we believe we are proceeding toward full compliance, there is no guarantee we will not incur fines or delays in our
ability to comply.

If we do not satisfactorily or timely comply with these requirements, possible consequences could include sanction or
investigation by regulatory authorities such as the Securities and Exchange Commission or the Nasdaq Stock Market; fines and penalties; incomplete or late filing of our periodic reports, including our annual report on Form 10-K; or civil or
criminal liability. Our stock price and business could also be adversely affected.

There are litigation and other claims against us
from time to time, which could distract management from our business activities, and could lead to adverse consequences to our business and financial condition.

As a growing company with expanding operations, we are increasingly involved from time to time with litigation and other claims against us. These arise primarily in the ordinary course of our business, and include
employee claims, commercial disputes, intellectual property issues and product-oriented allegations. Often these cases raise complex factual and legal issues, which are subject to risks and uncertainties and which could require significant
management time. Although we do not currently believe that the outcome of any current litigation and claims against us will have a material adverse effect on our overall financial condition, we have, in the past, incurred unexpected expense in
connection with litigation matters. In the future, adverse settlements or resolutions may occur and negatively impact earnings, injunctions against us could have an adverse effect on our business by requiring us to do or prohibiting us from doing
certain things, and other unexpected events could have a negative impact on us.

Recent accounting regulation changes require the
expensing of stock options.

Recently effective accounting regulation changes require that all publicly traded companies record
compensation expense related to stock options (and other equity awards). Accordingly, we now include compensation expense related to stock options and certain other equity awards in our reported earnings in our financial statements. Our reported
earnings have been negatively impacted by this new requirement of recording stock-based compensation expense, and our stock price could go down or fluctuate in the future as the amount and extent of these expenses may fluctuate from quarter to
quarter, as they are recognized.



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|ITEM1B. | UNRESOLVED STAFF COMMENTS
|------- | -------------------------

None.



|ITEM2. | PROPERTIES
|------ | ----------

We lease all of our
existing store locations, with lease terms expiring between 2007 and 2017. At February 3, 2007, we had a total of 1,541,294 leased store square feet (Hot Topic and Torrid stores) with an average store size of 1,861 square feet (Hot Topic and
Torrid stores). The leases for most of the existing stores are for approximately ten-year terms and provide for minimum rent payments as well as contingent rent based upon a percent of sales in excess of the specified minimums. Leases for future
stores will likely include similar contingent rent provisions.

We lease our headquarters and distribution center facility, located in City
of Industry, California, which is approximately 250,000 square feet. Our lease expires April 2014, with an option to renew for two more terms, and the annual base rent is approximately $1.1 million. In the second quarter of 2005, we completed the
purchase of the land, building and other improvements comprising our distribution center in LaVergne, Tennessee, for which we paid $14.3 million. This facility, which is approximately 300,000 square feet, became fully operational at the end of the
second quarter of fiscal 2005.



|ITEM3. | LEGAL PROCEEDINGS
|------ | -----------------

In
April 2006, a California resident filed a lawsuit against us in Superior Court of Los Angeles County, alleging that we violated California Civil Code Section 1747.08. That code section regulates when a retailer is permitted to obtain certain
customer information in connection with credit card transactions. The case is alleged as a class action. In May 2006, we answered the complaint and denied all liability. In October 2006, the court gave preliminary approval to a settlement agreement
between the plaintiff (on behalf of the purported class) and us, which agreement we entered into as opposed to incurring additional legal fees defending the claims. The settlement agreement set forth our position that complete defenses to the claims
exist. Further, there was no admission of liability and no finding of violation of law. In January 2007, the court granted final approval of the settlement terms. Under the settlement agreement, we will pay (during the first two quarters of fiscal
2007) an estimated aggregate of approximately $250,000 to cover certain attorneys fees and claims administration costs; and we will provide class members who have opted in to the settlement class a coupon to receive 20% off on a single
purchase of up to $100 in our Hot Topic or Torrid stores. We accrued amounts to account for the settlement during our third quarter of 2006 following agreement on the settlement terms. We expect the case to be finally dismissed with prejudice upon
completion of the above steps, and do not expect any further activity with respect to the matter.

On August 7, 2006, Cheryl Axelson
filed a purported shareholder derivative action for the benefit of Hot Topic, Inc. in the Los Angeles County Superior Court. The lawsuit named certain of our current and former executive officers and directors as individual defendants and us as a
nominal defendant. The lawsuit asserted claims for breach of fiduciary duty and unjust enrichment in connection with the granting of certain stock options by us and sought unspecified damages, disgorgement of the relevant stock options and any
proceeds thereof, and other relief. On September 12, 2006, Jane Daily, represented by the same law firms as Ms. Axelson, filed a substantially similar action. In October 2006, the court ordered consolidation of the two cases. We believed
the claims were without merit and intended to defend the case vigorously. However, following informal discussions with the plaintiffs attorneys, the plaintiffs agreed to dismiss the case, without any sort of payment or obligation made or
committed to by us or any of the other defendants. In January 2007, the court granted the parties request for dismissal without prejudice, and the case was dismissed.

On December 18, 2006, Lanell Lake filed a purported shareholder derivative action for the benefit of Hot Topic, Inc. in the Los Angeles County
Superior Court. The case was substantially similar to the Axelson and



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Daily cases referenced above. The lawsuit asserted claims against certain of our current and former executive officers and directors for breach of fiduciary
duty and unjust enrichment in connection with the granting of stock options. Following that filing, counsel for the parties engaged in informal discussions. As a result, plaintiff agreed to dismiss the case, without any sort of payment or obligation
made or committed to by us or any of the other defendants. In January 2007, the court granted the parties request for dismissal without prejudice, and the case was dismissed.

We are involved in other matters of litigation that arise in the ordinary course of business. We do not currently believe that the cases referenced
above, or any other litigation in which we are currently involved, will have a material adverse effect on our overall financial condition.



|ITEM4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|------ | ---------------------------------------------------

Not applicable.



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PART II



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

Our common stock is traded on the Nasdaq Stock Market under the symbol HOTT. The following table shows, for the periods indicated, the high
and low end-of-day closing sales prices of our shares of common stock, as reported on the Nasdaq Stock Market. Such quotations represent inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual
transactions.



|                          |  |      |       |     |   |      
|------------------------- |  | ---- | ----- | --- | - | -----
|2006 Fiscal Year Quarters |  | High |       | Low
|First Quarter             |  | $    | 14.83 |     | $ | 13.09
|Second Quarter            |  | $    | 15.47 |     | $ | 10.93
|Third Quarter             |  | $    | 14.70 |     | $ | 9.65 
|Fourth Quarter            |  | $    | 14.30 |     | $ | 9.82 
|                          |  |     
|2005 Fiscal Year Quarters |  | High |       | Low
|First Quarter             |  | $    | 23.07 |     | $ | 19.28
|Second Quarter            |  | $    | 22.65 |     | $ | 17.04
|Third Quarter             |  | $    | 17.18 |     | $ | 13.76
|Fourth Quarter            |  | $    | 15.95 |     | $ | 13.08

On March 26, 2007, the last sales price of our common stock as reported on the Nasdaq Stock
Market was $11.32 per share. As of March 26, 2007, there were approximately 196 holders of record of our common stock. This number does not reflect the actual number of beneficial holders of our common stock, which we believe to be in excess of
7,600 holders.

We have not paid any cash dividends since inception and do not anticipate paying any cash dividends in the foreseeable
future.

Please see Item 12 for information about our equity compensation plans.



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PERFORMANCE MEASUREMENT COMPARISON

The material in this section is not soliciting material, is not deemed filed with the Securities and Exchange Commission, and
is not to be incorporated by reference into any filing of Hot Topic under the Securities Act of 1933, as amended, or the Securities Act of 1934, as amended.

The following graph shows a comparison of five-year cumulative total returns for Hot Topic, the Nasdaq Stock Market (U.S.) Index and the Nasdaq Retail Trade Index for the period that commenced February 4, 2002
and ended on February 3, 2007. The graph assumes an initial investment of $100 and that all dividends have been reinvested (there have been no dividends declared by us other than stock dividends).

LOGO



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##### Table of Contents

|ITEM6. | SELECTED FINANCIAL DATA
|------ | -----------------------

The following table summarizes selected financial data for each of the five fiscal years in the period ended February 3, 2007. This data should be read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations and the consolidated financial statements and Notes included elsewhere in this Annual Report on Form 10-K.



|                                                                       |  |                                                                                                          |         |    |      |   |         |      |  |   |         |    |  |      |         |   |  |   |         |  
|---------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------- | ------- | -- | ---- | - | ------- | ---- |  | - | ------- | -- |  | ---- | ------- | - |  | - | ------- | -
|                                                                       |  | Fiscal Year                                                                                              |        
|                                                                       |  | 2006                                                                                                     |         |    | 2005 |   |         | 2004 |  |   | 2003    |    |  | 2002 |        
|                                                                       |  | (In thousands, except per share data, number of stores, comparablestore sales and sales per square
foot) |        
|Statement of Operations Data:                                          |  |                                                                                                          |         |    |      |   |         |      |  |   |         |    |  |      |         |   |  |   |         |  
|Net sales                                                              |  | $                                                                                                        | 751,558 |    |      | $ | 725,142 |      |  | $ | 656,468 |    |  | $    | 572,039 |   |  | $ | 443,250 |  
|Cost of goods sold, including buying, distribution and occupancy costs |  |                                                                                                          | 502,408 |    |      |   | 488,948 |      |  |   | 422,712 |    |  |      | 352,277 |   |  |   | 274,008 |  
|                                                                       |  |                                                                                                          |         |    |      |   |         |      |  |   |         |    |  |      |         |   |  |   |         |  
|Gross margin                                                           |  |                                                                                                          | 249,150 |    |      |   | 236,194 |      |  |   | 233,756 |    |  |      | 219,762 |   |  |   | 169,242 |  
|Selling, general and administrative expenses                           |  |                                                                                                          | 227,580 |    |      |   | 203,995 |      |  |   | 170,384 |    |  |      | 143,952 |   |  |   | 115,634 |  
|                                                                       |  |                                                                                                          |         |    |      |   |         |      |  |   |         |    |  |      |         |   |  |   |         |  
|Operating income                                                       |  |                                                                                                          | 21,570  |    |      |   | 32,199  |      |  |   | 63,372  |    |  |      | 75,810  |   |  |   | 53,608  |  
|Other income and interest, net                                         |  |                                                                                                          | 1,450   |    |      |   | 3,999   |      |  |   | 919     |    |  |      | 1,318   |   |  |   | 1,371   |  
|                                                                       |  |                                                                                                          |         |    |      |   |         |      |  |   |         |    |  |      |         |   |  |   |         |  
|Income before income taxes                                             |  |                                                                                                          | 23,020  |    |      |   | 36,198  |      |  |   | 64,291  |    |  |      | 77,128  |   |  |   | 54,979  |  
|Provision for income taxes                                             |  |                                                                                                          | 9,394   |    |      |   | 13,779  |      |  |   | 24,618  |    |  |      | 29,539  |   |  |   | 20,892  |  
|                                                                       |  |                                                                                                          |         |    |      |   |         |      |  |   |         |    |  |      |         |   |  |   |         |  
|Net income                                                             |  | $                                                                                                        | 13,626  |    |      | $ | 22,419  |      |  | $ | 39,673  |    |  | $    | 47,589  |   |  | $ | 34,087  |  
|                                                                       |  |                                                                                                          |         |    |      |   |         |      |  |   |         |    |  |      |         |   |  |   |         |  
|Earnings per share:                                                    |  |                                                                                                          |         |    |      |   |         |      |  |   |         |    |  |      |         |   |  |   |         |  
|Basic                                                                  |  | $                                                                                                        | 0.31    |    |      | $ | 0.50    |      |  | $ | 0.86    |    |  | $    | 1.00    |   |  | $ | 0.72    |  
|Diluted                                                                |  | $                                                                                                        | 0.30    |    |      | $ | 0.49    |      |  | $ | 0.83    |    |  | $    | 0.96    |   |  | $ | 0.69    |  
|Weighted average shares outstanding:                                   |  |                                                                                                          |         |    |      |   |         |      |  |   |         |    |  |      |         |   |  |   |         |  
|Basic                                                                  |  |                                                                                                          | 44,167  |    |      |   | 44,924  |      |  |   | 46,379  |    |  |      | 47,479  |   |  |   | 47,027  |  
|Diluted                                                                |  |                                                                                                          | 44,752  |    |      |   | 45,877  |      |  |   | 47,875  |    |  |      | 49,588  |   |  |   | 49,276  |  
|                                                                       |  |                                                                                                          |         |    |     
|Selected Operating Data:                                               |  |                                                                                                          |         |    |      |   |         |      |  |   |         |    |  |      |         |   |  |   |         |  
|Number of stores at year end                                           |  |                                                                                                          | 825     |    |      |   | 783     |      |  |   | 668     |    |  |      | 554     |   |  |   | 445     |  
|Comparable stores sales (decrease) increase                            |  |                                                                                                          | (6.6    | )% |      |   | (3.4    | )%   |  |   | (2.9    | )% |  |      | 7.4     | % |  |   | 5.0     | %
|Average sales per square foot                                          |  | $                                                                                                        | 500     |    |      | $ | 520     |      |  | $ | 571     |    |  | $    | 619     |   |  | $ | 619     |  
|Average sales per store                                                |  | $                                                                                                        | 930     |    |      | $ | 957     |      |  | $ | 1,034   |    |  | $    | 1,106   |   |  | $ | 1,064   |  
|                                                                       |  |                                                                                                          |         |    |     
|Balance Sheet Data:                                                    |  |                                                                                                          |         |    |      |   |         |      |  |   |         |    |  |      |         |   |  |   |         |  
|Cash and short-term investments                                        |  | $                                                                                                        | 55,490  |    |      | $ | 37,674  |      |  | $ | 66,339  |    |  | $    | 128,205 |   |  | $ | 83,418  |  
|Working capital                                                        |  |                                                                                                          | 91,267  |    |      |   | 70,623  |      |  |   | 87,221  |    |  |      | 141,803 |   |  |   | 90,261  |  
|Total assets                                                           |  |                                                                                                          | 318,271 |    |      |   | 299,435 |      |  |   | 278,395 |    |  |      | 296,082 |   |  |   | 215,854 |  
|Shareholders equity                                                   |  | $                                                                                                        | 221,457 |    |      | $ | 201,061 |      |  | $ | 187,562 |    |  | $    | 221,279 |   |  | $ | 158,756 |  



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##### Table of Contents

|ITEM7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|------ | -------------------------------------------------------------------------------------

The
following discussion of our results of operations, financial condition and liquidity, and other matters should be read in conjunction with our consolidated financial statements and notes related thereto included in Item 8. Financial
Statements and Supplementary Data in this Form 10-K. These statements have been prepared in conformity with accounting principles generally accepted in the United States and require our management to make estimates and assumptions that affect
amounts reported and disclosed in the financial statements and related notes. Actual results could differ from these estimates.

GENERAL

We are a mall-based specialty retailer operating the Hot Topic and Torrid store concepts. Hot Topic stores sell a selection of
music/pop culture-licensed and music/pop culture-influenced apparel, accessories and gift items for young men and women principally between the ages of 12 and 22. Torrid stores sell apparel, lingerie, shoes and accessories designed for various
lifestyles for plus-size females between the ages of 15 and 29. We were incorporated in California in 1988. We opened our first Hot Topic store in 1989 and our first Torrid store in 2001. At the end of fiscal 2006 (the fiscal year ended
February 3, 2007), we operated 694 Hot Topic stores throughout the United States and Puerto Rico, and 131 Torrid stores in 34 states. We also sell merchandise on two websites, www.hottopic.com and www.torrid.com, which reflect the Hot Topic and
Torrid store concepts and carry merchandise similar to that sold in the respective stores. Throughout this report, the terms our, we and us refer to Hot Topic, Inc. and its subsidiaries.

We operate on a 52 or 53-week fiscal year, which ends on the Saturday nearest to January 31. Fiscal 2005 and 2004 were 52-week fiscal years. Fiscal
2006 was a 53-week year. Our fiscal year 2007 is a 52-week year ending on February 2, 2008.

We consider a store comparable after it
has been open for 15 full months. If a store is relocated or expanded by more than 15% in total square footage, it is removed from the comparable store base and, similar to new stores, becomes comparable after 15 full months. If a store is closed
during a period, it is included in the computation of comparable store sales for that fiscal month, quarter and year-to-date period, only for the days in which the store was operating as compared to the full month in the comparable period. At the
end of fiscal 2006, 612 of the 694 Hot Topic stores were included in the comparable store base, compared to 550 of the 663 stores open at the end of fiscal 2005. At the end of fiscal 2006, 108 of the 131 Torrid stores were included in the comparable
store base, compared to 65 of the 120 stores open at the end of fiscal 2005.

OVERVIEW

Our Hot Topic division focuses on music-licensed, music-inspired and pop culture-inspired trends. Our teen customer-focused strategy includes immersing
ourselves into the rock music and pop culture scene, identifying products that are inspired by these scenes, and creating an in-store environment that reflects our inspiration. Our feedback loop is integral to our strategy. We gain input from
customers and store associates via reading customer comment cards and associate concert reports, visiting stores, allowing direct email communication with stores and observing focus groups. By engaging with our customers directly, we believe we
extend our competitive advantage over the other mall-based fashion retailers.

Our Torrid division focuses on fashion forward apparel and
accessories for plus-size women. Our target customers have a youthful attitude and desire to reflect current fashion trends in their dress.

In fiscal 2006, comparable store sales were down 6.6%. With the availability of music on the internet, we have seen a diversification of teen fashion preferences. We believe the iPod revolution has reduced the number of one
genre fans and, as such, requires a shift in our music strategy as well as our store design. In addition, as music is our primary driver of traffic, sales in our music-influenced apparel and accessories categories declined as well. The decline
in sales resulted in inventory overages and increased markdowns primarily due to more frequent promotions and liquidation.



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During 2006, we opened 34 new Hot Topic and 12 new Torrid stores, and expanded or relocated 22 Hot Topic
stores. In fiscal 2007, we are planning to open approximately 15 new Hot Topic stores and approximately 20 new Torrid stores, and we expect to expand or relocate approximately 60 to 80 stores. We believe that this measured store growth during 2007
will allow us to better focus on our existing merchandising strategies. We are committed to identifying the best store locations and negotiating the most favorable lease terms in order to attain this goal. In fiscal 2007, we also plan to invest in
our existing store base with capital spending for store renovations, refurbishments, and store-related support activities.

During 2006, we
made significant progress in the development of our Torrid brand. Consistent marketing, growth of our loyalty program, divastyle®, in-store operational improvements and refocusing the assortment to more correctly reflect our customers attitudes and preferences all
contributed to the growth of the brand. We also invested in leadership, naming Christopher Daniel as Torrids President, effective November 2006.

We use a number of key indicators of financial condition and operating performance to evaluate the performance of our business, including the following:



|                                              |  |             |         |    |      |   |         |      |  |   |         |   
|--------------------------------------------- |  | ----------- | ------- | -- | ---- | - | ------- | ---- |  | - | ------- | --
|                                              |  | Fiscal Year |        
|                                              |  | 2006        |         |    | 2005 |   |         | 2004 | 
|Net sales (in millions)                       |  | $           | 751.6   |    |      | $ | 725.2   |      |  | $ | 656.5   |   
|Total store count at end of period            |  |             | 825     |    |      |   | 783     |      |  |   | 668     |   
|Comparable store sales count at end of period |  |             | 720     |    |      |   | 615     |      |  |   | 517     |   
|Net sales growth                              |  |             | 3.6     | %  |      |   | 10.5    | %    |  |   | 14.8    | % 
|Comparable store sales growth                 |  |             | (6.6    | )% |      |   | (3.4    | )%   |  |   | (2.9    | )%
|Net sales per average square foot             |  | $           | 500     |    |      | $ | 520     |      |  | $ | 571     |   
|Gross margin (in millions)                    |  | $           | 249.2   |    |      | $ | 236.2   |      |  | $ | 233.8   |   
|Income from operations (in millions)          |  | $           | 21.6    |    |      | $ | 32.2    |      |  | $ | 63.4    |   
|Diluted earnings per share                    |  | $           | 0.30    |    |      | $ | 0.49    |      |  | $ | 0.83    |   
|Store square footage (in thousands)           |  |             | 1,541.3 |    |      |   | 1,452.7 |      |  |   | 1,214.4 |   

We also repurchase our common stock from time to time in the open market when we feel market
conditions make repurchases attractive. We completed share repurchase plans announced in each of fiscal 2004 and 2005. We repurchased 4,000,000 shares and 1,435,000 shares of our common stock during these two years, respectively. We did not
repurchase any shares of our common stock during fiscal 2006.

Our ability to achieve business objectives in fiscal 2007 and beyond will be
dependent on many factors, known and unknown, such as those outlined in the sections entitled Cautionary Statement Regarding Forward-Looking Disclosure and Risk Factors.

RESULTS OF OPERATIONS

The following table shows, for the periods indicated, certain selected statement of operations data expressed as a percentage of net sales and certain store data:



|                                                                     |  |             |   |  |       |   |  |       |  
|-------------------------------------------------------------------- |  | ----------- | - |  | ----- | - |  | ----- | -
|                                                                     |  | Fiscal Year |  
|                                                                     |  | 2006        |   |  | 2005  |   |  | 2004  |  
|Net Sales                                                            |  | 100.0       | % |  | 100.0 | % |  | 100.0 | %
|Cost of goods sold, including buying, distribution & occupancy costs |  | 66.8        | % |  | 67.4  | % |  | 64.4  | %
|                                                                     |  |             |   |  |       |   |  |       |  
|Gross margin                                                         |  | 33.2        | % |  | 32.6  | % |  | 35.6  | %
|Selling, general and administrative expenses                         |  | 30.3        | % |  | 28.2  | % |  | 25.9  | %
|                                                                     |  |             |   |  |       |   |  |       |  
|Operating income                                                     |  | 2.9         | % |  | 4.4   | % |  | 9.7   | %
|Interest and other income, net                                       |  | 0.2         | % |  | 0.6   | % |  | 0.1   | %
|                                                                     |  |             |   |  |       |   |  |       |  
|Income before income tax                                             |  | 3.1         | % |  | 5.0   | % |  | 9.8   | %
|Provision for income taxes                                           |  | 1.2         | % |  | 1.9   | % |  | 3.8   | %
|                                                                     |  |             |   |  |       |   |  |       |  
|Net income                                                           |  | 1.9         | % |  | 3.1   | % |  | 6.0   | %
|                                                                     |  |             |   |  |       |   |  |       |  



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##### Table of Contents

Fiscal 2006 Compared to Fiscal 2005

Net sales increased approximately $26.4 million, or 3.6%, to $751.6 million in fiscal 2006 from
$725.2 million in fiscal 2005. Approximately $10.8 million of this increase is due to the 53rdweek in fiscal 2006.
The components of this $26.4 million increase in net sales are as follows:



|                   |   |  |                                                                                                                                                 
|------------------ | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|Amount($ millions) |   |  | Description                                                                                                                                     
|$40.3              |   |  | Net sales from new Hot Topic stores opened since the fourth quarter of fiscal 2005 and Hot Topic stores not yet qualifying as comparable
stores.
|21.4               |   |  | Net sales from new Torrid stores opened since the fourth quarter of fiscal 2005 and Torrid stores not yet qualifying as comparable
stores.      
|7.4                |   |  | Increase in Internet sales (hottopic.com and torrid.com).                                                                                       
|(42.7              | ) |  | 6.6% decrease in comparable store net sales in fiscal 2006 compared to fiscal 2005.                                                             
|                   |  
|                   |   |  |                                                                                                                                                 
|$26.4              |   |  | Total                                                                                                                                           
|                   |  
|                   |   |  |                                                                                                                                                 

The annual average Hot Topic store volume was $0.9 million in fiscal 2006 compared to $1.0 million
in fiscal 2005. Hot Topic sales of apparel category merchandise, as a percentage of total net sales, were 55% in both fiscal 2006 and 2005.

Gross margin increased approximately $13.0 million to $249.2 million in fiscal 2006 from $236.2 million in fiscal 2005. As a percentage of net sales, gross margin increased to 33.2% in fiscal 2006 from 32.6% in fiscal 2005. The significant
components of this 0.6% increase in gross margin, as a percentage of net sales, are as follows:



|     |   |  |                                                                                                                                                      
|---- | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|%    |   |  | Description                                                                                                                                          
|1.5  | % |  | Increase in merchandise margin primarily due to higher initial markup, lower cost of goods sold and freight in, partially offset by higher
markdowns.
|0.3  |   |  | Decrease in distribution expenses primarily due to lower outside temporary personnel expenses and lower freight expenses to
stores.                  
|(0.1 | ) |  | Increase in buying costs due to higher payroll expenses.                                                                                             
|(0.1 | ) |  | Increase in non-cash stock-based compensation expense due to adoption of SFAS 123R in first quarter of 2006.                                         
|(1.0 | ) |  | Increase in store occupancy and depreciation expenses, primarily due to deleveraging store expenses over lower comparable store
sales.               
|     |  
|     |   |  |                                                                                                                                                      
|     |  
|0.6  | % |  | Total                                                                                                                                                
|     |  
|     |   |  |                                                                                                                                                      



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Selling, general and administrative expenses increased approximately $23.6 million to $227.6 million
during fiscal 2006 from $204.0 million during fiscal 2005. As a percentage of net sales, selling, general and administrative expenses were 30.3% for fiscal 2006 compared to 28.2% in fiscal 2005. The total dollar increase in selling, general and
administrative expenses was primarily attributable to recognizing additional impairment losses on some of our under-performing store locations, and additional payroll and other expenses required to support store growth from 783 stores at the end of
fiscal 2005 to 825 stores at the end of fiscal 2006. The significant components of this 2.1% increase in selling, general and administrative expenses as a percentage of net sales are as follows:



|     |   |  |                                                                                                                                                   
|---- | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|%    |   |  | Description                                                                                                                                       
|0.7  | % |  | Increase in store payroll and related benefits cost for new stores opened during 2006 and higher payroll relative to lower comparable store
sales.
|0.5  |   |  | Increase in non-cash stock-based compensation expense due to adoption of SFAS 123R in first quarter of 2006.                                      
|0.4  |   |  | Increase in performance-based bonus, primarily resulting from Torrid.                                                                             
|0.2  |   |  | Increase in other store expenses primarily due to utilities and deleveraging on lower comparable store sales.                                     
|0.2  |   |  | Increase in advertising costs to promote our Torrid stores and our divastyle customer loyalty program.                                            
|0.3  |   |  | Impairment charge for certain store locations and higher recruiting costs offset by a decrease in legal fees.                                     
|(0.2 | ) |  | Decrease in pre-opening expenses due to opening fewer stores in fiscal 2006 as compared to fiscal 2005.                                           
|     |  
|     |   |  |                                                                                                                                                   
|2.1  | % |  | Total                                                                                                                                             
|     |  
|     |   |  |                                                                                                                                                   

Operating income decreased to $21.6 million during fiscal 2006 from $32.2 million during fiscal
2005. As a percentage of net sales, operating income was 2.9% in fiscal 2006 compared to 4.4% in fiscal 2005. Operating income on an average store basis was approximately $26,000 in fiscal 2006 compared to $45,000 in fiscal 2005.

Interest income, net of interest expense, and other income decreased to $1.5 million in fiscal 2006 from $4.0 million in fiscal 2005, principally from a
decrease in the gift card breakage income of $3.1 million. In fiscal 2005, we recognized $3.1 million in estimated gift card breakage as a component of other income. In fiscal 2006, we recorded $1.2 million in gift card breakage as a component of
net sales. Gift card breakage is income recognized due to the non-redemption of a portion of gift cards sold by us for which liability was recorded in prior periods. Fiscal 2005 was the initial adoption year in which we recognized income from gift
card breakage and as a result, this income was recorded in other income. Such income has been recognized as a component of net sales in fiscal 2006, and will continue to be recognized in net sales in subsequent years.

Our effective tax rate was 40.8% and 38.1% for fiscal 2006 and 2005, respectively. The increase is due to the provision for additional contingency for
tax exposure items and the implementation of SFAS 123R, which increased stock-based compensation expense for which a portion is not deductible for tax purposes.



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##### Table of Contents

Fiscal 2005 Compared to Fiscal 2004

Net sales increased approximately $68.7 million, or 10.5%, to $725.2 million in fiscal 2005 from $656.5 million in fiscal 2004. The components of this $68.7 million increase in net sales are as follows:



|                   |   |  |                                                                                                                                                 
|------------------ | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|Amount($ millions) |   |  | Description                                                                                                                                     
|$51.8              |   |  | Net sales from new Hot Topic stores opened since the fourth quarter of fiscal 2004 and Hot Topic stores not yet qualifying as comparable
stores.
|29.2               |   |  | Net sales from new Torrid stores opened since the fourth quarter of fiscal 2004 and Torrid stores not yet qualifying as comparable
stores.      
|7.5                |   |  | Increase in Internet sales (hottopic.com and torrid.com).                                                                                       
|(19.8              | ) |  | 3.4% decrease in comparable store net sales in fiscal 2005 compared to fiscal 2004.                                                             
|                   |  
|                   |   |  |                                                                                                                                                 
|$68.7              |   |  | Total                                                                                                                                           
|                   |  
|                   |   |  |                                                                                                                                                 

The annual average Hot Topic store volume was $1.0 million in fiscal 2005 compared to $1.05
million in fiscal 2004. Hot Topic sales of apparel category merchandise, as a percentage of total net sales, were 55% in fiscal 2005 compared to 53% in fiscal 2004. The increase in apparel as a percentage of net sales was primarily due to increases
in mens music-related tee shirts and womens tops partially offset by decreases in womens bottoms and mens bottoms.

Gross margin increased approximately $2.4 million to $236.2 million in fiscal 2005 from $233.8 million in fiscal 2004. As a percentage of net sales, gross margin decreased to 32.6% in fiscal 2005 from 35.6% in fiscal 2004. The significant
components of this 3.0% decrease in gross margin, as a percentage of net sales, are as follows:



|     |    |  |                                                                                                                                                                                                                                     
|---- | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|%    |    |  | Description                                                                                                                                                                                                                         
|(1.7 | )% |  | Decrease in merchandise margin principally due to higher markdowns taken to reduce inventory, and higher freight-in
expense.                                                                                                        
|(0.9 | )  |  | Increase in store occupancy, store depreciation and amortization expenses from new stores, and deleveraging of such expenses for existing
stores over lower comparable store sales, partially offset by lower percentage rent.      
|(0.4 | )  |  | Increase principally from depreciation of the new distribution center, higher distribution operating costs to support inventory through-put of
higher overall inventory receipts, and start-up costs of the new distribution center.
|     |   
|     |    |  |                                                                                                                                                                                                                                     
|(3.0 | )% |  | Total                                                                                                                                                                                                                               
|     |    |  |                                                                                                                                                                                                                                     



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##### Table of Contents

Selling, general and administrative expenses increased approximately $33.6 million to $204.0 million
during fiscal 2005 from $170.4 million during fiscal 2004. As a percentage of net sales, selling, general and administrative expenses were 28.2% for fiscal 2005 compared to 25.9% in fiscal 2004. The total dollar increase in selling, general and
administrative expenses was primarily attributable to settlement of litigation claims during 2005, providing for impairment losses on some of our non-performing store locations, and additional payroll and other expenses required to support store
growth from 668 stores at the end of fiscal 2004 to 783 at the end of fiscal 2005. The significant components of this 2.3% increase in selling, general and administrative expenses as a percentage of net sales are as follows:



|    |   |  |                                                                                                                                                                       
|--- | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|%   |   |  | Description                                                                                                                                                           
|0.7 | % |  | Increase primarily from provision for litigation claims during 2005, recording of an impairment charge for certain store locations, and
slightly higher depreciation. 
|0.4 |   |  | Increase in store payroll and related benefits cost for new stores opened during 2005 and higher payroll costs over lower comparable store
sales.                     
|0.4 |   |  | Increase in administrative payroll to support store growth.                                                                                                           
|0.4 |   |  | Increase in other store expenses from merchandise security tags, credit card processing fees, higher utilities costs, and property taxes from
new stores.             
|0.4 |   |  | Increase in advertising costs to promote our Torrid stores and our divastyle customer loyalty program, and amortization for new store systems
implemented during 2005.
|    |  
|    |   |  |                                                                                                                                                                       
|2.3 | % |  | Total                                                                                                                                                                 
|    |  
|    |   |  |                                                                                                                                                                       

Operating income decreased to $32.2 million during fiscal 2005 from $63.4 million during fiscal
2004. As a percentage of net sales, operating income was 4.4% in fiscal 2005 compared to 9.7% in fiscal 2004. Operating income on an average store basis was approximately $45,000 in fiscal 2005 compared to $103,000 in fiscal 2004.

Interest income, net of interest expense, and other income increased to $4.0 million in fiscal 2005 from $0.9 million in fiscal 2004, principally from
gift card breakage income of $3.1 million. We historically have recognized income from gift cards when the customer redeems the gift card. Gift card breakage is income recognized due to the non-redemption of a portion of gift cards sold by us for
which liability was recorded in prior periods. We determined a gift card breakage rate of approximately 5% in the fourth quarter of fiscal 2005 based upon historical redemption patterns, which represented the cumulative estimated amount of gift card
breakage from the inception of the program in July 2002. In future periods, we will recognize estimated gift card breakage as a component of net sales in proportion to actual gift card redemptions, over the period that remaining gift card values are
redeemed.

Our effective tax rate was 38.1% and 38.3% for fiscal 2005 and 2004, respectively.

QUARTERLY RESULTS AND SEASONALITY

Our quarterly results of operations may fluctuate materially depending on, among other things, the timing of store openings and related pre-opening and
other startup expenses, net sales contributed by new stores, increases or decreases in comparable store sales, releases of new music and music/pop culture-related products, shifts in timing of certain holidays, changes in our merchandise mix and
overall economic and political conditions.

Our business is also subject to seasonal influences, with heavier concentrations of sales
during the back-to-school, Halloween and holiday seasons (defined as the week of Thanksgiving through the first few days of January), and other periods when schools are not in session. The holiday season remains our single most important selling
season. We believe, however, that the importance of the summer vacation and back-to-school seasons (which affect operating results in the second and third quarters, respectively) and to a lesser extent, the spring break season (which affects
operating results in the first quarter) as well as Halloween (which affects operating results in the third quarter), all reduce our dependence on the holiday selling season. Furthermore, summer vacation, back-to-school season and spring break season
take place at somewhat different times in



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different parts of the country, spreading the impact of these events on our sales over a longer period. As is the case with many retailers of apparel,
accessories and related merchandise, we typically experience lower first fiscal quarter net sales relative to other quarters.

The
following table shows certain statement of operations and selected operating data for each of our last eight fiscal quarters (13-week periods). The quarterly statement of operations data and selected operating data shown below were derived from our
unaudited financial statements, which in the opinion of management contain all adjustments (consisting only of normal recurring adjustments) necessary for fair presentation. Results in any quarter are not necessarily indicative of results that may
be achieved for a full year.



|                                     |  |                                                              |         |    |                  |   |         |       |  |   |         |    |  |       |         |    |        |   |         |       |  |   |         |    |  |   |         |    |  |   |         |   
|------------------------------------ |  | ------------------------------------------------------------ | ------- | -- | ---------------- | - | ------- | ----- |  | - | ------- | -- |  | ----- | ------- | -- | ------ | - | ------- | ----- |  | - | ------- | -- |  | - | ------- | -- |  | - | ------- | --
|                                     |  | Fiscal Year 2006                                             |         |    | Fiscal Year 2005 |  
|                                     |  | First                                                        |         |    | Second           |   |         | Third |  |   | Fourth  |    |  | First |         |    | Second |   |         | Third |  |   | Fourth  |   
|                                     |  | (In thousands, except selected operating and per share data) |        
|Statement of Operations Data:        |  |                                                              |         |    |                  |   |         |       |  |   |         |    |  |       |         |    |        |   |         |       |  |   |         |    |  |   |         |    |  |   |         |   
|Net sales                            |  | $                                                            | 154,041 |    |                  | $ | 160,348 |       |  | $ | 196,669 |    |  | $     | 240,500 |    |        | $ | 149,762 |       |  | $ | 152,234 |    |  | $ | 192,747 |    |  | $ | 230,399 |   
|Gross margin                         |  |                                                              | 48,257  |    |                  |   | 50,834  |       |  |   | 68,398  |    |  |       | 81,661  |    |        |   | 51,165  |       |  |   | 47,622  |    |  |   | 63,476  |    |  |   | 73,931  |   
|Operating (loss) income              |  |                                                              | (2,685  | )  |                  |   | (1,706  | )     |  |   | 11,494  |    |  |       | 14,467  |    |        |   | 7,764   |       |  |   | 1,124   |    |  |   | 9,433   |    |  |   | 13,878  |   
|Net (loss) income                    |  | $                                                            | (1,408  | )  |                  | $ | (905    | )     |  | $ | 7,070   |    |  | $     | 8,869   |    |        | $ | 4,999   |       |  | $ | 893     |    |  | $ | 5,931   |    |  | $ | 10,596  |   
|                                     |  |                                                              |         |    |                  |   |         |      
|Earnings per share:                  |  |                                                              |         |    |                  |   |         |       |  |   |         |    |  |       |         |    |        |   |         |       |  |   |         |    |  |   |         |    |  |   |         |   
|Basic                                |  | $                                                            | (0.03   | )  |                  | $ | (0.02   | )     |  | $ | 0.16    |    |  | $     | 0.20    |    |        | $ | 0.11    |       |  | $ | 0.02    |    |  | $ | 0.13    |    |  | $ | 0.24    |   
|Diluted                              |  | $                                                            | (0.03   | )  |                  | $ | (0.02   | )     |  | $ | 0.16    |    |  | $     | 0.20    |    |        | $ | 0.11    |       |  | $ | 0.02    |    |  | $ | 0.13    |    |  | $ | 0.23    |   
|                                     |  |                                                              |         |    |                  |   |         |      
|Weighted average shares outstanding: |  |                                                              |         |    |                  |   |         |       |  |   |         |    |  |       |         |    |        |   |         |       |  |   |         |    |  |   |         |    |  |   |         |   
|Basic                                |  |                                                              | 44,065  |    |                  |   | 44,180  |       |  |   | 44,207  |    |  |       | 44,218  |    |        |   | 44,748  |       |  |   | 45,065  |    |  |   | 45,108  |    |  |   | 44,762  |   
|Diluted                              |  |                                                              | 44,065  |    |                  |   | 44,180  |       |  |   | 44,735  |    |  |       | 44,775  |    |        |   | 46,175  |       |  |   | 46,246  |    |  |   | 45,738  |    |  |   | 45,350  |   
|                                     |  |                                                              |         |    |                  |   |         |      
|Selected Operating Data:             |  |                                                              |         |    |                  |   |         |       |  |   |         |    |  |       |         |    |        |   |         |       |  |   |         |    |  |   |         |    |  |   |         |   
|Comparable store sales               |  |                                                              | (9.6    | )% |                  |   | (5.5    | )%    |  |   | (6.8    | )% |  |       | (5.3    | )% |        |   | 0.9     | %     |  |   | (3.5    | )% |  |   | (6.2    | )% |  |   | (3.8    | )%
|Stores open at end of period         |  |                                                              | 794     |    |                  |   | 809     |       |  |   | 822     |    |  |       | 825     |    |        |   | 694     |       |  |   | 728     |    |  |   | 762     |    |  |   | 783     |   

LIQUIDITY AND CAPITAL RESOURCES

In recent years, we have satisfied our operating cash requirements principally from cash flows from operations and to a lesser extent, proceeds from the
exercise of stock options. During the last three fiscal years, our primary uses of cash have been to finance store openings and remodels, purchase merchandise inventories, repurchase our common stock, and purchase our distribution center in
Tennessee. We maintain a $5.0 million unsecured credit agreement for the purpose of issuing letters of credit, primarily for inventory purchases. At February 3, 2007, there were letters of credit for $80,000 outstanding under the credit
agreement. There were no letters of credit outstanding as of January 28, 2006. At the end of fiscal 2006, we had $55.5 million in cash, cash equivalents and short-term investments, an increase of $17.8 million, or 47.2%, compared to $37.7
million at the end of fiscal 2005. Working capital was $91.3 million and $70.6 million for fiscal 2006 and 2005, respectively. The increase in working capital from 2005 to 2006 is primarily attributable to opening fewer stores and not repurchasing
any of our common stock during fiscal 2006.

Net cash flows provided by operating activities were $54.0 million and $53.6 million in fiscal
2006 and 2005, respectively. The $0.4 million increase in cash flows from operating activities in fiscal 2006 as compared to fiscal 2005 was primarily attributable to increases in accrued liabilities and deferred rent along with a decrease in
prepaid expenses and other current assets. The increase in cash flows from operating activities was partially offset by increases in inventory and deposits and other assets along with decreases in accounts payable and income taxes payable.



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Net cash flows used in investing activities were $62.2 million and $36.1 million in fiscal 2006 and 2005,
respectively. In fiscal 2006, $23.3 million was used for the construction of 34 Hot Topic stores, 12 Torrid stores, expansion and refurbishment of 22 Hot Topic stores and progress payments for construction of stores opening in early 2007. We used
approximately $6.0 million on computer hardware and software and $9.3 million on our headquarters and distribution center infrastructure. We opened 46 and 117 stores in fiscal 2006 and 2005, respectively. The increase in net cash used in investing
activities in fiscal 2006 as compared to fiscal 2005 was also attributable to a $23.6 million increase of short-term investments purchased, net of proceeds, along with a $38.6 million increase in purchases of property and equipment.

Net cash flows provided by financing activities were $2.4 million in fiscal 2006 compared to net cash flows used in financing activities of $13.0 million
in fiscal 2005. The $15.4 million increase in fiscal 2006 compared to fiscal 2005 was principally a result of $20.0 million of cash used to repurchase our common stock in fiscal 2005, offset by a $5.3 million decrease related to proceeds from
exercise of stock options.

We anticipate we will spend approximately $45.0 to $50.0 million on capital expenditures in fiscal 2007,
including approximately $34.0 to $39.0 million for stores, $9.0 million for computer hardware and software, and approximately $2.0 million to improve our Internet sites. The $34.0 to $39.0 million for stores is expected to be primarily used for the
construction of approximately 15 new Hot Topic stores and 20 new Torrid stores, and to remodel or relocate approximately 60 to 80 existing stores. We will spend more in fiscal 2007 to remodel or relocate stores than in any year of our history.

During fiscal 2006, our average gross capital expenditures for a new Hot Topic and Torrid store, including leasehold improvements and
furniture and fixtures, totaled approximately $276,000 and $348,000, respectively. Hot Topic stores were an average of approximately 1,700 square feet compared to Torrid stores which were approximately 2,500 square feet. The average initial gross
inventory for the new Hot Topic stores opened in 2006 was approximately $102,000 compared to $94,000 for new Torrid stores. The average pre-opening costs for a new Hot Topic and a new Torrid store were approximately $20,700 and $31,000,
respectively. Initial inventory requirements vary at new stores depending on the season and current merchandise trends. We expect the average total cost per square foot associated with opening a Hot Topic store and a Torrid store to be approximately
the same in fiscal 2007 as in fiscal 2006. Hot Topic stores are planned to be approximately 1,700 square feet compared to Torrid stores which are planned to be approximately 2,300 square feet.

The following table summarizes our contractual obligations as of February 3, 2007, and the timing and effect that such commitments are expected to
have on our liquidity and capital requirements in future periods:



|                                        |  |                                       |         |               |   |           |  |           |         |                  |   |        |  |   |        
|--------------------------------------- |  | ------------------------------------- | ------- | ------------- | - | --------- |  | --------- | ------- | ---------------- | - | ------ |  | - | -------
|                                        |  | Payments due by period (in thousands)
|                                        |  | Total                                 |         | Within 1 Year |   | 2-3 Years |  | 4-5 Years |         | More than5 Years
|Contractual obligations                 |  |                                       |         |               |   |           |  |           |         |                  |   |        |  |   |        
|                                        |  |                                       |         |               |  
|Operating leases                        |  | $                                     | 356,134 |               | $ | 55,963    |  | $         | 105,056 |                  | $ | 92,202 |  | $ | 102,913
|Purchase obligations                    |  |                                       | 40,219  |               |   | 40,219    |  |           |        |                  |   |       |  |   |       
|Letters of credit and other obligations |  |                                       | 1,253   |               |   | 1,253     |  |           |        |                  |   |       |  |   |       
|                                        |  |                                       |         |               |   |           |  |           |         |                  |   |        |  |   |        
|Total contractual obligations           |  | $                                     | 397,606 |               | $ | 97,435    |  | $         | 105,056 |                  | $ | 92,202 |  | $ | 102,913
|                                        |  |                                       |         |               |   |           |  |           |         |                  |   |        |  |   |        

See Note 6 to our consolidated financial statements for additional disclosure related to operating
lease obligations.

On March 19, 2004, we announced that our Board of Directors approved the repurchase of up to an aggregate of
2,000,000 shares of our common stock during the period ending January 29, 2005. As of July 31, 2004 we had completed that repurchase of 2,000,000 shares of our common stock at a cost of $46.8 million at an average price of $23.41.



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On August 18, 2004, we announced that our Board of Directors approved an additional repurchase of up
to an aggregate of 2,000,000 shares of our common stock during the period ending January 29, 2005. As of January 29, 2005 we had completed that repurchase of 2,000,000 shares of our common stock at a cost of $32.8 million at an average
price of $16.42.

On August 19, 2005, we announced that our Board of Directors approved the repurchase of up to an aggregate of
$20,000,000 of our common stock during the period ending January 28, 2006. As of January 28, 2006 we had completed that repurchase of 1,435,000 shares of our common stock at a cost of $20 million at an average price of $13.94.

We did not repurchase any shares of our common stock during fiscal 2006.

We believe that our existing cash balances and cash generated from operations will be sufficient to fund our operations and planned expansion for the
foreseeable future.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Managements discussion and analysis of Hot Topic, Inc.s financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate estimates, including those related primarily to inventories, long-lived assets
and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the more significant judgments
and estimates used in the preparation of our consolidated financial statements. For a further discussion about the application of these and other accounting policies, see Note 1 to our consolidated financial statements included elsewhere in this
report.

Inventories: Inventories are valued at the lower of average cost or market, on a weighted average cost basis, using the retail
method. Under the retail method, inventory is stated at its current retail selling value, and then is converted to a cost basis by applying an average cost factor that represents the average cost-to-retail ratio based on beginning inventory and the
purchase activity for the month. Throughout the year, we review our inventory levels in order to identify slow-moving merchandise and use permanent markdowns to sell through selected merchandise. We record a charge to cost of goods sold for
permanent markdowns. Inherent in the retail method are certain significant management judgments and estimates including initial merchandise markup, future sales, markdowns and shrinkage, which significantly impact the ending inventory valuation at
cost and the resulting gross margins. To the extent our estimated markdowns at period-end prove to be insufficient, additional future markdowns will need to be recorded. Physical inventories are conducted during the year to determine actual
inventory on hand and shrinkage. We accrue our estimated inventory shrinkage for the period between the last physical count and current period end balance sheet date, thus, the difference between actual and estimated shrink amounts may cause
fluctuations in quarterly results, but not for the fiscal year results.

Valuation of Long-Lived Assets: In accordance with SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144) we assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be
recoverable. We group and evaluate long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified. Factors we consider important that could trigger an impairment review
include a significant underperformance relative to expected historical or projected future operating results, a significant change in the manner of the use of the asset or a significant negative industry or economic trend. When we determine that the
carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the



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aforementioned factors, impairment is measured based on a projected discounted cash flow method using a discount rate determined by management. In the event
future store performance is lower than forecasted results, future cash flows may be lower than expected, which could result in future impairment charges. While we believe recently opened stores will provide sufficient cash flow, material changes in
results could result in future impairment charges.

Revenue Recognition: Revenue is recognized at our retail store locations at the point
at which the customer receives and pays for the merchandise at the register. For online sales, revenue is recognized at the time of shipment, which we refer to as the date of purchase by the customer. Sales are recognized net of merchandise returns,
which are reserved for based on historical experience. Revenue from gift cards, gift certificates and store merchandise credits is recognized at the time of redemption. Shipping and handling revenues from our websites are included as a component of
net sales.

We recognize estimated gift card breakage as a component of net sales in proportion to actual gift card redemptions over the
period that remaining gift card values are redeemed. Gift card breakage is income recognized due to the non-redemption of a portion of gift cards sold by us for which liability was recorded in prior periods. While customer redemption patterns result
in estimated gift card breakage, which approximates 5 to 6%, changes in our customers behavior could impact the amount that ultimately is unused and could affect the amount recognized as a component of net sales.

Vendor Allowances: We receive certain allowances from our vendors primarily related to damaged merchandise, markdowns and, for our Torrid division, new
store openings. Allowances received from vendors related to damaged merchandise and new Torrid store openings are reflected as a reduction of inventory in the period they are received and allocated to cost of sales during the period in which the
items are sold. Markdown allowances received from vendors are reflected as reductions to cost of sales in the period they are received.

Stock-Based Payments: We estimate the fair value of stock options granted using the Black-Scholes option-pricing formula and a single option award approach. This fair value is then amortized over the requisite service periods of the awards.
This option-pricing model requires the input of highly subjective assumptions, including the options expected life, price volatility of the underlying stock, risk free interest rate and expected dividend rate. As stock-based compensation
expense is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. Forfeitures are estimated based on historical experience.

Rent Expense: Rent expense under our operating leases
typically provides for fixed non-contingent rent escalations. We recognize rent expense on a straight-line basis over the non-cancelable term of each lease, commencing when we take possession of the property. Construction allowances are recorded as
a deferred rent liability, which we amortize as a reduction of rent expense over the non-cancelable term of each lease.

Self-Insurance: We
are self-insured for certain losses related to medical and workers compensation although we maintain stop loss coverage with third party insurers to limit our total liability exposure. The estimate of our self-insurance liability involves
uncertainty since we must use judgment to estimate the ultimate cost that will be incurred to settle reported claims and unreported claims for incidents incurred but not report as of the balance sheet date. When estimating our self-insurance
liability, we consider a number of factors, which include historical claim experience and valuations provided by independent third party actuaries. As claims develop, the actual ultimate losses may differ from actuarial estimates. Therefore, an
analysis is performed quarterly to determine if modifications to the accrual are required.

Income Taxes: Current income tax expense is the
amount of income taxes expected to be payable for the current year. The combined federal, state and local income tax expense is calculated using estimated effective annual tax rates. A deferred income tax asset or liability is established for the
expected future consequences of temporary differences in the financial reporting and tax bases of assets and liabilities. We consider future taxable



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income and ongoing prudent and feasible tax planning in assessing the value of our deferred tax assets. Evaluating the value of these assets is based
on our judgment. If we determine that it is more likely than not that these assets will not be realized, we would reduce the value of these assets to their expected realizable value through a valuation allowance, thereby decreasing net income. If we
subsequently were to determine that the deferred tax assets, which had been written down, would be realized in the future, the value of the deferred tax assets would be increased, thereby increasing net income in the period when that determination
was made. We have recorded tax contingencies based on our estimates of current tax exposures and adjust our estimates as circumstances or regulations change.

In accordance with SFAS 123R, we recognize a tax benefit upon expensing certain stock-based awards associated with our stock-based compensation plans, including nonqualified stock options and restricted stock unit
awards. However, under current accounting standards we cannot recognize a tax benefit currently for those stock-based compensation expenses associated with incentive stock options (also known as qualified stock options) and employee stock purchase
plan rights. For qualified stock options that vested after our adoption of SFAS 123R, we recognize tax benefits only in the period when disqualifying dispositions of the underlying stock occur. We recorded a tax benefit directly to additional
paid-in capital for qualified stock options that vested prior to our adoption of SFAS 123R.

INFLATION

We do not believe that inflation has had a material adverse effect on our net sales or results of operations. We have generally been able to pass along
increased costs related to inflation through increases in selling prices.



|ITEM7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

We are not a party to any derivative financial instruments. Our exposure to market risk primarily relates to changes in
interest rates on our investments with maturities of less than three months (which are considered to be cash and cash equivalents) and short-term investments with maturities in excess of three months. Changes in interest rates affect the investment
income earned on those investments.



|ITEM8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------ | -------------------------------------------

Our consolidated financial statements and notes listed in Part IV, Item 15(a)(1) are incorporated herein by reference.



|ITEM9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
|------ | ------------------------------------------------------------------------------------

Not applicable.



|ITEM9A. | CONTROLS AND PROCEDURES
|------- | -----------------------

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

The management of the Company maintains
disclosure controls and procedures that are designed to ensure that the information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and
forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required
disclosure.

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures in
connection with the preparation of this Annual Report, under the supervision of and with the participation of our management, including the CEO and CFO.



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In making our assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of February 3, 2007.

Report of Management on Internal Control Over Financial Reporting

We are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Our internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial
statements.

Our management assessed the effectiveness of our internal control over financial reporting as of February 3, 2007. In
making this assessment, management used the criteria set forth by COSO in Internal Control-Integrated Framework. Our management concluded that, as of February 3, 2007, our internal control over financial reporting was effective based on the
criteria set forth by COSO in Internal Control-Integrated Framework.

Our independent registered public accounting firm, Ernst &
Young LLP, has issued an attestation report on managements assessment of our internal control over financial reporting. This report appears below.

Changes in Internal Control Over Financial Reporting

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



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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Hot Topic, Inc.

We have audited managements assessment, included in the accompanying Report of Management on Internal Control Over Financial Reporting, that Hot Topic, Inc. and its subsidiaries maintained effective internal
control over financial reporting as of February 3, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Hot Topic,
Inc.s and its subsidiaries management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express
an opinion on managements assessment and an opinion on the effectiveness of the companys internal control over financial reporting based on our audit.

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

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

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

In our opinion, managements assessment that Hot Topic, Inc. and its subsidiaries maintained effective internal control over financial reporting as
of February 3, 2007 is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Hot Topic, Inc. and its subsidiaries maintained, in all material respects, effective internal control over financial reporting as
of February 3, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of Hot Topic, Inc. and its subsidiaries as of February 3, 2007 and January 28, 2006, and the related consolidated statements of income, shareholders equity,
and cash flows for each of the three years in the period ended February 3, 2007 of Hot Topic, Inc. and its subsidiaries and our report dated March 9, 2007 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Los Angeles, California

March 27, 2007

ITEM9B. OTHER INFORMATION

Not applicable.



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PART III



|ITEM10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|------- | ------------------------------------------------------

See the section entitled Executive Officers and Key Employees in Part I, Item 1 hereof for information regarding our executive officers.

The information required by this item with respect to directors is incorporated by reference to the information appearing under the
caption Election of Directors, contained in our Definitive Proxy Statement which will be filed with the SEC within 120 days of February 3, 2007 pursuant to Regulation 14A in connection with the solicitation of proxies for our Annual
Meeting of Shareholders to be held on June 14, 2007, or the Proxy Statement.

Certain other information required by this item is
incorporated by reference to the information appearing under the captions Section 16(a) Beneficial Ownership Reporting Compliance and Standards of Business Ethics in the Proxy Statement.



|ITEM11. | EXECUTIVE COMPENSATION
|------- | ----------------------

The information required by this item is incorporated by reference to the information appearing under the captions Executive Compensation, Compensation Committee Report and Compensation Committee Interlocks and
Insider Participation in the Proxy Statement.



|ITEM12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED SHAREHOLDER MATTERS
|------- | ----------------------------------------------------------------------------------------------

The
information required by this item is incorporated by reference to the information appearing under the captions Security Ownership of Certain Beneficial Owners and Management and Equity Compensation Plan Information in the
Proxy Statement.



|ITEM13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|------- | -------------------------------------------------------------------------

The information required by this item is incorporated by reference to the information
appearing under the captions Election of Directors and Certain Transactions in the Proxy Statement.



|ITEM14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|------- | --------------------------------------

The information required by this item is incorporated by reference to the information appearing under the caption Ratification of Selection of
Independent Auditors in the Proxy Statement.



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PART IV



|ITEM15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|------- | ------------------------------------------

(a)(1)Consolidated Financial Statements

The following 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:



|                                                                                                                            |  |     
|--------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                            |  | Page
|                                                                                                                            | 
|Report of Independent Registered Public Accounting Firm                                                                     |  | F-1 
|Consolidated Balance Sheets as of February 3, 2007 and January 28, 2006                                                     |  | F-2 
|Consolidated Statements of Income for the years ended February 3, 2007, January 28, 2006 and January 29, 2005               |  | F-3 
|Consolidated Statements of Shareholders Equity for the years ended February 3, 2007, January 28, 2006 and January 29, 2005 |  | F-4 
|Consolidated Statements of Cash Flows for the years ended February 3, 2007, January 28, 2006 and January 29, 2005           |  | F-5 
|Notes to Consolidated Financial Statements                                                                                  |  | F-6 

(a)(2)Financial Statement Schedules

Schedule IIValuation and Qualifying Accounts

All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission other than the one listed above are not required under the related instructions or are not applicable, and
therefore, have been omitted.

Schedule II

Valuation and Qualifying Accounts

(in thousands)

For the Fiscal Years Ended February 3, 2007, January 28, 2006 and January 29, 2005



|                             |  |                            |       |                             |   |      |                       |  |                       |   |  |   |      
|---------------------------- |  | -------------------------- | ----- | --------------------------- | - | ---- | --------------------- |  | --------------------- | - |  | - | -----
|                             |  | Balance atBeginning ofYear |       | Charged toCosts andExpenses |   |      | Deductions/Write-offs |  | Balance atEnd of Year
|Fiscal 2006                  |  |                            |       |                             |   |      |                       |  |                       |   |  |   |      
|Allowance for sales returns  |  | $                          | 558   |                             | $ | (63  | )                     |  | $                     |  |  | $ | 495  
|Allowance for aged inventory |  |                            | 740   |                             |   | 499  |                       |  |                       |  |  |   | 1,239
|                             |  |                            |       |                             |   |      |                       |  |                       |   |  |   |      
|                             |  | $                          | 1,298 |                             | $ | 436  |                       |  | $                     |  |  | $ | 1,734
|                             |  |                            |       |                             |   |      |                       |  |                       |   |  |   |      
|Fiscal 2005                  |  |                            |       |                             |   |      |                       |  |                       |   |  |   |      
|Allowance for sales returns  |  | $                          | 577   |                             | $ | (19  | )                     |  | $                     |  |  | $ | 558  
|Allowance for aged inventory |  |                            | 1,510 |                             |   | (770 | )                     |  |                       |  |  |   | 740  
|                             |  |                            |       |                             |   |      |                       |  |                       |   |  |   |      
|                             |  | $                          | 2,087 |                             | $ | (789 | )                     |  | $                     |  |  | $ | 1,298
|                             |  |                            |       |                             |   |      |                       |  |                       |   |  |   |      
|Fiscal 2004                  |  |                            |       |                             |   |      |                       |  |                       |   |  |   |      
|Allowance for sales returns  |  | $                          | 512   |                             | $ | 65   |                       |  | $                     |  |  | $ | 577  
|Allowance for aged inventory |  |                            | 1,057 |                             |   | 453  |                       |  |                       |  |  |   | 1,510
|                             |  |                            |       |                             |   |      |                       |  |                       |   |  |   |      
|                             |  | $                          | 1,569 |                             | $ | 518  |                       |  | $                     |  |  | $ | 2,087
|                             |  |                            |       |                             |   |      |                       |  |                       |   |  |   |      



41



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##### Table of Contents

(a)(3)    Index to ExhibitsSee Item 15(b) below.



| | (b) | Exhibits
| | --- | --------

The exhibits listed under Item 15(b)
hereof are filed with, and incorporated by reference into, this Annual Report on Form 10-K. Management contracts or compensatory plans or arrangements required to be filed pursuant to Item 15(b) are so identified therein.



|              |  |                                                                                                                                                                                                                                    
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                            
|3.1           |  | Amended and Restated Articles of Incorporation. (1)                                                                                                                                                                                
|              | 
|3.2           |  | Certificate of Amendment of Amended and Restated Articles of Incorporation. (8)                                                                                                                                                    
|              | 
|3.3           |  | Amended and Restated Bylaws, as amended. (8)                                                                                                                                                                                       
|              | 
|4.1           |  | Reference is made to Exhibits 3.1 and 3.2.                                                                                                                                                                                         
|              | 
|4.2           |  | Specimen stock certificate. (1)                                                                                                                                                                                                    
|              | 
|10.1a         |  | Form of Indemnity Agreement to be entered into between Registrant and its directors and officers. (1)                                                                                                                              
|              | 
|10.2a         |  | 2006 Equity Incentive Plan (the 2006 Plan), as amended.                                                                                                                                                                          
|              | 
|10.3a         |  | Form of Nonstatutory Stock Option Agreement of Registrant pursuant to the 2006 Plan. (10)                                                                                                                                          
|              | 
|10.4a         |  | Form of Incentive Stock Option Agreement of Registrant pursuant to the 2006 Plan. (10)                                                                                                                                             
|              | 
|10.5a         |  | Non-Employee Directors Stock Option Plan, as amended.                                                                                                                                                                             
|              | 
|10.6a         |  | Employee Stock Purchase Plan, as amended.                                                                                                                                                                                          
|              | 
|10.7a         |  | 401(k) Defined Contribution Plan of Registrant, effective as of August 1, 1995, as amended. (8)                                                                                                                                    
|              | 
|10.8          |  | Industrial Real Estate Lease (Multi-Tenant Facility), dated December 10, 1998, entered into between Registrants wholly owned subsidiary, Hot Topic Administration, Inc. and Majestic
Realty Co. and Patrician Associates, Inc. (2)
|              | 
|10.9          |  | Guaranty of Lease, dated December 10, 1998, entered into between the Registrant and Majestic Realty Co. and Patrician Associates, Inc. (2)                                                                                         
|              | 
|10.10         |  | First Amendment to Industrial Real Estate Lease, dated March 19, 2001, by and between MajesticFullerton Road, LLC, PFG Fullerton Limited Partnership, and Hot Topic Administration, Inc.
(3)                                      
|              | 
|10.11a        |  | Employment Offer Letter dated January 12, 2001, between the Registrant and Gerald Cook. (3)                                                                                                                                        
|              | 
|10.12a        |  | Form of Restricted Stock Bonus Agreement between the Registrant and each of its non-employee directors as discussed in the Companys Proxy Statement annually. (4)                                                                 
|              | 
|10.13a        |  | Employment Letter dated January 23, 2003, between the Registrant and James McGinty. (5)                                                                                                                                            
|              | 
|10.15         |  | Third Amendment to Industrial Real Estate Lease, dated February 25, 2004, by and among Majestic-Fullerton Road, LLC, PFG Fullerton Limited Partnership, and Hot Topic Administration, Inc.
(6)                                     
|              | 
|10.17         |  | Centre Pointe Distribution Park Lease, dated June 1, 2004, by and among Crescent Resources, LLC and Hot Topic, Inc. (7)                                                                                                            
|              | 
|10.19         |  | Purchase and sale agreement between the Registrant and Crescent Resources, LLC. (9)                                                                                                                                                
|              | 
|10.20a        |  | Employment Offer Letter dated July 11, 2005, between the Registrant and Maria Comfort. (11)                                                                                                                                        
|              | 
|10.22a        |  | Performance Share Award Agreement and Program, under the 1996 Equity Incentive Plan. (13)                                                                                                                                          



42



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##### Table of Contents

|              |  |                                                                                                                                                                     
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                             
|10.23a        |  | Hot Topic, Inc. Deferred Compensation Plan. (14)                                                                                                                    
|              | 
|10.24a        |  | Severance and Change of Control Letter Agreement dated November 15, 2006 between the Registrant and Christopher Daniel. (15)                                        
|              | 
|10.25         |  | Union Bank of California Trust Agreement. (14)                                                                                                                      
|              | 
|10.26a        |  | 2006 Executive Officer Salary, Bonus and Equity Compensation Summary. (8)                                                                                           
|              | 
|10.27a        |  | 2006 Board Compensation Summary. (8)                                                                                                                                
|              | 
|10.28a        |  | Performance Share Award Agreement and Program, under the 2006 Equity Incentive Plan.                                                                                
|              | 
|21            |  | Hot Topic, Inc. List of Subsidiaries.                                                                                                                               
|              | 
|23.1          |  | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.                                                                                        
|              | 
|24.1          |  | Power of Attorney is contained on the signature page.                                                                                                               
|              | 
|31.1          |  | Certification, dated March 28, 2007, of Registrants Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.                             
|              | 
|31.2          |  | Certification, dated March 28, 2007, of Registrants Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.                             
|              | 
|32.1          |  | Certifications, dated March 28, 2007, of Registrants Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.

---

|(1) | Filed as an exhibit to Registrants Registration Statement on Form SB-2 ( 333-5054-LA) and incorporated herein by reference.
|--- | ----------------------------------------------------------------------------------------------------------------------------

|(2) | Filed as an exhibit to Registrants Annual Report on Form 10-K for the year ended January 30, 1999 and incorporated herein by reference.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

|(3) | Filed as an exhibit to Registrants Annual Report on Form 10-K for the year ended February 3, 2001 and incorporated herein by reference.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

|(4) | Filed as an exhibit to Registrants Quarterly Report on Form 10-Q for the quarter ended May 5, 2001 and incorporated herein by reference.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

|(5) | Filed as an exhibit to Registrants Annual Report on Form 10-K for the year ended February 1, 2003 and incorporated herein by reference.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

|(6) | Filed as an exhibit to Registrants Quarterly Report on Form 10-Q for the quarter ended May 1, 2004 and incorporated herein by reference.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

|(7) | Filed as an exhibit to Registrants Quarterly Report on Form 10-Q for the quarter ended July 31, 2004 and incorporated herein by reference.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Filed as an exhibit to Registrants Annual Report on Form 10-K for the year ended January 29, 2005 and incorporated herein by reference.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

|(9) | Filed as an exhibit to Registrants Current Report on Form 8-K filed on June 20, 2005 and incorporated herein by reference.
|--- | ---------------------------------------------------------------------------------------------------------------------------

|(10) | Filed as an exhibit to Registrants Current Report on Form 8-K filed on June 15, 2006 and incorporated herein by reference.
|---- | ---------------------------------------------------------------------------------------------------------------------------

|(11) | Filed as an exhibit to Registrants Current Report on Form 8-K filed on August 17, 2005 and incorporated herein by reference.
|---- | -----------------------------------------------------------------------------------------------------------------------------

|(12) | Filed as an exhibit to Registrants Current Report on Form 8-K filed on January 11, 2006 and incorporated herein by reference.
|---- | ------------------------------------------------------------------------------------------------------------------------------

|(13) | Filed as an exhibit to Registrants Quarterly Report on Form 10-Q for the quarter ended April 29, 2006 and incorporated herein by reference.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------



43



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##### Table of Contents

|(14) | Filed as an exhibit to Registrants Current Report on Form 8-K filed on July 6, 2006 and incorporated herein by reference.
|---- | --------------------------------------------------------------------------------------------------------------------------

|(15) | Filed as an exhibit to Registrants Current Report on Form 8-K filed on November 15, 2006 and incorporated herein by reference.
|---- | -------------------------------------------------------------------------------------------------------------------------------

|a | Denotes management contract or compensatory plan or arrangement.
|- | ----------------------------------------------------------------



| | (c) | Financial Statement Schedules
| | --- | -----------------------------

Reference is made
to Item 15(a)(2).



44



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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 caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



HOT TOPIC, INC.By:

/s/    ELIZABETH
MCLAUGHLINElizabeth McLaughlinChief Executive Officer and Director


March 28, 2007

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Elizabeth McLaughlin and James McGinty, or
either of them, his attorney-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report, and to file the same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.

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.



|                                                 |  |                                                                                        |  |               
|------------------------------------------------ |  | -------------------------------------------------------------------------------------- |  | --------------
|Name                                             |  | Position                                                                               |  | Date          
|                                                 |  |                                                                                       
|/s/    ELIZABETH
MCLAUGHLIN Elizabeth McLaughlin |  | Chief Executive Officer and Director (Principal Executive Officer)                     |  | March 28, 2007
|                                                 |  |                                                                                       
|/s/    JAMES
MCGINTY James McGinty               |  | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |  | March 28, 2007
|                                                 |  |                                                                                       
|/s/    BRUCE
QUINNELL Bruce Quinnell             |  | Chairman of the Board                                                                  |  | March 28, 2007
|                                                 |  |                                                                                       
|/s/    KATHLEEN
MASON Kathleen Mason             |  | Director                                                                               |  | March 28, 2007
|                                                 |  |                                                                                       
|/s/    CORRADO
FEDERICO Corrado Federico         |  | Director                                                                               |  | March 28, 2007
|                                                 |  |                                                                                       
|/s/    ANDREW
SCHUON Andrew Schuon               |  | Director                                                                               |  | March 28, 2007
|                                                 |  |                                                                                       
|/s/    CYNTHIA
COHEN Cynthia Cohen               |  | Director                                                                               |  | March 28, 2007
|                                                 |  |                                                                                       
|/s/    W. SCOTT
HEDRICK W. Scott Hedrick         |  | Director                                                                               |  | March 28, 2007



45



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and
Shareholders of Hot Topic, Inc. and its Subsidiaries

We have audited the accompanying consolidated balance sheets of Hot Topic, Inc. and
its subsidiaries as of February 3, 2007 and January 28, 2006, and the related consolidated statements of income, shareholders equity, and cash flows for each of the three years in the period ended February 3, 2007. Our
audit also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

In our opinion, the financial statements
referred to above present fairly, in all material respects, the consolidated financial position of Hot Topic, Inc. and subsidiaries at February 3, 2007 and January 28, 2006, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended February 3, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material respects the information set forth herein.

As discussed in
Notes 1 and 2 to the consolidated financial statements, on January 29, 2006 the Company changed its method of accounting for share based payments in accordance with Statement of Financial Accounting Standards No. 123 (Revised 2004).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness
of Hot Topic Incs internal control over financial reporting as of February 3, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and
our report dated March 9, 2007 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Los Angeles, California

March 27, 2007



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##### Table of Contents

Hot Topic, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share amounts)



|                                                                                                                                                                           |  |                 |         |   |                 |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | - | --------------- | - | ------- | -
|                                                                                                                                                                           |  | February 3,2007 |         |   | January 28,2006 |  
|Assets                                                                                                                                                                     |  |                 |         |   |                 |   |         |  
|Current assets:                                                                                                                                                            |  |                 |         |   |                 |   |         |  
|Cash and cash equivalents                                                                                                                                                  |  | $               | 3,910   |   |                 | $ | 9,673   |  
|Short-term investments                                                                                                                                                     |  |                 | 51,580  |   |                 |   | 28,001  |  
|Inventory                                                                                                                                                                  |  |                 | 73,868  |   |                 |   | 71,160  |  
|Prepaid expenses and other                                                                                                                                                 |  |                 | 14,435  |   |                 |   | 16,781  |  
|Deferred tax assets                                                                                                                                                        |  |                 | 3,258   |   |                 |   | 2,487   |  
|                                                                                                                                                                           |  |                 |         |   |                 |   |         |  
|Total current assets                                                                                                                                                       |  |                 | 147,051 |   |                 |   | 128,102 |  
|                                                                                                                                                                           |  |                
|Property and equipment, net                                                                                                                                                |  |                 | 166,726 |   |                 |   | 171,089 |  
|Deposits and other                                                                                                                                                         |  |                 | 588     |   |                 |   | 244     |  
|Deferred tax assets                                                                                                                                                        |  |                 | 3,906   |   |                 |   |        |  
|                                                                                                                                                                           |  |                 |         |   |                 |   |         |  
|Total assets                                                                                                                                                               |  | $               | 318,271 |   |                 | $ | 299,435 |  
|                                                                                                                                                                           |  |                 |         |   |                 |   |         |  
|Liabilities and shareholders equity                                                                                                                                       |  |                 |         |   |                 |   |         |  
|Current liabilities:                                                                                                                                                       |  |                 |         |   |                 |   |         |  
|Accounts payable, net of overdraft                                                                                                                                         |  | $               | 15,862  |   |                 | $ | 18,122  |  
|Accrued liabilities                                                                                                                                                        |  |                 | 34,332  |   |                 |   | 33,569  |  
|Income taxes payable                                                                                                                                                       |  |                 | 5,590   |   |                 |   | 5,788   |  
|                                                                                                                                                                           |  |                 |         |   |                 |   |         |  
|Total current liabilities                                                                                                                                                  |  |                 | 55,784  |   |                 |   | 57,479  |  
|                                                                                                                                                                           |  |                
|Deferred rent                                                                                                                                                              |  |                 | 40,674  |   |                 |   | 39,941  |  
|Deferred tax liabilities                                                                                                                                                   |  |                 |        |   |                 |   | 954     |  
|Deferred compensation                                                                                                                                                      |  |                 | 356     |   |                 |   |        |  
|                                                                                                                                                                           |  |                
|Commitments and contingencies                                                                                                                                              |  |                 |         |   |                 |   |         |  
|                                                                                                                                                                           |  |                
|Shareholders equity:                                                                                                                                                      |  |                 |         |   |                 |   |         |  
|Preferred shares, no par value; 10,000,000 shares authorized; no shares issued and outstanding                                                                             |  |                 |        |   |                 |   |        |  
|Common shares, no par value; 150,000,000 shares authorized; 44,229,848 and 43,976,536 shares issued and outstanding at February 3, 2007
and January 28, 2006, respectively |  |                 | 107,088 |   |                 |   | 100,328 |  
|Retained earnings                                                                                                                                                          |  |                 | 114,372 |   |                 |   | 100,746 |  
|Accumulated other comprehensive loss                                                                                                                                       |  |                 | (3      | ) |                 |   | (13     | )
|                                                                                                                                                                           |  |                 |         |   |                 |   |         |  
|Total shareholders equity                                                                                                                                                 |  |                 | 221,457 |   |                 |   | 201,061 |  
|                                                                                                                                                                           |  |                 |         |   |                 |   |         |  
|Total liabilities and shareholders equity                                                                                                                                 |  | $               | 318,271 |   |                 | $ | 299,435 |  
|                                                                                                                                                                           |  |                 |         |   |                 |   |         |  

See accompanying notes to consolidated financial statements.



F-2



---

##### Table of Contents

Hot Topic, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except per share amounts)



|                                                                       |  |                 |         |                 |   |                 |  |   |        
|---------------------------------------------------------------------- |  | --------------- | ------- | --------------- | - | --------------- |  | - | -------
|                                                                       |  | Years Ended    
|                                                                       |  | February 3,2007 |         | January 28,2006 |   | January 29,2005
|Net sales                                                              |  | $               | 751,558 |                 | $ | 725,142         |  | $ | 656,468
|Cost of goods sold, including buying, distribution and occupancy costs |  |                 | 502,408 |                 |   | 488,948         |  |   | 422,712
|                                                                       |  |                 |         |                 |   |                 |  |   |        
|Gross margin                                                           |  |                 | 249,150 |                 |   | 236,194         |  |   | 233,756
|Selling, general and administrative expenses                           |  |                 | 227,580 |                 |   | 203,995         |  |   | 170,384
|                                                                       |  |                 |         |                 |   |                 |  |   |        
|Income from operations                                                 |  |                 | 21,570  |                 |   | 32,199          |  |   | 63,372 
|Interest income, net                                                   |  |                 | 1,450   |                 |   | 1,054           |  |   | 919    
|Other Income                                                           |  |                 |        |                 |   | 2,945           |  |   |       
|                                                                       |  |                 |         |                 |   |                 |  |   |        
|Income before income taxes                                             |  |                 | 23,020  |                 |   | 36,198          |  |   | 64,291 
|Provision for income taxes                                             |  |                 | 9,394   |                 |   | 13,779          |  |   | 24,618 
|                                                                       |  |                 |         |                 |   |                 |  |   |        
|Net income                                                             |  | $               | 13,626  |                 | $ | 22,419          |  | $ | 39,673 
|                                                                       |  |                 |         |                 |   |                 |  |   |        
|Earnings per share:                                                    |  |                 |         |                 |   |                 |  |   |        
|Basic                                                                  |  | $               | 0.31    |                 | $ | 0.50            |  | $ | 0.86   
|                                                                       |  |                 |         |                 |   |                 |  |   |        
|Diluted                                                                |  | $               | 0.30    |                 | $ | 0.49            |  | $ | 0.83   
|                                                                       |  |                 |         |                 |   |                 |  |   |        
|Shares used in computing earnings per share:                           |  |                 |         |                 |   |                 |  |   |        
|Basic                                                                  |  |                 | 44,167  |                 |   | 44,924          |  |   | 46,379 
|Diluted                                                                |  |                 | 44,752  |                 |   | 45,877          |  |   | 47,875 



See accompanying notes to
consolidated financial statements.



F-3



---

##### Table of Contents

Hot Topic, Inc. and Subsidiaries

Consolidated Statements of Shareholders Equity

(In thousands)



|                                                |        |               |   |        |                  |         |   |                                             |   |         |                           |  |   |      |   |  |   |         |  
|----------------------------------------------- | ------ | ------------- | - | ------ | ---------------- | ------- | - | ------------------------------------------- | - | ------- | ------------------------- |  | - | ---- | - |  | - | ------- | -
|                                                |        | Common Shares |   |        | RetainedEarnings |         |   | AccumulatedOther ComprehensiveIncome (Loss) |   |         | Total ShareholdersEquity | 
|                                                | Shares |               |   | Amount |                  |         |   |                                            
|Balance at January 31, 2004                     |        | 48,121        |   |        | $                | 86,238  |   |                                             | $ | 135,242 |                           |  | $ | (201 | ) |  | $ | 221,279 |  
|Exercise of stock options                       |        | 409           |   |        |                  | 3,662   |   |                                             |   |        |                           |  |   |     |   |  |   | 3,662   |  
|Employee stock purchase plan                    |        | 54            |   |        |                  | 862     |   |                                             |   |        |                           |  |   |     |   |  |   | 862     |  
|Restricted stock awards                         |        | 9             |   |        |                  | 155     |   |                                             |   |        |                           |  |   |     |   |  |   | 155     |  
|Repurchase of common stock                      |        | (4,000        | ) |        |                  | (1,581  | ) |                                             |   | (78,068 | )                         |  |   |      |   |  |   | (79,649 | )
|Tax benefit from exercise of stock options      |        |              |   |        |                  | 1,585   |   |                                             |   |        |                           |  |   |     |   |  |   | 1,585   |  
|Comprehensive income:                           |        |               |   |        |                  |         |   |                                             |   |         |                           |  |   |      |   |  |   |         |  
|Net income                                      |        |              |   |        |                  |        |   |                                             |   | 39,673  |                           |  |   |     |   |  |   | 39,673  |  
|Unrealized loss on marketable securities, net   |        |              |   |        |                  |        |   |                                             |   |        |                           |  |   | (5   | ) |  |   | (5      | )
|                                                |        |               |   |        |                  |         |   |                                             |   |         |                           |  |   |      |   |  |   |         |  
|Total comprehensive income                      |        |               |   |        |                  |         |   |                                             |   |         |                           |  |   |      |   |  |   | 39,668  |  
|                                                |        |               |   |        |                  |         |   |                                             |   |         |                           |  |   |      |   |  |   |         |  
|Balance at January 29, 2005                     |        | 44,593        |   |        |                  | 90,921  |   |                                             |   | 96,847  |                           |  |   | (206 | ) |  |   | 187,562 |  
|Exercise of stock options                       |        | 758           |   |        |                  | 7,072   |   |                                             |   |        |                           |  |   |     |   |  |   | 7,072   |  
|Employee stock purchase plan                    |        | 53            |   |        |                  | 700     |   |                                             |   |        |                           |  |   |     |   |  |   | 700     |  
|Restricted stock awards                         |        | 8             |   |        |                  | 155     |   |                                             |   |        |                           |  |   |     |   |  |   | 155     |  
|Repurchase of common stock                      |        | (1,435        | ) |        |                  | (1,479  | ) |                                             |   | (18,520 | )                         |  |   |      |   |  |   | (19,999 | )
|Tax benefit from exercise of stock options      |        |              |   |        |                  | 2,959   |   |                                             |   |        |                           |  |   |     |   |  |   | 2,959   |  
|Comprehensive income:                           |        |               |   |        |                  |         |   |                                             |   |         |                           |  |   |      |   |  |   |         |  
|Net income                                      |        |              |   |        |                  |        |   |                                             |   | 22,419  |                           |  |   |     |   |  |   | 22,419  |  
|Unrealized gain on marketable securities, net   |        |              |   |        |                  |        |   |                                             |   |        |                           |  |   | 193  |   |  |   | 193     |  
|                                                |        |               |   |        |                  |         |   |                                             |   |         |                           |  |   |      |   |  |   |         |  
|Total comprehensive income                      |        |               |   |        |                  |         |   |                                             |   |         |                           |  |   |      |   |  |   | 22,612  |  
|                                                |        |               |   |        |                  |         |   |                                             |   |         |                           |  |   |      |   |  |   |         |  
|Balance at January 28, 2006                     |        | 43,977        |   |        |                  | 100,328 |   |                                             |   | 100,746 |                           |  |   | (13  | ) |  |   | 201,061 |  
|Exercise of stock options                       |        | 195           |   |        |                  | 1,865   |   |                                             |   |        |                           |  |   |     |   |  |   | 1,865   |  
|Employee stock purchase plan                    |        | 50            |   |        |                  | 493     |   |                                             |   |        |                           |  |   |     |   |  |   | 493     |  
|Restricted stock awards                         |        | 8             |   |        |                  | 155     |   |                                             |   |        |                           |  |   |     |   |  |   | 155     |  
|Tax benefit from exercise of stock options, net |        |              |   |        |                  | 147     |   |                                             |   |        |                           |  |   |     |   |  |   | 147     |  
|Stock-based compensation expense                |        |              |   |        |                  | 4,100   |   |                                             |   |        |                           |  |   |     |   |  |   | 4,100   |  
|Comprehensive income:                           |        |               |   |        |                  |         |   |                                             |   |         |                           |  |   |      |   |  |   |         |  
|Net income                                      |        |              |   |        |                  |        |   |                                             |   | 13,626  |                           |  |   |     |   |  |   | 13,626  |  
|Unrealized gain on marketable securities, net   |        |              |   |        |                  |        |   |                                             |   |        |                           |  |   | 10   |   |  |   | 10      |  
|                                                |        |               |   |        |                  |         |   |                                             |   |         |                           |  |   |      |   |  |   |         |  
|Total comprehensive income                      |        |               |   |        |                  |         |   |                                             |   |         |                           |  |   |      |   |  |   | 13,636  |  
|                                                |        |               |   |        |                  |         |   |                                             |   |         |                           |  |   |      |   |  |   |         |  
|Balance at February 3, 2007                     |        | 44,230        |   |        | $                | 107,088 |   |                                             | $ | 114,372 |                           |  | $ | (3   | ) |  | $ | 221,457 |  
|                                                |        |               |   |        |                  |         |   |                                             |   |         |                           |  |   |      |   |  |   |         |  

See accompanying notes to consolidated financial statements.



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Hot Topic, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)



|                                                                                  |  |                 |          |   |                 |   |          |                 |  |   |          |  
|--------------------------------------------------------------------------------- |  | --------------- | -------- | - | --------------- | - | -------- | --------------- |  | - | -------- | -
|                                                                                  |  | Years Ended     |         
|                                                                                  |  | February 3,2007 |          |   | January 28,2006 |   |          | January 29,2005 | 
|Operating Activities                                                              |  |                 |          |   |                 |   |          |                 |  |   |          |  
|Net income                                                                        |  | $               | 13,626   |   |                 | $ | 22,419   |                 |  | $ | 39,673   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                 |          |   |                 |   |          |                 |  |   |          |  
|Depreciation and amortization                                                     |  |                 | 38,941   |   |                 |   | 32,396   |                 |  |   | 24,635   |  
|Stock-based compensation                                                          |  |                 | 4,255    |   |                 |   | 155      |                 |  |   | 155      |  
|Tax benefit from exercise of stock options                                        |  |                 |         |   |                 |   | 2,959    |                 |  |   | 1,585    |  
|Loss on disposal of fixed assets                                                  |  |                 | 720      |   |                 |   | 272      |                 |  |   | 751      |  
|Impairment of long-lived assets                                                   |  |                 | 3,395    |   |                 |   | 1,660    |                 |  |   |         |  
|Deferred taxes                                                                    |  |                 | (5,838   | ) |                 |   | (5,068   | )               |  |   | 4,086    |  
|Gift card breakage                                                                |  |                 | (1,198   | ) |                 |   | (3,132   | )               |  |   |         |  
|Changes in operating assets and liabilities:                                      |  |                 |          |   |                 |   |          |                 |  |   |          |  
|Inventory                                                                         |  |                 | (2,708   | ) |                 |   | (10,679  | )               |  |   | (8,544   | )
|Prepaid expenses and other current assets                                         |  |                 | 2,270    |   |                 |   | (3,987   | )               |  |   | (1,736   | )
|Deposits and other assets                                                         |  |                 | (344     | ) |                 |   | (2       | )               |  |   | (53      | )
|Accounts payable, net of overdraft                                                |  |                 | (2,260   | ) |                 |   | 248      |                 |  |   | 2,033    |  
|Accrued liabilities                                                               |  |                 | 2,579    |   |                 |   | 9,714    |                 |  |   | (1,318   | )
|Deferred rent                                                                     |  |                 | 733      |   |                 |   | 9,714    |                 |  |   | 8,383    |  
|Income taxes payable                                                              |  |                 | (198     | ) |                 |   | (3,099   | )               |  |   | 1,609    |  
|                                                                                  |  |                 |          |   |                 |   |          |                 |  |   |          |  
|Net cash provided by operating activities                                         |  |                 | 53,973   |   |                 |   | 53,570   |                 |  |   | 71,259   |  
|                                                                                  |  |                 |         
|Investing Activities                                                              |  |                 |          |   |                 |   |          |                 |  |   |          |  
|Purchases of property and equipment                                               |  |                 | (38,617  | ) |                 |   | (69,419  | )               |  |   | (57,853  | )
|Proceeds from sale of short-term investments                                      |  |                 | 94,354   |   |                 |   | 134,398  |                 |  |   | 162,931  |  
|Purchases of short-term investments                                               |  |                 | (117,923 | ) |                 |   | (101,114 | )               |  |   | (107,709 | )
|                                                                                  |  |                 |          |   |                 |   |          |                 |  |   |          |  
|Net cash used in investing activities                                             |  |                 | (62,186  | ) |                 |   | (36,135  | )               |  |   | (2,631   | )
|                                                                                  |  |                 |         
|Financing Activities                                                              |  |                 |          |   |                 |   |          |                 |  |   |          |  
|Payments on capital lease obligations                                             |  |                 | (262     | ) |                 |   | (783     | )               |  |   | (141     | )
|Excess tax benefit from stock-based compensation                                  |  |                 | 207      |   |                 |   |         |                 |  |   |         |  
|Proceeds from employee stock purchases and exercise of stock options              |  |                 | 2,505    |   |                 |   | 7,772    |                 |  |   | 4,524    |  
|Repurchase of common stock                                                        |  |                 |         |   |                 |   | (19,999  | )               |  |   | (79,649  | )
|                                                                                  |  |                 |          |   |                 |   |          |                 |  |   |          |  
|Net cash provided by (used in) financing activities                               |  |                 | 2,450    |   |                 |   | (13,010  | )               |  |   | (75,266  | )
|                                                                                  |  |                 |          |   |                 |   |          |                 |  |   |          |  
|(Decrease) increase in cash and cash equivalents                                  |  |                 | (5,763   | ) |                 |   | 4,425    |                 |  |   | (6,638   | )
|Cash and cash equivalents at beginning of year                                    |  |                 | 9,673    |   |                 |   | 5,248    |                 |  |   | 11,886   |  
|                                                                                  |  |                 |          |   |                 |   |          |                 |  |   |          |  
|Cash and cash equivalents at end of year                                          |  | $               | 3,910    |   |                 | $ | 9,673    |                 |  | $ | 5,248    |  
|                                                                                  |  |                 |          |   |                 |   |          |                 |  |   |          |  
|Supplemental Information                                                          |  |                 |          |   |                 |   |          |                 |  |   |          |  
|Cash paid during the period for interest                                          |  | $               | 24       |   |                 | $ | 35       |                 |  | $ | 8        |  
|                                                                                  |  |                 |          |   |                 |   |          |                 |  |   |          |  
|Cash paid during the period for income taxes                                      |  | $               | 15,326   |   |                 | $ | 18,973   |                 |  | $ | 17,400   |  
|                                                                                  |  |                 |          |   |                 |   |          |                 |  |   |          |  

See accompanying notes to consolidated financial statements.



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HOT TOPIC, INC. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

February 3, 2007

NOTE 1. Organization and
Summary of Significant Accounting Policies

Organization and Business Activities

Hot Topic, Inc. is a mall-based specialty retailer operating the Hot Topic and Torrid concepts. At our Hot Topic stores, we sell a selection of music/pop
culture-licensed and music/pop culture-influenced apparel, accessories and gift items for young men and women principally between the ages of 12 and 22. At our Torrid stores, we sell apparel, lingerie, shoes and accessories designed for various
lifestyles for plus-size females between the ages of 15 and 29. We were incorporated in California in 1988. We opened our first Hot Topic store in 1989 and our first Torrid store in 2001. At the end of fiscal 2006 (the fiscal year ended
February 3, 2007), we operated 694 Hot Topic stores throughout the United States and Puerto Rico, and 131 Torrid stores in 34 states. We also sell merchandise on two websites, www.hottopic.com and www.torrid.com, which reflect the Hot Topic and
Torrid store concepts and sell merchandise similar to that sold in the respective stores. We have one reportable segment given the similarities of the economic characteristics among the Hot Topic and Torrid concepts.

Throughout this report, the terms our, we and us refer to Hot Topic, Inc. and its subsidiaries.

Principles of Consolidation

Our consolidated
financial statements are prepared in accordance with accounting principles generally accepted in the United States. The consolidated financial statements include the accounts of Hot Topic, Inc. and our wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.

Fiscal Year

Our fiscal year is on a 52-53 week basis and ends on the Saturday nearest to January 31. The fiscal year ended February 3, 2007 was a 53-week
year. The fiscal years ended January 28, 2006 and January 29, 2005 were 52-week years.

Use of Estimates

We are required to make certain estimates and assumptions in order to prepare consolidated financial statements in conformity with generally accepted
accounting principles. Such estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities in the financial statements and accompanying notes. Our most
significant estimates relate to the valuation of inventory balances, the determination of sales returns, the assessment of expected cash flows used in evaluating long-lived assets for impairment and the determination of gift card breakage. The
estimation process required to prepare our consolidated financial statements requires assumptions to be made about future events and conditions, and as such, is inherently subjective and uncertain. Our actual results could differ materially from
those estimates.

Cash and Cash Equivalents

We consider all highly liquid investments with maturities of less than three months when purchased to be cash equivalents. We are potentially exposed to a concentration of credit risk when cash deposits in banks are in excess of federally
insured limits.



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Fair Value of Financial Instruments

We consider carrying amounts of cash and cash equivalents, receivables, and accounts payable to approximate fair value because of the short maturity of these financial instruments.

Short-Term Investments

Short-term investments with
maturities in excess of three months consist primarily of interest bearing bonds that are highly liquid, low risk and are available for sale. At February 3, 2007 and January 28, 2006, short-term investments consisted of municipal bonds of
$40.9 million and $16.8 million, government and corporate bonds of $7.7 million and $8.2 million, respectively. Government obligations were $3.0 million at February 3, 2007 and January 28, 2006. Short-term investments are recorded at fair
market value, based on established market prices as of the end of the period for which the values are determined.

Accumulated other
comprehensive income is comprised of unrealized gains from short-term investments, net of all related taxes, and are reflected in the Shareholders Equity section of the Consolidated Balance Sheets. For the fiscal years ended
February 3, 2007 and January 28, 2006, unrealized gains were $10,000 and $193,000, respectively.

Inventory

Inventories are valued at the lower of average cost or market, on a weighted average cost basis, using the retail method. Under the retail method,
inventory is stated at its current retail selling value, and then is converted to a cost basis by applying an average cost factor that represents the average cost-to-retail ratio based on beginning inventory and the purchase activity for the month.
Throughout the year, we review our inventory levels in order to identify slow-moving merchandise and use permanent markdowns to sell through selected merchandise. We record a charge to cost of goods sold for permanent markdowns. Inherent in the
retail method are certain significant management judgments and estimates including initial merchandise markup, future sales, markdowns and shrinkage, which significantly impact the ending inventory valuation at cost and the resulting gross margins.
To the extent our estimated markdowns at period-end prove to be insufficient, additional future markdowns will need to be recorded. Physical inventories are conducted during the year to determine actual inventory on hand and shrinkage. We accrue our
estimated inventory shrinkage for the period between the last physical count and current period end balance sheet date, thus, the difference between actual and estimated shrink amounts may cause fluctuations in quarterly results, but not for the
fiscal year results.

Property and Equipment

Property and equipment are recorded at cost less accumulated depreciation, or in the case of capitalized leases, at the present value of future minimum lease payments. Major renewals and improvements are capitalized, while routine
maintenance and repairs are expensed as incurred. Costs associated with internally developed software are accounted for in accordance with Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use (SOP 98-1). SOP 98-1 provides guidance for the treatment of costs associated with computer software development and defines those costs to be capitalized and those to be expensed. These costs consist of salaries
of employees and payments made to third parties and consultants working on such software development. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform
a task it previously did not perform. Capitalized internal use software costs are amortized using the straight-line method over their estimated useful lives, generally 3 years. In fiscal 2006, we amortized approximately $0.4 million. Additionally,
as of February 3, 2007, the net book value of capitalized internal use software totaled approximately $1.0 million. The amortization and net book value amounts were immaterial at January 28, 2006.

Depreciation expense is calculated using the straight-line method over the estimated useful lives of the related assets (3 to 20 years).



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Leasehold improvements are amortized using the straight-line method over the shorter of the respective
initial lease terms or the 10 year estimated useful life of the assets.

The Company assesses property and equipment for impairment
whenever events or changes in circumstances indicate that an assets carrying amount may not be recoverable.

Insurance

We are self-insured for certain losses related to medical and workers compensation although we maintain stop loss coverage with third party insurers to
limit our total liability exposure. The estimate of our self-insurance liability involves uncertainty since we must use judgment to estimate the ultimate cost that will be incurred to settle reported claims and unreported claims for incidents
incurred but not report as of the balance sheet date. When estimating our self-insurance liability, we consider a number of factors, which include historical claim experience and valuations provided by independent third party actuaries. As claims
develop, the actual ultimate losses may differ from actuarial estimates. Therefore, an analysis is performed quarterly to determine if modifications to the accrual are required.

Revenue Recognition

Revenue is recognized at our retail store locations at the point at which the
customer receives and pays for the merchandise at the register. For online sales, revenue is recognized at the time of shipment, which we refer to as the date of purchase by the customer. Sales are recognized net of merchandise returns, which are
reserved for based on historical experience. Revenue from gift cards, gift certificates and store merchandise credits is recognized at the time of redemption. Shipping and handling revenues from our websites are included as a component of net sales.

Cost of Goods Sold, Including Buying, Distribution and Occupancy Costs

Cost of goods sold, including buying, distribution and occupancy costs includes: merchandise costs, freight, inventory shrink, payroll expenses associated
with the merchandising and distribution departments, distribution center expenses including rent, common area maintenance charges, real estate taxes, depreciation, utilities, supplies and maintenance, and store expenses including rents, common area
maintenance charges, real estate taxes, and depreciation.

Vendor Allowances

We receive certain allowances from our vendors primarily related to damaged merchandise, markdowns and, for our Torrid division, new store openings.
Allowances received from vendors related to damaged merchandise and new Torrid store openings are reflected as a reduction of inventory in the period they are received and allocated to cost of sales during the period in which the items are sold.
Markdown allowances received from vendors are reflected as reductions to cost of sales in the period they are received as these allowances are generally received after goods have been sold or marked down.

Selling, General and Administrative Expenses

Selling, general and administrative expenses include: payroll expenses associated with stores, store operating expenses, store pre-opening costs, marketing expenses; and payroll and other expenses associated with headquarters and
administrative functions.

Gift Cards

We recognize estimated gift card breakage as a component of net sales in proportion to actual gift card redemptions over the period that remaining gift card values are redeemed. Gift card breakage is income



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recognized due to the non-redemption of a portion of gift cards sold by us for which liability was recorded in prior periods. While customer redemption
patterns result in estimated gift card breakage, which approximates 5 to 6%, changes in our customers behavior could impact the amount that ultimately is unused and could affect the amount recognized as a component of net sales.

In fiscal 2006, we recognized $1.2 million as a component of sales in proportion to actual gift card redemptions over the period that remaining gift card
values are redeemed. In fiscal 2005, we recognized $3.1 million in other income related to gift card breakage, which represented the cumulative estimated amount of gift card breakage from the inception of the program.

Store Pre-Opening Costs

Costs incurred in connection
with the opening of a new store are expensed as incurred.

Shipping and Handling Costs

We classify shipping and handling costs in costs of goods sold, including buying, distribution and occupancy costs in the accompanying statements of
income.

Leases

Rent expense under
non-cancelable operating leases with scheduled rent increases or free rent periods is accounted for on a straight-line basis over the lease term, beginning on the date of initial possession, which is generally when we enter the space and begin
construction build-out. The amount of the excess of straight-line rent expense over scheduled payments is recorded as a deferred rent liability. Construction allowances and other such lease incentives are recorded as deferred credits, and are
amortized on a straight-line basis as a reduction of rent expense.

Advertising Costs

Advertising costs are expensed the first time the event occurs or as incurred. Advertising expenses were $3,842,000, $3,428,000, and $1,372,000 for the
years ended February 3, 2007, January 28, 2006 and January 29, 2005, respectively. At February 3, 2007 and January 28, 2006, the amount of advertising costs reported as prepaid advertising was $176,000 and $74,000,
respectively.

Income Taxes

We utilize
SFAS No. 109, Accounting for Income Taxes, which prescribes the use of the liability method to compute the difference between the tax basis of assets and liabilities and the related financial reporting amounts using currently
enacted tax laws and rates.

Long-Lived Assets

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. We group and evaluate long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified. Factors we consider important that could trigger an impairment
review include a significant underperformance relative to expected historical or projected future operating results, a significant change in the manner of the use of the asset or a significant negative industry or economic trend. When we determine
that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the aforementioned factors, impairment is measured based on a projected discounted cash flow method using a discount rate determined by
management.



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In the event future store performance is lower than forecasted results, future cash flows may be lower
than expected, which could result in future impairment charges. While we believe recently opened stores will provide sufficient cash flow, material changes in results could result in future impairment charges. During the years ended February 3,
2007 and January 28, 2006, we recorded impairment charges of $3.4 million and $1.7 million, respectively, which is included in selling, general and administrative expenses in our consolidated statements of income.

Stock-Based Compensation

Stock-based compensation
has been computed in accordance with SFAS No. 123R, Share-Based Payments (see Note 2).

Earnings Per Share

Earnings per share has been computed in accordance with SFAS No. 128, Earnings per Share (see Note 8).

Accelerated Options

In fiscal 2005, we accelerated
the vesting of certain stock options awarded to employees, officers and directors under various stock option plans, which had exercise prices between $19.72 and $21.57 that were above market closing price on November 14, 2005. Options to
purchase approximately 1.17 million shares became exercisable immediately as a result of such vesting acceleration. Our Board approved such vesting acceleration as a result of SFAS 123R requiring the expensing of stock options effective in
fiscal 2006 which, with respect to such accelerated options, would have negatively impacted our results from operations. We also accelerated the vesting of certain stock options awarded to employees, officers and directors under various stock option
plans that had exercise prices that were above market closing price on January 4, 2005. Options to purchase approximately 1.38 million shares became exercisable immediately as a result of such vesting acceleration. Our Board approved such
vesting acceleration as a result of SFAS 123R requiring the expensing of stock options which, with respect to such accelerated options, would have negatively impacted our results from operations.

Comprehensive Income

Comprehensive income includes
all changes in equity during a period except those that resulted from investments by or distributions to stockholders. Other comprehensive income refers to revenues, expenses, gains and losses that, under generally accepted accounting principles,
are included in comprehensive income, but excluded from net income as these amounts are recorded directly as an adjustment to stockholders equity.

We report comprehensive income in accordance with the provisions of SFAS No. 130, Reporting Comprehensive Income (SFAS 130). SFAS 130 established standards for the reporting and display of
comprehensive income. Components of comprehensive income include net income (loss), foreign currency translation adjustments and gains/losses associated with investments available for sale. Comprehensive income for the years ended February 3,
2007, January 28, 2006, and January 29, 2005 is as follows (in thousands):



|                                              |  |                 |        |                 |   |                 |  |   |        |  
|--------------------------------------------- |  | --------------- | ------ | --------------- | - | --------------- |  | - | ------ | -
|                                              |  | Years Ended     |       
|                                              |  | February 3,2007 |        | January 28,2006 |   | January 29,2005 | 
|Comprehensive Income                          |  |                 |        |                 |   |                 |  |   |        |  
|Net income                                    |  | $               | 13,626 |                 | $ | 22,419          |  | $ | 39,673 |  
|Unrealized gain on marketable securities, net |  |                 | 10     |                 |   | 193             |  |   | (5     | )
|                                              |  |                 |        |                 |   |                 |  |   |        |  
|Total comprehensive income                    |  | $               | 13,636 |                 | $ | 22,612          |  | $ | 39,668 |  
|                                              |  |                 |        |                 |   |                 |  |   |        |  



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Off-Balance Sheet Arrangements

As of February 3, 2007, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance 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 these relationships.

New Accounting
Pronouncements

In July 2006, the FASB issued FASB Interpretation 48, Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement 109 (FIN 48), which prescribes accounting for and disclosure of uncertainty in tax positions. This interpretation defines the criteria that must be met for the benefits of a tax position to be
recognized in the financial statements and the measurement of tax benefits recognized. The provisions of FIN 48 will be effective as of the beginning of our 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings. We are currently evaluating the impact of adopting FIN 48 on our financial condition, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), which defines fair value, establishes a framework for measuring fair value and requires enhanced
disclosures about fair value measurements. SFAS 157 requires companies to disclose the fair value of their financial instruments according to a fair value hierarchy (i.e., levels 1, 2, and 3, as defined). Additionally, companies are required to
provide enhanced disclosure regarding instruments in the level 3 category, including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities. SFAS 157 will be effective for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years. We are currently evaluating the impact adoption may have on our financial condition or results of operations.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year
misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and
qualitative factors are considered, is material. SAB 108 will be effective for fiscal years ending on or after November 15, 2006, with early application encouraged. We adopted SAB 108 for fiscal 2006 and there was no material impact on our
financial condition, results of operations or cash flows.

NOTE 2. Stock-Based Compensation

Stock Plan Activity

Under our 1996 Equity Incentive
Plan, we granted stock options, stock bonuses, and other awards to our employees, directors, and consultants as deemed appropriate by the Board of Directors (the Board). On June 14, 2006, the 1996 Equity Incentive Plan expired and
was replaced with the 2006 Equity Incentive Plan (the 2006 Plan). The 2006 Plan was approved by the Board on March 17, 2006 and by our shareholders on June 13, 2006. Upon expiration of the 1996 Equity Incentive Plan, 732,456
shares out of an aggregate of 18,300,000 shares of common stock that were available for grant remained unissued.

The 2006 Plan provides
for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance stock awards and other forms of equity compensation to our employees, consultants
and directors as deemed appropriate by the Board. Both incentive and non-statutory stock options granted by us under the 2006 Plan must carry an exercise price of at



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least 100% of the fair market value of the stock on the date of grant. Options granted may be subject to different vesting terms as determined by the Board
and the maximum term of options granted is 10 years. In addition, the maximum number of shares of common stock available for future issuance may not exceed the sum of (a) the number of unallocated shares of common stock remaining available for
issuance under the 1996 Incentive plan as of June 13, 2006, (b) an additional 2,350,000 shares and (c) the number of shares subject to stock awards as of June 13, 2006 under the 1996 Incentive Plan pursuant to the terms of the
1996 Incentive Plan. As of February 3, 2007, 3,177,169 shares were available for future grants. All awards to date under the 2006 Plan have been granted to employees of the company and none have been granted to consultants.

In March 2006, we granted restricted stock unit awards under the 1996 Equity Incentive Plan to certain members of our management. None of
these awards have vested and no shares have been issued pursuant to the grants. These awards provide for the issuance of up to 474,000 shares of our common stock, with vesting and issuance contingent upon achieving performance goals for fiscal 2008
based upon operating income for the company for that fiscal year; and prior to vesting (or termination without vesting), the units will constitute an agreement by us to issue shares to the extent performance goals are ultimately met. The
market value of our common stock as of the grant date of these restricted stock unit awards was $13.90. Compensation expense for these awards will be recorded over the three-year term of the award, based on the market value as of the
grant date, with actual amounts expensed dependent upon the likelihood from period to period of vesting of such awards at the end of fiscal 2008. As of February 3, 2007, it is our best estimate that none of the awards will be earned at the end
of the three-year term. This new estimate differs from our previous best estimate in the third quarter of fiscal 2006 that 25% of these awards, or 118,500 out of a possible 474,000, will be earned. Accordingly, during the fourth quarter of fiscal
2006, we reversed previously recognized compensation expense of $412,000. In aggregate, we have not recognized any compensation expense for the twelve months ended February 3, 2007 for these restricted stock unit awards.

Under our 1996 Non-Employee Directors Stock Option Plan, we may grant and have granted stock options and other awards to non-employee directors.
The exercise price of options granted under this plan shall be determined by the Board at the date of grant and shall not be lower than (i) 100% of the fair market value of our common stock on the date of grant for incentive stock options,
(ii) 85% of the fair market value of our common stock on the date of grant for non-statutory stock options, and (iii) 110% of the fair market value of our common stock on the date of grant for persons possessing 10% or more of the total
combined voting power of all classes of stock. Unless the Board declares otherwise, options vest over four years and generally expire ten years from the date of grant. An aggregate of 720,000 shares of common stock may be issued pursuant to this
plan. As of February 3, 2007, 23,264 shares were available for future grants. No options under this plan have been granted to consultants.

In June 2006, we granted 11,842 shares of restricted common stock to non-employee directors under the 1996 Equity Incentive Plan, and we made additional restricted stock grants to non-employee directors in fiscal 2005 and 2004. Restricted
shares generally vest in the year subsequent to the grant year. All awarded common shares remain restricted (i.e., not transferable by the holders) until such time as the recipient is no longer a member of our Board of Directors. The value of these
grants is expensed over the vesting period. During fiscal 2006, $155,000, of which $52,000 relates to fiscal 2005 grants, has been expensed. During fiscal 2005, non-employee directors were granted 7,496 shares of restricted stock and $155,000, of
which $52,000 related to fiscal 2004 grants, was expensed.

In June 1996, the Board of Directors adopted the Employee Stock Purchase Plan
(the Stock Purchase Plan). The Stock Purchase Plan provides for the issuance of up to 1,350,000 shares of common stock to our employees. All eligible employees are granted identical rights to purchase common stock for each Board
authorized offering under the Stock Purchase Plan. Rights granted pursuant to any offering under the Stock Purchase Plan terminate immediately upon cessation of an employees employment for any reason. In general, an employee may reduce
contribution or withdraw from participation in an offering at any time during the purchase period for such offering. Employees receive a 15% discount on shares purchased under the Stock Purchase Plan.



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##### Table of Contents

Rights granted under the Stock Purchase Plan are not transferable and may be exercised only by the person to whom such rights are granted. The initial
offering under the Stock Purchase Plan commenced October 24, 1996 and terminated December 31, 1996. Subsequent offerings occur every six months commencing January 1, 1997. At February 3, 2007, 1,086,960 shares were available for
sale to employees under the plan. Compensation expense for the year ended February 3, 2007 was $219,000 to account for the fair value of the rights granted to participants under the plan at the beginning of the then-current offering.

The following table summarizes stock options outstanding as of February 3, 2007, January 28, 2006 and January 29,
2005:



|                                 |  |                  |   |                  |                                |                  |         |           |   |                               |   |         |  |           |                               |  |   |      
|-------------------------------- |  | ---------------- | - | ---------------- | ------------------------------ | ---------------- | ------- | --------- | - | ----------------------------- | - | ------- |  | --------- | ----------------------------- |  | - | -----
|                                 |  | February 3, 2007 |   | January 28, 2006 |                                | January 29, 2005
|                                 |  | Options          |   |                  | Weighted-Average ExercisePrice |                  | Options |           |   | Weighted-AverageExercisePrice |   | Options |  |           | Weighted-AverageExercisePrice
|Outstanding at beginning of year |  | 5,775,313        |   |                  | $                              | 16.27            |         | 5,692,845 |   |                               | $ | 14.67   |  | 4,813,795 |                               |  | $ | 11.28
|Granted                          |  | 1,100,296        |   |                  | $                              | 13.39            |         | 1,424,650 |   |                               | $ | 20.43   |  | 1,447,750 |                               |  | $ | 24.75
|Exercised                        |  | (195,382         | ) |                  | $                              | 9.55             |         | (758,334  | ) |                               | $ | 9.33    |  | (409,446  | )                             |  | $ | 8.94 
|Forfeited or expired             |  | (724,872         | ) |                  | $                              | 20.03            |         | (583,848  | ) |                               | $ | 19.63   |  | (159,254  | )                             |  | $ | 19.51
|                                 |  |                  |   |                  |                                |                  |         |           |   |                               |   |         |  |           |                               |  |   |      
|Outstanding at end of year       |  | 5,955,355        |   |                  | $                              | 15.50            |         | 5,775,313 |   |                               | $ | 16.28   |  | 5,692,845 |                               |  | $ | 14.67
|                                 |  |                  |   |                  |                                |                  |         |           |   |                               |   |         |  |           |                               |  |   |      
|Exercisable at end of year       |  | 4,680,454        |   |                  | $                              | 16.01            |         | 5,165,454 |   |                               | $ | 16.39   |  | 4,417,071 |                               |  | $ | 14.48
|                                 |  |                  |   |                  |                                |                  |         |           |   |                               |   |         |  |           |                               |  |   |      

The following table summarizes the aggregate intrinsic value and the weighted-average remaining
contractual life of options outstanding and exercisable for the years ended February 3, 2007, January 28, 2006 and January 29, 2005:



|                                                    |  |                 |           |                 |   |                 |  |   |           
|--------------------------------------------------- |  | --------------- | --------- | --------------- | - | --------------- |  | - | ----------
|                                                    |  | Years Ended    
|                                                    |  | February 3,2007 |           | January 28,2006 |   | January 29,2005
|Aggregate Intrinsic Value                           |  |                 |           |                 |   |                 |  |   |           
|Options Outstanding                                 |  | $               | 5,473,785 |                 | $ | 11,056,928      |  | $ | 32,400,704
|Options Exercisable                                 |  | $               | 5,466,485 |                 | $ | 10,972,381      |  | $ | 27,770,094
|                                                    |  |                 |          
|Weighted-Average Remaining Contractual Life (Years) |  |                 |           |                 |   |                 |  |   |           
|Options Outstanding                                 |  |                 | 6.50      |                 |   | 6.99            |  |   | 7.23      
|Options Exercisable                                 |  |                 | 5.81      |                 |   | 6.88            |  |   | 7.06      

The following table summarizes information about stock options outstanding and exercisable as of
February 3, 2007:



|                         |  |                     |  |                               |       |                                         |      |         |           |                              |   |      
|------------------------ |  | ------------------- |  | ----------------------------- | ----- | --------------------------------------- | ---- | ------- | --------- | ---------------------------- | - | -----
|                         |  | Outstanding Options |  | Options Exercisable          
|Range of Exercise Prices |  | Options             |  | Weighted-AverageExercisePrice |       | Weighted-AverageContractualLife (Years) |      | Options |           | WeightedAverageExercisePrice
|$  1.51  $10.31         |  | 1,033,471           |  | $                             | 5.41  |                                         | 3.09 |         | 1,023,471 |                              | $ | 5.36 
|$10.64  $13.90          |  | 1,405,707           |  | $                             | 12.80 |                                         | 8.05 |         | 333,786   |                              | $ | 10.95
|$14.01  $15.61          |  | 1,483,552           |  | $                             | 15.36 |                                         | 5.92 |         | 1,333,390 |                              | $ | 15.43
|$16.31  $21.24          |  | 1,141,775           |  | $                             | 20.61 |                                         | 7.91 |         | 1,099,895 |                              | $ | 20.74
|$21.30  $27.13          |  | 890,850             |  | $                             | 25.17 |                                         | 7.14 |         | 889,912   |                              | $ | 25.17
|                         |  |                     |  |                               |       |                                         |      |         |           |                              |   |      
|$  1.51  $27.13         |  | 5,955,355           |  | $                             | 15.50 |                                         | 6.50 |         | 4,680,454 |                              | $ | 16.01
|                         |  |                     |  |                               |       |                                         |      |         |           |                              |   |      



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##### Table of Contents

Cash proceeds, tax benefits and intrinsic value related to total stock options exercised during the years
ended February 3, 2007 and January 28, 2006 are provided in the following table (in thousands):



|                                               |  |                 |       |                 |   |      
|---------------------------------------------- |  | --------------- | ----- | --------------- | - | -----
|                                               |  | Years Ended    
|                                               |  | February 3,2007 |       | January 28,2006
|Proceeds from stock options exercised          |  | $               | 1,865 |                 | $ | 7,072
|Tax benefit related to stock options exercised |  | $               | 207   |                 | $ | 2,959
|Intrinsic value of stock options exercised     |  | $               | 530   |                 | $ | 7,736

Accounting for Stock-Based Compensation Expense

Effective January 29, 2006, we adopted SFAS 123R, which addresses the accounting for stock-based payment transactions whereby an entity receives
employee services in exchange for equity instruments, including stock options. SFAS 123R eliminates the ability to account for stock-based compensation transactions using the intrinsic value method under Accounting Principles Board
Opinion 25, Accounting for Stock Issued to Employees (APB 25), and instead generally requires that such transactions be accounted for using a fair value based method. We have elected the modified prospective transition
method as permitted under SFAS 123R, and accordingly prior periods have not been restated to reflect the impact of SFAS 123R. The modified prospective transition method requires that stock-based compensation expense be recorded for all new and
unvested stock options that are ultimately expected to vest as the requisite service is rendered beginning on January 29, 2006. Stock-based compensation for awards granted prior to January 29, 2006 is based upon the grant-date fair value
of such compensation as determined under the pro forma provisions of SFAS 123, Accounting for Stock-Based Compensation (SFAS 123).

Prior to fiscal 2006, we determined stock based compensation expense using the intrinsic value method of APB 25 and we provided the disclosures required by SFAS 123, as amended by SFAS 148 Accounting for
Stock-Based CompensationTransition and Disclosure. The following table provides the pro forma effects on our net income and earnings per share for years ended January 28, 2006 and January 29, 2005 as if the fair value
recognition provisions of SFAS 123R had been applied (in thousands, except per share amounts):



|                                                                                                                             |  |                 |        |   |                 |   |         |  
|---------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------ | - | --------------- | - | ------- | -
|                                                                                                                             |  | Years Ended     |       
|                                                                                                                             |  | January 28,2006 |        |   | January 29,2005 |  
|Net income                                                                                                                   |  |                 |        |   |                 |   |         |  
|As reported                                                                                                                  |  | $               | 22,419 |   |                 | $ | 39,673  |  
|Add: Stock-based compensation expense included in reported net income, net of related tax effects                            |  |                 | 96     |   |                 |   | 96      |  
|Deduct: Total stock-based compensation expense determined under fair value method for all awards, net of related tax effects |  |                 | (9,225 | ) |                 |   | (11,804 | )
|                                                                                                                             |  |                 |        |   |                 |   |         |  
|Net income                                                                                                                   |  | $               | 13,290 |   |                 | $ | 27,965  |  
|                                                                                                                             |  |                 |        |   |                 |   |         |  
|Basic earnings per share:                                                                                                    |  |                 |        |   |                 |   |         |  
|As reported                                                                                                                  |  | $               | 0.50   |   |                 | $ | 0.86    |  
|Pro forma                                                                                                                    |  | $               | 0.30   |   |                 | $ | 0.60    |  
|Diluted earnings per share:                                                                                                  |  |                 |        |   |                 |   |         |  
|As reported                                                                                                                  |  | $               | 0.49   |   |                 | $ | 0.83    |  
|Pro forma                                                                                                                    |  | $               | 0.29   |   |                 | $ | 0.59    |  



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##### Table of Contents

The effect of recording stock-based compensation for the year ended February 3, 2007 was as follows:



|                                               |  |   |            |  
|---------------------------------------------- |  | - | ---------- | -
|Stock-based compensation by type of award:     |  |   |            |  
|Employee stock options and awards              |  | $ | 4,035,940  |  
|Restricted stock units                         |  |   |           |  
|Employee stock purchase plan                   |  |   | 219,118    |  
|                                               |  |   |            |  
|Total stock-based compensation expense         |  | $ | 4,255,058  |  
|Tax effect on stock-based compensation expense |  |   | (1,179,619 | )
|                                               |  |   |            |  
|Net effect on net income                       |  | $ | 3,075,439  |  
|                                               |  |   |            |  
|Effect on earnings per share:                  |  |   |            |  
|Basic and diluted                              |  | $ | (0.07      | )
|                                               |  |   |            |  

For the year ended February 3, 2007, $668,000 was recorded as a component of cost of goods
sold and the remainder, $3,587,000, was charged to selling, general and administrative expense. The entire amount of $155,000 was charged to selling, general and administrative expense for the year ended January 28, 2006.

The application of SFAS 123R did not impact our cash position, but resulted in a change in presentation on our consolidated statements of cash flows.
Previously, the tax benefit from the exercise of stock options was recorded as a component of operating activities. Subsequent to the adoption of SFAS 123R it is recorded as a component of cash flows from financing activities in the consolidated
statements of cash flows.

The incremental stock-based compensation expense resulting from the adoption of SFAS 123R includes expense
related to stock options granted prior to, but not yet vested as of January 29, 2006. As of February 3, 2007, we had $6.5 million of unrecognized expense, net of estimated forfeitures, related to non-vested stock-based compensation, which
is expected to be recognized over a weighted average period of 2.99 years.

Calculation of Fair Value of Options

We use a Black-Scholes option valuation model to determine the fair value of stock-based compensation under SFAS 123R, consistent with that used by us
previously for pro forma disclosures under SFAS 123. The Black-Scholes model incorporates various assumptions including the expected term of awards, volatility of stock price, risk-free rates of return and dividend yield. The expected term of
an award is generally no less than the option vesting period and is based on our historical experience. Expected volatility is based upon the historical volatility of our stock price. The risk-free interest rate is approximated using rates available
on U.S. Treasury securities with a remaining term equal to the options expected life. We use a dividend yield of zero in the Black-Scholes option valuation model, as we do not anticipate paying cash dividends in the foreseeable future.

The following weighted average assumptions were used for stock options granted for the years ended February 3,
2007, January 28, 2006 and January 29, 2005:



|                                          |  |                 |           |   |                 |   |           |                 |  |   |           |  
|----------------------------------------- |  | --------------- | --------- | - | --------------- | - | --------- | --------------- |  | - | --------- | -
|                                          |  | Years Ended     |          
|                                          |  | February 3,2007 |           |   | January 28,2006 |   |           | January 29,2005 | 
|Risk free interest rate                   |  |                 | 5         | % |                 |   | 5         | %               |  |   | 5         | %
|Expected life                             |  |                 | 5.0 years |   |                 |   | 5.0 years |                 |  |   | 5.0 years |  
|Expected volatility                       |  |                 | 48        | % |                 |   | 50        | %               |  |   | 61        | %
|Expected dividend yield                   |  |                 | 0.00      | % |                 |   | 0.00      | %               |  |   | 0.00      | %
|                                          |  |                 |          
|Weighted average fair value at grant date |  | $               | 6.07      |   |                 | $ | 7.93      |                 |  | $ | 8.57      |  



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##### Table of Contents

NOTE 3. Property and Equipment

Property and equipment are summarized as follows (in thousands):



|                                                |  |                 |          |   |                 |   |          |  
|----------------------------------------------- |  | --------------- | -------- | - | --------------- | - | -------- | -
|                                                |  | February 3,2007 |          |   | January 28,2006 |  
|Leasehold improvements                          |  | $               | 150,229  |   |                 | $ | 142,201  |  
|Furniture, fixtures and equipment               |  |                 | 113,219  |   |                 |   | 104,733  |  
|Software and licenses                           |  |                 | 39,758   |   |                 |   | 30,682   |  
|Building and land                               |  |                 | 14,270   |   |                 |   | 14,266   |  
|                                                |  |                 |          |   |                 |   |          |  
|                                                |  |                 | 317,476  |   |                 |   | 291,882  |  
|Less: accumulated depreciation and amortization |  |                 | (150,750 | ) |                 |   | (120,793 | )
|                                                |  |                 |          |   |                 |   |          |  
|Property and equipment, net                     |  | $               | 166,726  |   |                 | $ | 171,089  |  
|                                                |  |                 |          |   |                 |   |          |  

NOTE 4. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):



|                                                            |  |                 |        |                 |   |       
|----------------------------------------------------------- |  | --------------- | ------ | --------------- | - | ------
|                                                            |  | February 3,2007 |        | January 28,2006
|Accrued payroll and related expenses                        |  | $               | 11,243 |                 | $ | 7,523 
|Gift cards, gift certificates and store merchandise credits |  |                 | 7,541  |                 |   | 7,039 
|Accrued self insurance liabilities                          |  |                 | 2,811  |                 |   | 2,186 
|Accrued sales tax                                           |  |                 | 2,742  |                 |   | 2,171 
|Accrued percentage rents                                    |  |                 | 1,256  |                 |   | 1,692 
|Accrued cost of fixed assets and software                   |  |                 | 447    |                 |   | 2,479 
|Accrued legal settlements and expenses                      |  |                 | 422    |                 |   | 2,355 
|Other                                                       |  |                 | 7,870  |                 |   | 8,124 
|                                                            |  |                 |        |                 |   |       
|Accrued liabilities                                         |  | $               | 34,332 |                 | $ | 33,569
|                                                            |  |                 |        |                 |   |       

NOTE 5. Bank Credit Agreement

We maintain an unsecured bank credit agreement of $5.0 million. The credit agreement will expire in August 2007. Letters of credit are issued under the credit agreement, which are primarily used for inventory
purchases. At February 3, 2007, there were letters of credit for $80,000 outstanding under the credit agreement. There were no letters of credit outstanding at January 28, 2006.

NOTE 6. Commitments and Contingencies

Leases

We have entered into lease agreements for retail, distribution and office space, vehicles, and equipment under primarily noncancelable leases with terms
ranging from approximately two to ten years. The retail space leases provide for rents based upon the greater of the minimum annual rental amounts or 5% to 8% of annual sales volume. Certain leases provide for increasing minimum annual rental
amounts. Rent expense is recorded on a straight-line basis over the term of the lease based on us taking possession of premises. Accordingly, deferred rent, as reflected in the accompanying balance sheets, represents the difference between rent
expense accrued and amounts paid under the terms of the lease agreements. Total rent expense for the years ended February 3, 2007, January 28, 2006, and January 29, 2005 was $52,305,000, $50,710,000, and $44,341,000,
respectively, including contingent rentals of $1,741,000, $3,210,000, and $4,259,000, respectively.



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##### Table of Contents

Annual future minimum lease payments under operating leases as of February 3, 2007 are as follows
(in thousands):



|                                       |  |   |        
|-------------------------------------- |  | - | -------
|Fiscal Year                            |  |  
|2007                                   |  | $ | 55,963 
|2008                                   |  |   | 53,818 
|2009                                   |  |   | 51,239 
|2010                                   |  |   | 48,240 
|2011                                   |  |   | 43,961 
|Thereafter                             |  |   | 102,913
|                                       |  |   |        
|Total minimum operating lease payments |  | $ | 356,134
|                                       |  |   |        

Litigation

In April 2006, a California resident filed a lawsuit against us in Superior Court of Los Angeles County, alleging that we violated California Civil Code Section 1747.08. That code section regulates when a
retailer is permitted to obtain certain customer information in connection with credit card transactions. The case is alleged as a class action. In May 2006, we answered the complaint and denied all liability. In October 2006, the court gave
preliminary approval to a settlement agreement between the plaintiff (on behalf of the purported class) and us, which agreement we entered into as opposed to incurring additional legal fees defending the claims. The settlement agreement set forth
our position that complete defenses to the claims exist. Further, there was no admission of liability and no finding of violation of law. In January 2007, the court granted final approval of the settlement terms. Under the settlement agreement, we
will pay (during the first two quarters of fiscal 2007) an estimated aggregate of approximately $250,000 to cover certain attorneys fees and claims administration costs; and we will provide class members who have opted in to the settlement
class a coupon to receive 20% off on a single purchase of up to $100 in our Hot Topic or Torrid stores. We accrued amounts to account for the settlement during our third quarter of 2006 following agreement on the settlement terms. We expect the case
to be dismissed with prejudice upon completion of the above steps, and do not expect any further activity with respect to the matter.

On
August 7, 2006, Cheryl Axelson filed a purported shareholder derivative action for the benefit of Hot Topic, Inc. in the Los Angeles County Superior Court. The lawsuit named certain of our current and former executive officers and directors as
individual defendants and us as a nominal defendant. The lawsuit asserted claims for breach of fiduciary duty and unjust enrichment in connection with the granting of certain stock options by us and sought unspecified damages, disgorgement of the
relevant stock options and any proceeds thereof, and other relief. On September 12, 2006, Jane Daily, represented by the same law firms as Ms. Axelson, filed a substantially similar action. In October 2006, the court ordered consolidation
of the two cases. We believed the claims were without merit and intended to defend the case vigorously. However, following informal discussions with the plaintiffs attorneys, the plaintiffs agreed to dismiss the case, without any sort of
payment or obligation made or committed to by us or any of the other defendants. In January 2007, the court granted the parties request for dismissal without prejudice, and the case was dismissed.

On December 18, 2006, Lanell Lake filed a purported shareholder derivative action for the benefit of Hot Topic, Inc. in the Los Angeles County
Superior Court. The case was substantially similar to the Axelson and Daily cases referenced above. The lawsuit asserted claims against certain of our current and former executive officers and directors for breach of fiduciary duty and unjust
enrichment in connection with the granting of stock options. Following that filing, counsel for the parties engaged in informal discussions. As a result, plaintiff agreed to dismiss the case, without any sort of payment or obligation made or
committed to by us or any of the other defendants. In January 2007, the court granted the parties request for dismissal without prejudice, and the case was dismissed.



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##### Table of Contents

We are involved in other matters of litigation that arise in the ordinary course of business. We do not
currently believe that the cases referenced above, or any other litigation in which we are currently involved, will have a material adverse effect on our overall financial condition.

Indemnities, Commitments and Guarantees

During the ordinary course of business, we have made certain
indemnities, commitments and guarantees under which we may be required to make payments in relation to certain transactions. These indemnities include those given to various lessors in connection with facility leases for certain claims arising from
such facility or lease and indemnities to our directors and officers to the maximum extent permitted under the laws of the State of California. From time to time, we have issued guarantees in the form of letters of credit as security for some
merchandise shipments from overseas. At February 3, 2007 there were letters of credit for $80,000 outstanding. The durations of these indemnities, commitments and guarantees vary. Some of these indemnities, commitments and guarantees do not
provide for any limitation of the maximum potential future payments we could be obligated to make. We have not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated financial statements.

NOTE 7. Shareholders Equity

Stock
Repurchases

On March 19, 2004, we announced that our Board of Directors approved the repurchase of up to an aggregate of 2,000,000
shares of our common stock during the period ending January 29, 2005. As of July 31, 2004 we completed the repurchase of 2,000,000 shares of our common stock at a cost of $46.8 million at an average price of $23.41.

On August 18, 2004, we announced that our Board of Directors approved an additional repurchase of up to an aggregate of 2,000,000 shares of our
common stock during the period ending January 29, 2005. As of January 29, 2005, we completed the repurchase of 2,000,000 shares of our common stock at a cost of $32.8 million at an average price of $16.42.

On August 19, 2005, we announced that our Board of Directors approved the repurchase of up to $20 million of our common stock during the period
ending January 28, 2006. As of January 28, 2006, we completed the repurchase of 1,435,000 shares of our common stock at a cost of $20 million at an average price of $13.94.

We did not repurchase any of our common stock during the fiscal year ended February 3, 2007.

NOTE 8. Earnings Per Share

We compute earnings per
share pursuant to SFAS No. 128, Earnings Per Share. Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by
dividing net income by the weighted average number of common shares outstanding for the period and potentially dilutive common stock equivalents outstanding for the period. Options to purchase 4,613,223, 2,306,175, and 1,279,350 shares of common
stock were outstanding at February 3, 2007, January 28, 2006, and January 29, 2005, respectively, but were not included in the computation of diluted earnings per share because the options exercise prices were greater than
the average market price of the shares and, therefore, the effect would be anti-dilutive.



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##### Table of Contents

A reconciliation of the numerator and denominator of basic earnings per share and diluted earnings per
share is as follows (in thousands except per share amounts):



|                                                    |  |                 |        |                 |   |                 |  |   |       
|--------------------------------------------------- |  | --------------- | ------ | --------------- | - | --------------- |  | - | ------
|                                                    |  | Feburary 3,2007 |        | January 28,2006 |   | January 29,2005
|Basic Earnings Per Share Computation:               |  |                 |        |                 |   |                 |  |   |       
|Numerator                                           |  | $               | 13,626 |                 | $ | 22,419          |  | $ | 39,673
|Denominator:                                        |  |                 |        |                 |   |                 |  |   |       
|Weighted average common shares outstanding          |  |                 | 44,167 |                 |   | 44,924          |  |   | 46,379
|                                                    |  |                 |        |                 |   |                 |  |   |       
|Basic earnings per share                            |  | $               | 0.31   |                 | $ | 0.50            |  | $ | 0.86  
|                                                    |  |                 |        |                 |   |                 |  |   |       
|Diluted Earnings Per Share Computation:             |  |                 |        |                 |   |                 |  |   |       
|Numerator                                           |  | $               | 13,626 |                 | $ | 22,419          |  | $ | 39,673
|Denominator:                                        |  |                 |        |                 |   |                 |  |   |       
|Weighted average common shares outstanding          |  |                 | 44,167 |                 |   | 44,924          |  |   | 46,379
|Incremental shares from assumed exercise of options |  |                 | 584    |                 |   | 953             |  |   | 1,496 
|                                                    |  |                 |        |                 |   |                 |  |   |       
|Total shares                                        |  |                 | 44,752 |                 |   | 45,877          |  |   | 47,875
|                                                    |  |                 |        |                 |   |                 |  |   |       
|Diluted earnings per share                          |  | $               | 0.30   |                 | $ | 0.49            |  | $ | 0.83  
|                                                    |  |                 |        |                 |   |                 |  |   |       

NOTE 9. Income Taxes

Composition of the provision for income taxes for the years ended (in thousands):



|                         |  |                 |        |   |                 |   |        |                 |  |   |        |  
|------------------------ |  | --------------- | ------ | - | --------------- | - | ------ | --------------- |  | - | ------ | -
|                         |  | February 3,2007 |        |   | January 28,2006 |   |        | January 29,2005 | 
|Current:                 |  |                 |        |   |                 |   |        |                 |  |   |        |  
|Federal                  |  | $               | 13,359 |   |                 | $ | 17,141 |                 |  | $ | 17,141 |  
|State                    |  |                 | 1,666  |   |                 |   | 1,706  |                 |  |   | 3,574  |  
|                         |  |                 |        |   |                 |   |        |                 |  |   |        |  
|                         |  |                 | 15,025 |   |                 |   | 18,847 |                 |  |   | 20,715 |  
|                         |  |                 |        |   |                 |   |        |                 |  |   |        |  
|Deferred:                |  |                 |        |   |                 |   |        |                 |  |   |        |  
|Federal                  |  |                 | (5,126 | ) |                 |   | (5,183 | )               |  |   | 3,949  |  
|State                    |  |                 | (505   | ) |                 |   | 115    |                 |  |   | (46    | )
|                         |  |                 |        |   |                 |   |        |                 |  |   |        |  
|                         |  |                 | (5,631 | ) |                 |   | (5,068 | )               |  |   | 3,903  |  
|                         |  |                 |        |   |                 |   |        |                 |  |   |        |  
|Total income tax expense |  | $               | 9,394  |   |                 | $ | 13,779 |                 |  | $ | 24,618 |  
|                         |  |                 |        |   |                 |   |        |                 |  |   |        |  

Significant components of our deferred tax assets and liabilities are as follows (in thousands):



|                                              |  |                 |       |   |                 |   |        |  
|--------------------------------------------- |  | --------------- | ----- | - | --------------- | - | ------ | -
|                                              |  | February 3,2007 |       |   | January 28,2006 |  
|Current deferred tax assets:                  |  |                 |       |   |                 |   |        |  
|Inventory                                     |  | $               | 884   |   |                 | $ | 582    |  
|Accrued expense and other                     |  |                 | 1,790 |   |                 |   | 1,342  |  
|State taxes                                   |  |                 | 277   |   |                 |   | 272    |  
|Other assets                                  |  |                 | 307   |   |                 |   | 291    |  
|                                              |  |                 |       |   |                 |   |        |  
|Net current deferred tax assets               |  |                 | 3,258 |   |                 |   | 2,487  |  
|                                              |  |                 |       |   |                 |   |        |  
|Noncurrent deferred tax assets (liabilities): |  |                 |       |   |                 |   |        |  
|Depreciation                                  |  |                 | (60   | ) |                 |   | (4,917 | )
|Deferred rent                                 |  |                 | 2,842 |   |                 |   | 3,963  |  
|Stock-based compensation expense              |  |                 | 1,124 |   |                 |   |       |  
|                                              |  |                 |       |   |                 |   |        |  
|Total noncurrent deferred tax liabilities     |  |                 | 3,906 |   |                 |   | (954   | )
|                                              |  |                 |       |   |                 |   |        |  
|Net deferred tax assets (liabilities)         |  | $               | 7,164 |   |                 | $ | 1,533  |  
|                                              |  |                 |       |   |                 |   |        |  



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##### Table of Contents

Reconciliation of the provision for income taxes to the statutory tax rate for the years ended:



|                                              |  |                 |   |  |                 |   |  |                 |  
|--------------------------------------------- |  | --------------- | - |  | --------------- | - |  | --------------- | -
|                                              |  | February 3,2007 |   |  | January 28,2006 |   |  | January 29,2005 |  
|Statutory federal rate                        |  | 35              | % |  | 35              | % |  | 35              | %
|Stock-based compensation expense              |  | 1.8             |   |  |                |   |  |                |  
|Other permanent differences                   |  | 0.8             |   |  | (0.2            | ) |  | (0.2            | )
|State and local taxes, net of federal benefit |  | 3.3             |   |  | 3.3             |   |  | 3.6             |  
|Other items                                   |  | (0.1            | ) |  |                |   |  | (0.1            | )
|                                              |  |                 |   |  |                 |   |  |                 |  
|Effective income tax rate                     |  | 40.8            | % |  | 38.1            | % |  | 38.3            | %
|                                              |  |                 |   |  |                 |   |  |                 |  

We operate in numerous tax jurisdictions and are subject to routine tax examinations. Future tax
examinations could involve difficult issues and multiple years. Although we cannot predict the outcome of future examinations, amounts that could be owed in excess of amounts accrued would impact future tax expense but would not be expected to have
material impact on our financial condition. We periodically review the recorded liability for contingent tax obligations and adjust our estimate of the potential liability for tax contingencies. At February 3, 2007 and January 28, 2006,
the reserve for contingent tax liabilities was approximately $700,000 and $1,044,000, respectively, which are included in income taxes payable.

The increase in our effective tax rate for the current year is due to the adoption of SFAS 123R, in which we cannot currently recognize a tax benefit for stock-based compensation expense associated with incentive stock options (also known
as qualified stock options) and employee stock purchase plan rights.

NOTE 10. Employee Benefit Plan

Effective January 1, 1995, we adopted the Hot Topic 401(k) Retirement Savings Plan (the 401(k) Plan). All employees who have been
employed by us for at least one year of service maintained a minimum of 1,000 hours worked during the year and are at least 21 years of age are eligible to participate. Employees may contribute to the 401(k) Plan up to 25% of their current
compensation, subject to a statutorily prescribed annual limit. We may at our discretion contribute certain amounts to eligible employees accounts. We have not made any contributions to the 401(k) Plan.

NOTE 11. Deferred Compensation Plan

In August 2006,
we adopted the Hot Topic Inc. Management Deferred Compensation Plan (the Deferred Compensation Plan) for the purpose of providing highly compensated employees and members of our Board of Directors a program to meet their financial
planning needs. The Deferred Compensation Plan provides participants with the opportunity to defer up to 80% of their base salary and up to 100% of their annual earned bonus, all of which, together with the associated investment returns, are 100%
vested from the outset. The plan, which is designed to be exempt from most provisions of the Employee Retirement Security Act of 1974, is informally funded by us in order to preserve the tax-deferred savings advantages of a non-qualified plan. As
such, all deferrals and associated earnings are general unsecured obligations of Hot Topic, Inc. held as an asset within a rabbi trust on our consolidated balance sheets. We do not currently contribute to the plan. As of February 3,
2007, assets and associated liabilities of the Deferred Compensation Plan were $344,000 and $356,000, respectively, and are included in other non-current assets and non-current liabilities, respectively, in our consolidated balance sheets.



F-20