<PAGE>

                                  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 JANUARY 29, 2000

                                       OR

[ ]           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from
_____________________________ TO ____________________________________

                           COMMISSION FILE NO. 0-28784

                                 HOT TOPIC, INC.
             (Exact name of registrant as specified in its charter)

           California                                             77-0198182
(State or other jurisdiction of                                (I.R.S. Employer
 incorporation or organization)                              Identification No.)

         18305 E. SAN JOSE AVE.                                    91748
      CITY OF INDUSTRY, CALIFORNIA                               (Zip Code)
(Address of principal executive offices)

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

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

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

                           COMMON STOCK, NO PAR VALUE
                                (Title of Class)

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

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

         The number of shares outstanding of the Registrant's Common Stock was
9,829,724 as of April 21, 2000.

         The aggregate market value of Common Stock held by non-affiliates of
the registrant as of April 21, 2000 was approximately $265,909,000, based on the
closing price on that date of Common Stock on the Nasdaq National Stock Market.*

                       DOCUMENTS INCORPORATED BY REFERENCE

         Certain portions of the Company's Definitive Proxy Statement for the
annual meeting of stockholders to be held on June 28, 2000 to be filed with the
Securities and Exchange Commission (the "Commission") no later than 120 days
after January 29, 2000, are incorporated by reference into Part III of this Form
10-K (Items 10 through 13).

         Certain Exhibits filed with the Registrant's Registration Statement on
Form SB-2 (Registration No. 333-5054-LA), as amended, are incorporated by
reference into Part IV of this Form 10-K (Item 14).

------------
*Excludes 966,087 shares of Common Stock held by directors and officers and
shareholders whose beneficial ownership exceeds 10% of the shares outstanding on
April 21, 2000. Exclusion of shares held by any person should not be construed
to indicate that such person possesses the power, direct or indirect, to direct
or cause the direction of the management or policies of the Registrant, or that
such person is controlled by or under common control with the Registrant.

<PAGE>

         THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL FUTURE
RESULTS COULD DIFFER MATERIALLY FROM THOSE STATEMENTS. FACTORS THAT COULD CAUSE
OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE FOUND
IN THIS ANNUAL REPORT ON FORM 10-K IN PART I, ITEM 1 UNDER THE CAPTION "CERTAIN
RISK FACTORS RELATED TO THE COMPANY'S BUSINESS," IN PART II, ITEM 7 UNDER THE
CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" AND ADDITIONAL FACTORS DISCUSSED ELSEWHERE IN THIS ANNUAL REPORT.

                                     PART I

ITEM 1. BUSINESS

GENERAL

        Hot Topic, Inc. ("Hot Topic" or the "Company") is a rapidly growing,
mall-based specialty retailer of music-licensed and music-influenced apparel,
accessories and gift items for young men and women principally between the ages
of 12 and 22. The Company believes teenagers throughout the United States have
similar fashion preferences, largely as a result of the nationwide influence of
MTV, music distribution, movies, television programs and fashion magazines. The
Company opened its first store in 1989, and operated 212 stores as of January
29, 2000 in 42 states across the United States. During fiscal 1995, the Company
significantly accelerated its store expansion program and opened 18 stores,
including its first stores in the Northeast and Midwest. The Company opened 26,
40, 50 and 54 additional stores during fiscal 1996, 1997, 1998 and 1999,
respectively, and in fiscal 1996 relocated two existing stores. In fiscal 1998,
the Company opened its first "street stores," which are stores on street fronts
rather than in enclosed shopping malls. The Company plans to open approximately
60 new stores in fiscal 2000, 11 of which were opened as of April 21, 2000. The
Company also maintains a website, www.hottopic.com through which it markets its
stores and store concept and sells certain of its merchandise. During fiscal
1999, the site was relaunched with a focus on e-commerce together with posting
boards, customer surveys, a gift registry and content features including artist
news and concert tour schedules. The Company's net sales via the Internet
continue to increase significantly, although the total sales are still modest.

THE MARKET

         The music-licensed apparel industry began in the 1960s with bootleggers
selling T-shirts at concert venues. Over the ensuing two decades, artists began
to realize the commercial potential of licensing their likenesses and logos to
T-shirt manufacturers and others who produced assorted merchandise. Management
believes that the single largest impact on the music industry during recent
years has been the success of MTV, which enables fans not only to listen to the
latest music and artists 24 hours a day, but also to see a full sight and sound
package of appearance and attitude. According to industry estimates, in 1996 MTV
programming could be seen in more than 60 million households in the United
States and in over 260 million households worldwide. It is also estimated that
viewers in over 23 million homes watch MTV every week. As a result, popular
artists and the fashions they wear are much more visible today than 30 years
ago. Management believes that this increased visibility has contributed to the
increase in demand for music-licensed and music-influenced apparel and
accessories.

         Hot Topic's target customers are young men and women between the ages
of 12 to 22 years old, who are passionate about music, music videos and
music-inspired fashion, and are avid MTV viewers. The Company believes its
music-oriented merchandise appeals to teenagers from diverse socio-economic
backgrounds, and that its customers are broadly representative of the teenage
population in the United States.

                                       2
<PAGE>

         Teenagers represent both a growing part of the United States population
and an increasing source of purchasing power. According to the U.S. Department
of Commerce Bureau of the Census, the teenage population in the United States
reached approximately 31 million in 1998 and is expected to grow to
approximately 35 million by 2008, representing a projected growth rate close to
twice the rate of the overall population. By 2010, there likely will be more
teenagers in the United States than at any other time in history. The Company
also believes, based upon statistics released by an independent research firm,
that teenage spending has also been increasing annually, growing to an estimated
$111 billion in 1997.

BUSINESS STRATEGY

         The Company's goal is to become the leading retailer of music-licensed
and music-influenced apparel and accessories for young men and women. The
principal elements of the Company's business strategy are as follows:

         O        FOCUS ON UNIQUE MUSIC-ORIENTED MERCHANDISE.

         Management believes that fashions and products associated with popular
music artists have a significant influence on teenagers today, who often want to
emulate their favorite artists. The Company has developed a unique strategy
focused exclusively on offering music-licensed and music-influenced merchandise
in the mall environment. The Company believes most of the merchandise it offers
is not available elsewhere in the mall and is often hard to find other than at
alternative shopping venues in major metropolitan areas. Accordingly, the
Company believes it is well-positioned to capitalize on the growing teenage
population and demand for music related merchandise.

         O        OFFER "EVERYTHING ABOUT THE MUSIC."

         The Company's stores are designed to serve as a headquarters for
music-licensed and music-influenced apparel, accessories and gift items. The
Company's slogan, "Everything About The Music," reflects the Company's broad
assortment of products, which currently consists of over 12,000 SKUs in 26
different product categories. The Company believes its selection of
music-licensed merchandise is the most extensive assortment available in one
mall store. The Company complements its licensed merchandise with a unique and
eclectic assortment of music-influenced apparel and accessories, and frequently
introduces new items and categories in response to changes in trends and demand.
The Company believes it has a history of being the first to offer the latest
music fashions, which, together with its assortment of merchandise, has made it
a destination store for teenagers seeking music-related products.

         O        PROMOTE MUSIC-INSPIRED CULTURE.

         Hot Topic is committed to addressing the music-oriented lifestyles of
its customers by building a culture throughout the organization that reflects a
passion for music. Management diligently tracks alternative and rock music
trends by regularly monitoring new music, music video releases and radio station
air play, visiting nightclubs around the country and attending concerts. The
Company also actively solicits feedback from its employees and customers. The
Company believes these activities enable it to react quickly to emerging trends,
and provide it with a competitive advantage over retailers who do not devote the
time and resources necessary to anticipate these trends.

         O        ACTIVELY MANAGE MERCHANDISE MIX.

         Hot Topic does not dictate fashion trends, but rather seeks to identify
music artists and releases that will have strong appeal and related products
that will generate strong demand. The Company has developed a disciplined
approach to buying and a proactive inventory management program around this
strategy. The Company often tests new merchandise in a small number of stores

                                       3
<PAGE>

before chain-wide distribution, and orders a majority of its merchandise not
more than 60 days before delivery, enabling it to respond quickly to emerging
trends. In cases where it does not have return privileges with its vendors, Hot
Topic is aggressive in taking prompt markdowns to maintain a fresh merchandise
mix. By actively managing the mix of categories and products in its stores, the
Company believes it is able to capitalize on emerging trends and minimize its
dependence on any particular category. The Company believes that this approach
to managing its merchandise mix has contributed to its strong merchandise
margins and to consistent markdown rates which the Company believes are lower
than industry averages.

         O        CREATE AN ENTERTAINING STORE ENVIRONMENT.

         The Company seeks to create a compelling shopping environment that
brings into the mall elements of the alternative urban shopping experience
sought by teenagers. Hot Topic stores are designed with an industrial warehouse
theme that incorporates dense merchandising and utilizes a professional sound
system playing alternative music releases to create a fun, high-energy store
that teens will consider "their place" to shop with friends. The Company
believes that this atmosphere enhances the Company's image as a source for
music-inspired fashion while encouraging customers to shop in its stores for
longer periods of time.

         O        EMPHASIZE CUSTOMER SERVICE.

         Hot Topic trains its store associates to provide value-added,
non-intrusive customer service. Sales associates are taught to greet each
customer, provide information about new music and fashion trends and suggest
merchandise that matches the customer's lifestyle and music preferences. The
Company strives to give its teenage customers the same level of respect and
attention that is generally given to adult customers at other retail stores and
to provide friendly and informed customer service for parents. The Company
believes that a high level of product knowledge and a commitment to music
fashion create high credibility and differentiate the Company from other teenage
focused retailers.

         O        DEVELOP PRIVATE LABEL PRODUCTS FOR MUSIC-ORIENTED LIFESTYLES.

         The Company has developed private label product lines to complement and
supplement its other product offerings. The Company's private label product
lines include, among others, Morbid Threads (apparel and hosiery), MT2 (apparel)
and Morbid Metals (body jewelry). The Company believes that these private label
products differentiate it from its competition and enhance customer loyalty
through the development of a unique brand image.

STORE LOCATIONS

         As of January 29, 2000, the Company operated 212 stores in both
metropolitan and middle markets in 42 states across the United States. The
following chart sets forth, as of April 21, 2000, the number of stores that Hot
Topic operates in each state and the cities in which those stores are located.
(1)
--------------------
(1). An asterisk next to a city indicates that a store has been opened in such
city during fiscal 2000.

                                       4
<PAGE>
<TABLE>
<CAPTION>

<S>                     <C>                  <C>                 <C>                   <C>                  <C>
ARIZONA - 3             Connecticut - 5      Kansas - 4          Missouri - 4          North Carolina - 4   Texas - 15
Phoenix                 Danbury              Olathe              Columbia              Concord              Austin (2)
Tucson (2)              Manchester           Topeka              St .Louis (2)         Hickory*             Beaumont
                        Milford              Wichita             St. Peters            Pineville            College Station
CALIFORNIA - 37         Waterbury            Wichita*                                  Winston              Corpus Christi
Arcadia*                Waterford                                NEBRASKA - 2                               Dallas
Bakersfield                                  KENTUCKY - 3        Lincoln               NORTH DAKOTA - 1     Ft. Worth
Berkeley                DELAWARE - 1         Bowling Green       Omaha                 Grand Forks*         Humble
Brea                    Wilmington           Louisville                                                     Katy
Capitola                                     Paducah             NEVADA - 5            Ohio - 7             Lewisville
Carlsbad                FLORIDA - 6                              Henderson             Cincinnati           Lubbock
Cerritos                Altamonte Springs    LOUISIANA - 3       Las Vegas (2)         Dayton               Mesquite
Citrus Heights          Coral Springs        Baton Rouge         Reno (2)              Elyria               Plano*
Concord                 Jacksonville         Metarie                                   Mentor               San Antonio
Cupertino               St. Petersburg       Monroe              NEW HAMPSHIRE - 3     North Olmstead       Woodlands
Daly City               Tallahassee                              Manchester            Niles
El Cajon                Tampa                MAIN - 1            Nashua                Parma                UTAH - 3
Escondido                                    Bangor              Salem                                      Orem
Fairfield               GEORGIA - 5                                                    OKLAHOMA - 2         Salt Lake City
Fresno                  Buford               MARYLAND - 3        New Jersey - 9        Oklahoma City (2)    Sandy
Lakewood                Douglasville         Baltimore           Deptford
Modesto                 Duluth               Columbia            Eatontown             OREGON - 2           Virginia - 2
Montclair               Kennesaw             Towson              Freehold              Portland (2)         Dulles
Montebello              Macon                                    Mays Landing                               Springfield
National City                                MASSACHUSETTS - 6   Paramus               PENNSYLVANIA - 12
Northridge              HAWAII - 1           Holyoke             Rockaway              Altoona              WASHINGTON - 12
Ontario                 Honolulu             Marlborough         Toms River            Camp Hill            Bellingham
Palm Desert                                  Natick              Wayne                 King of Prussia      Everett
Palmdale                IDAHO - 1            North Attleboro     Woodbridge            Lancaster            Kennewick
Pleasanton              Boise                Saugus                                    Langhorne            Lynnwood
Riverside                                    Taunton             NEW MEXICO - 2        Media                Olympia
Sacramento              IOWA - 2                                 Albuquerque (2)       North Wales          Puyallup
San Diego               Coralville           MICHIGAN - 6                              Scranton             Seattle
San Jose                Sioux City*          Auburn Hills        NEW YORK - 16         W. Mifflin           Silverdale
San Leandro                                  Flint               Albany                Wilkes-Barre         Spokane (2)
Santa Ana               ILLINOIS - 6         Grandville          Bay Shore             Williamsport*        Tacoma
Santa Monica            Aurora               Lansing             Buffalo               York                 Tukwila
Thousand Oaks           Bloomingdale         Traverse City       Clay
Valencia                Champaign            Troy                Johnson City          RHODE ISLAND - 1     West Virginia - 1
Ventura                 Joliet                                   Lake Grove            Providence           Charleston
Victor Valley           Orland Park          MINNESOTA - 6       Massapequa
West Covina*            West Dundee          Bloomington         Middletown            SOUTH CAROLINA - 2   Wisconsin - 5
                                             Burnsville          New Hartford          Greenville           Appleton
COLORADO - 6            Indiana - 5          Duluth              Poughkeepsie*         North Charleston     Brookfield
Colorado Springs (2)    Evansville           Mankato             Rochester                                  Eau Claire
Denver                  Fort Wayne           St. Cloud           Staten Island         SOUTH DAKOTA - 1     Greendale*
Littleton (2)           Lafayette            St. Paul            Syracuse              Sioux Falls          Madison
Westminster             Mishawaka                                Victor
                        Terre Haute                              West Nyack            TENNESSEE - 2
                                                                 White Plains          Antioch
                                                                                       Goodlettsville*
</TABLE>

                                       5
<PAGE>

EXPANSION STRATEGY

         The following table provides a history of the Company's store expansion
over the last five fiscal years:

<TABLE>
<CAPTION>
                                                               FISCAL YEAR
                                       ---------------------------------------------------------------
                                         1995         1996        1997         1998        1999
                                       ---------------------------------------------------------------
                                                           (number of stores)
     <S>                                  <C>          <C>        <C>          <C>         <C>
     Stores at beginning of year          24           42          68          108         158
     New Stores opened                    18           26          40           50          54
                                       ---------------------------------------------------------------
     Stores at end of year                42           68         108          158         212
                                       ---------------------------------------------------------------
</TABLE>

         All but two of the Company's stores are currently in shopping malls.
During fiscal 1998, the Company opened two "street location" stores, one each in
Denver, Colorado and in Berkeley, California. The Company's expansion strategy
is to open stores in shopping malls in both new and existing markets throughout
the United States. The Company may open additional "street stores" in markets
that the Company believes can sustain a Hot Topic store outside the mall
environment, although the Company may elect not to aggressively expand its
"street store" concept. The Company believes it has developed a store concept
that is successful in both metropolitan and middle markets. Further, as a result
of the nationwide influence of MTV, music distribution, movies, television
programs and fashion magazines, the Company believes that its 12 to 22 year old
target customers have similar fashion preferences throughout the United States.

         The Company opened 54 new stores in fiscal 1999 and plans to open
approximately 60 new stores during fiscal 2000. The Company selects and
evaluates potential store locations based on a variety of criteria including the
sales and square footage of the mall, sales of anchor stores, sales of
teenage-oriented stores, foot traffic, number of teenagers in trade area, median
family income and other factors relevant to the Company's unique merchandising
strategy. The Company looks at similar criteria for "street store" locations.
Model statements of operations are developed for each potential location and are
measured against target financial criteria. Hot Topic has a real estate
committee, including its Chief Executive Officer and two outside directors,
which reviews and approves all new store locations. The Company generally seeks
potential store sites between 1,200 and 2,400 square feet and its stores
currently average approximately 1,480 square feet.

STORE-LEVEL ECONOMICS

         During fiscal 1999, the Company's 158 stores that were in operation for
all of the fiscal year generated average net sales of approximately $905,000 and
average net sales per square foot of approximately $635. These stores also
generated average store-level operating cash flow (defined as store operating
income before depreciation and excluding changes in working capital) of
approximately $270,000, or 29% of average net sales. Capital expenditures,
including leasehold improvements, furniture and fixtures and net of landlord
construction allowances for the 54 stores opened in fiscal 1999 averaged
approximately $175,000, initial gross inventory requirements (which were
partially financed by trade credit) averaged $75,000, and pre-opening costs
(which were expensed in the periods the stores opened) averaged $22,000.
Inventory requirements vary at new stores depending on the season and on current
merchandise trends. In fiscal 1999, all of the Company's stores generated
positive store-level operating income, but there can be no assurance this trend
will continue. There also can be no assurance that in the future the average
store-level sales and operating cash flow will not vary from historical results
or that the total estimated capital expenditures for new stores will not
increase.

                                       6
<PAGE>

MERCHANDISING

         The Company's stores are designed to serve as a headquarters for
music-licensed and music-influenced apparel, accessories and gift items.
Music-licensed merchandise includes T-shirts, hats, posters, stickers, patches,
postcards, books, CDs, videos and other items. Music-influenced merchandise
includes woven and knit tops, skirts, pants, shorts, jackets, shoes, costume
jewelry, body jewelry, sunglasses, cosmetics and gift items. The Company
estimates that approximately half of the Company's products are music-licensed
products, and half are music-influenced products. A key strategy of the Company
is to offer over 12,000 SKUs in 26 different product categories or
"departments." Within each category, the Company seeks to offer a broader
assortment of merchandise than is available at any other mall location. For
example, on average, over 100 different licensed band T-shirts are carried in
each store from alternative artists such as Korn, Blink 182, Limp Bizkit,
Deftones, Rage Against the Machine, Slip Knot, and others; and rock artists such
as the Pink Floyd, Static X, Pantera, Metallica, Jimi Hendrix, The Doors, the
Beatles, Led Zeppelin, and others. New items and categories are tested regularly
as customer demand and product trends evolve.

         The Company does not dictate leading edge fashion, but quickly reacts
to changes in trends and demand to keep Hot Topic stores fresh and exciting.
Further, the Company strives to identify music artists and releases that will
have strong appeal, and to quickly acquire related music-licensed products and
music-influenced merchandise, featured on music videos or otherwise, associated
with such artists and releases.

         The following table sets forth the Company's four major merchandise
groups as an approximate percentage of net sales for fiscal years 1999, 1998 and
1997:

                                              PERCENTAGE OF NET SALES
                                        ------------------------------------
                                         1999           1998         1997
                                        ------------------------------------
      Apparel and T-Shirts                48%            48%          47%
      Gifts                               18             19           20
      Accessories                         27             26           25
      Hosiery, Shoes, and Outerwear        7              7             8
                                        ------------------------------------
                                         100%           100%         100%

         The Company has five lines of private label merchandise to complement
and supplement its current product offerings. The Company believes that Hot
Topic brands play an important part in differentiating its stores from those of
its competitors and provide the Company with higher margin opportunities as
compared to other merchandise. Management estimates that Hot Topic brands
accounted for approximately 20% of the Company's sales in both fiscal 1999 and
1998. The Company's proprietary brands include Morbid Makeup (cosmetics), Morbid
Metals (body jewelry), Morbid Scents (incense and oils), Morbid Threads (men's
and women's apparel and hosiery) and MT:2 (men's and women's apparel).

PURCHASING

         The Company's purchasing staff consists of a Vice President, General
Merchandise Manager, a Divisional Vice President, Merchandise Managers, nine
buyers and seven assistant buyers. The purchasing staff reflects the Company's
culture in that its decisions and actions are influenced by a passion for music.
In determining which merchandise to buy, the purchasing staff spends
considerable time viewing music videos, reviewing industry album sales,
monitoring alternative radio station air play, consulting with sales associates,
reviewing customer requests, attending trade shows and reading music and fashion
industry periodicals. In addition, the staff regularly visits nightclubs, and
attends concerts and other events that attract young people. The Company also
conducts periodic customer focus groups and intercept surveys, and consults with
and solicits input from its store employees, in order to draw from many
different experiences and perspectives.

                                       7
<PAGE>

         Approximately half of the Company's products are licensed products.
Artists typically license their likeness to a "master licensor". The master
licensor often retains the rights to market T-shirts and then may choose to
sub-license to manufacturers other categories of merchandise such as posters,
stickers and patches. Some artists also retain their licensing rights and
negotiate directly with licensees. Hot Topic buys its licensed merchandise from
master licensors, licensees and directly from artists. The Company currently
purchases licensed T-shirts from over 30 companies and other licensed products
from over 100 companies. Because of the Company's knowledge of teenage
consumers' music preferences and music-influenced fashion, licensors often seek
the Company's advice prior to licensing new artists or product designs. As a
result, the Company sometimes receives accommodations such as pre-ticketing of
orders, early shipments of new releases, exclusive merchandise and vendors'
acceptance of returns.

         The Company buys its unlicensed, music-influenced merchandise from a
variety of manufacturers. The Company actively searches for new vendors that
offer unique and timely music-influenced products. As a result, the Company at
any given time has many different vendors of different sizes, including some
from which it has not previously purchased. Most of the products purchased from
the Company's vendors are sold under the labels of the manufacturers, and some
are sold under Hot Topic's private labels.

         In order to reduce fashion risk and maintain the ability to respond
quickly to emerging trends, Hot Topic buys a majority of its merchandise not
more than 60 days in advance of delivery, and will often begin with small
purchases for testing prior to chain-wide distribution. The Company regularly
monitors store sales by merchandise classification, SKU, color and size to
determine types and amounts of products to purchase, to detect products and
trends that are emerging or declining, and to manage the product mix in its
stores to respond to the spending patterns of its customers. The Company also
works with its vendors to ensure that sources for new and private label products
are maintained and expanded.

         During fiscal 1999, the Company had approximately 800 vendors, certain
of which have limited financial resources and production capabilities. No single
vendor accounted for more than 6% of the Company's merchandise purchases. The
Company believes that its relationships with its vendors are good.

ALLOCATION AND DISTRIBUTION OF MERCHANDISE

         Allocation and distribution of the Company's inventory is addressed 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 inventory plans and SKU performance by using the Arthur
Allocation software system implemented during fiscal 1999. Prior to the
implementation of the Arthur Allocation system, the Company used proprietary
software developed by Hot Topic to allocate merchandise to each store. Buyers
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.

         The Company's Vice President of Planning and Allocation and 12
inventory analysts work closely with the merchandise buyers and store personnel
to meet the requirements of individual stores for appropriate merchandise in
sufficient quantities.

         Hot Topic's headquarters and distribution facility, consisting of
approximately 125,000 square feet, is located in City of Industry, California.
All merchandise is delivered by vendors to this facility, where it is inspected,
price marked, entered into the Company's allocation software system, picked and
boxed for shipment to the Company's stores. Merchandise is shipped to stores
each weekday, providing Hot Topic stores with a steady flow of reordered and new
merchandise. Minimal back stock is maintained in the Company's distribution
facility and at its stores, so that at all times almost all of the Company's
merchandise is available for sale on the floors of its stores.

                                       8
<PAGE>

STORE OPERATIONS

         Hot Topic's store operations are currently managed by four regional
managers and 37 district or area managers who each supervise approximately eight
stores. Individual stores are managed by a store manager and two or three
assistant managers. In addition to managers and assistant managers, a typical
store has approximately six to ten part time sales associates, depending on the
season. The hiring and training of new employees are the responsibility of the
store manager and district manager, and the Company has established training and
operations procedures to assist them. Additionally, Hot Topic uses a customized,
automated telephone screening system licensed from a third party to help
evaluate potential new employees, which helps streamline the Company's interview
and hiring processes at the store level.

         The Company strives to create a store environment that teenagers will
consider "their place" to shop with friends. Hot Topic seeks to hire sales
associates who fit the profile of its target customer -- energetic people who
are knowledgeable and passionate about music and music-inspired fashion. To
assist management in properly considering the preferences and opinions of its
target customers, selected sales associates accompany Hot Topic's buyers on
buying trips. Further, in return for feedback on fashion and other trends, sales
associates are reimbursed for the cost of attending concerts and clubs, and are
encouraged to communicate customer requests and their own merchandise ideas to
management. Hot Topic encourages its sales associates to dress and accessorize
themselves with the same fashionable merchandise that is sold in its stores.
Management believes its music-based culture and its interaction with and respect
for sales associates has led to associate turnover rates that the Company
believes are lower than the industry average.

         The primary objective of sales associates is to provide superior,
informed customer service in order to maximize sales and minimize inventory
shrinkage. Store management is provided with daily store sales and weekly
category sales 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 Company management. The Company strives
to give its teenage customers the same level of respect and attention that is
generally given to adult customers at other retail stores. Associates are
trained to greet each customer, to inform the customer about new music fashion
trends and to suggest merchandise that matches the customer's lifestyle and
music preferences. Hot Topic also strives to provide friendly and informed
customer service for parents. The Company provides a listing of music artists'
national tour dates at each of its stores. The Company believes that its high
level of product knowledge and service differentiates Hot Topic from other
teenage-focused retailers.

         Store, district and area managers are compensated with a base salary
and may qualify to receive a quarterly bonus based on sales and inventory
shrinkage. Additionally, district and area managers may also qualify to receive
periodic stock option grants, and certain employees are eligible to participate
in the Company's Employee Stock Purchase Plan. The Company believes that its
continued success is dependent in part on its ability to attract, retain and
motivate qualified employees. In particular, the success of the Company's
expansion program will be dependent on its ability to promote and/or recruit
qualified district and store managers. To date, the majority of its store
managers have been promoted from within the Company.

                                       9
<PAGE>

STORE ENVIRONMENT

         Hot Topic stores are designed with an industrial warehouse theme that
incorporates dense merchandising, and the latest music releases are played on a
professional sound system to create a high-energy and fun shopping environment.
The Company believes this atmosphere enhances the Company's image as a source
for music-inspired fashion while encouraging customers to shop in its stores for
longer periods of time.

         Stores are constructed and fixtured to maximize merchandising
flexibility, which enables the Company to highlight new product offerings and
create a compelling shopping environment. Bi-monthly planograms are developed to
assist store managers in displaying merchandise in an exciting and dynamic
manner. In addition, sales associates are encouraged to wear the Company's
products, which the Company believes contributes to the overall atmosphere of
its stores.

MARKETING, PROMOTION AND INTERNET

        The Company generally locates its stores in high traffic malls located
within areas of high teenage population and relies on existing customers, sales
associates, store design and exciting music to attract new customers to its
stores. Special artist events are run in conjunction with record companies and
licensed merchandise companies to promote new bands, music and movie releases.
Hot Topic has found these methods to be more effective than traditional media
advertising.

         As a part of the Company's marketing strategy, the Company maintains a
website www.hottopic.com through which it markets its stores and store concept
and sells certain of its merchandise. During fiscal 1999, the site was
re-launched with a focus on e-commerce together with posting boards, customer
surveys, a gift registry and content features including artist news and tour
schedules. The Company's net sales via the Internet continue to increase
significantly, although the total sales are still modest.

MANAGEMENT INFORMATION SYSTEMS

         Hot Topic's information systems provide integration of store,
merchandising, distribution and financial systems. These systems include SKU and
classification inventory tracking, purchase order management, open to buy,
merchandise distribution, automated ticket making, general ledger, sales audit,
accounts payable, fixed asset management, payroll and integrated financials.
These systems operate on a Unix platform with a central IBM minicomputer and a
PC NT server network. Sales are updated daily in the merchandising reporting
systems by polling sales information from each store's point-of-sale ("POS")
terminals. The Company's POS system consists of registers providing price
look-up, time and attendance, e-mail and credit card and check authorization.
Through automated nightly two-way electronic communication with each store,
sales information, payroll hours and e-mail messages are uploaded to the host
system, and receiving, price changes and system maintenance are downloaded
through the POS devices. The Company evaluates information obtained through
daily polling to implement merchandising decisions regarding reorders, markdowns
and allocation of merchandise.

         During fiscal 1999, after completing an evaluation of its long-term
management information system needs, the Company selected new hardware and
software for its stores, office and distribution center. The Company is planning
to implement the host hardware and software systems at its office and
distribution center during the second half of fiscal 2000 and install certain
point of sale upgrades at its stores in fiscal 2001. The Company presently
estimates the hardware, software, modifications, training and implementation
will cost approximately $4 to $5 million. Of that amount, approximately $1.5
million was spent in fiscal 1999. The Company presently estimates the balance
will be spent in fiscal 2000 and 2001.

                                       10
<PAGE>

YEAR 2000

         In prior years, the Company discussed the nature and progress of its
plans to become Year 2000 ready. In late 1999, the Company completed remediation
and testing of its technology systems. As a result of those planning and
implementation efforts, the Company has experienced no significant disruptions
in mission critical information technology and non-information technology
systems as of April 21, 2000 and believes those systems successfully responded
to the Year 2000 date change. The Company expensed less than $100,000 during
1999 in connection with remediating its systems. The Company is not aware of any
material problems resulting from Year 2000 issues, either with its products, its
internal systems, or the products and services of third parties. The Company
will continue to monitor its mission critical computer applications and those of
its suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.

TRADEMARKS

         The Company has registered on the Principal Register of the United
States Patent and Trademark Office its retail store service mark Hot Topic(R)
and various trademarks for merchandise including Hot Topic(R), Morbid
Make-Up(R), Morbid Scents(R), Morbid Metals(R), Morbid Adornments(R),
Tragedy(R) and Misery(R). Each federal registration is renewable indefinitely
if the mark is in use at the time of the renewal. Applications have been made to
register Everything About the Music(TM), Morbid Threads(TM) and MT:2(TM) in the
United States. The Company is not aware of any claims of infringement or other
challenges to the Company's right to use its marks in the United States. The
Company also has additional registrations and pending applications in foreign
jurisdictions.

COMPETITION

         The teenage retail apparel and accessory industry is highly competitive
and the Company expects competition in its niche to increase. The Company
competes with other retailers for vendors and for teenage and college age
customers, suitable retail locations and qualified employees and management
personnel. Hot Topic currently competes with street alternative and vintage
clothing stores located primarily in metropolitan areas and with other
mall-based teenage-focused retailers such as The Buckle, Millers Outpost, Inc.,
Pacific Sunwear of California, Inc., Spencer Gifts, Inc., Urban Outfitters,
Inc., The Wet Seal, Inc., Gadzooks, Inc. and, to a lesser extent, with music
stores. Competition from mail order catalogs of apparel and accessories
targeting the teen customer has increased in recent years. Many of the Company's
competitors are larger and have substantially greater financial, marketing and
other resources than the Company. The principal factors of competition in the
Company's business are merchandise selection, customer service, store location
and price.

EMPLOYEES

         The Company employed approximately 685 full-time and 1,596 part-time
employees at April 8, 2000. Of the Company's 2,281 employees, 209 were corporate
and distribution center personnel and 2,072 were store employees. The number of
part-time employees fluctuates with seasonal needs. None of the Company's
employees is covered by a collective bargaining agreement. The Company considers
its employee relations to be good.

EXECUTIVE OFFICERS AND KEY EMPLOYEES

         The executive officers and key employees of the Company and their ages
at April 21, 2000 are as follows:

                                       11
<PAGE>
<TABLE>
<CAPTION>

             NAME                        AGE                       POSITION
------------------------------          -----     -----------------------------------------------
<S>                                      <C>      <C>
Orval D. Madden...............           51       Chief Executive Officer and Director

Elizabeth M. McLaughlin                  39       President

Jay A. Johnson................           54       Chief Financial Officer and Assistant Secretary

Marc R. Bertone...............           43       Vice President, Real Estate and Construction

Cindy Levitt..................           39       Vice President, General Merchandise Manager

Alain Krakirian...............           34       Vice President, Planning and Allocation

Darrell Kinsley...............           37       Vice President, Store Operations

M. Reid Killen................           42       Vice President, Information Technology

</TABLE>

         ORVAL D. MADDEN founded Hot Topic in 1988, and has been the Company's
Chief Executive Officer and a Director since its inception and was also its
President until February 2000. Prior to founding Hot Topic, Mr. Madden was a
Senior Vice President of Federal Department Stores' Children's Place and
Accessory Place divisions, and was a Divisional Vice President for
Carter-Hawley-Hale Stores' Broadway and Weinstock's Department Store divisions.
In 1993, Mr. Madden was recognized as regional California retailing
"Entrepreneur Of The Year" in a competition sponsored by Ernst & Young, Merrill
Lynch, and Inc. Magazine.

         ELIZABETH M. MCLAUGHLIN was promoted to President in February 2000.
>From June 1998 through February 2000, Ms. McLaughlin was the Company's Senior
Vice President, General Merchandise Manager and from June 1996 through May 1998,
Ms. McLaughlin was the Company's Vice President, General Merchandise Manager.
Ms. McLaughlin was the Company's Vice President, Operations from May 1993
through May 1996. From 1985 to May 1993, she held various positions with Millers
Outpost including, Director of Stores, Director of Planning and Divisional
Merchandise Manager. From 1978 to 1985, she held various positions with The
Broadway.

         JAY A. JOHNSON has been Chief Financial Officer and Assistant Secretary
of the Company since May 1995. From January 1993 to May 1995, he was Vice
President/Chief Financial Officer of Frame-n-Lens Optical, Inc., a national
optical retailer with approximately 300 stores. From July 1978 to July 1992, Mr.
Johnson held senior financial management positions at one manufacturing and two
retail companies. Mr. Johnson is a certified public accountant.

         MARC R. BERTONE has been Vice President, Real Estate and Construction,
of the Company since August 1994. Mr. Bertone has 18 years of leasing and legal
experience, and from November 1988 to August 1994, served as Vice President and
General Counsel for The Wet Seal, Inc., a specialty retailer. Mr. Bertone was
admitted to the California Bar in June 1982.

         CINDY LEVITT has been Vice President, General merchandise Manager since
February 2000. Ms. Levitt joined Hot Topic in 1989. Since 1989, Ms. Levitt has
held senior buying positions at Hot Topic, most recently from June 1996 to
February 2000 as the Divisional Merchandise Manager, Apparel and Music.

         ALAIN KRAKIRIAN has been Vice President, Planning and Allocation since
February 2000. From July 1997 through February 2000, Mr. Krakirian was the
Company's Director of Planning and Allocation. Mr. Krakirian was the Planning
Manager at Disney Stores from December 1996 to July 1997 and the Director of
Merchandise Planning and Allocation at Kids Mart from February 1996 to December
1996. From September 1991 to January 1996, Mr. Krakirian held various
merchandise control and planning positions at Clothestime Stores, including
Director of Merchandise Control and Information Office from October 1994 to
January 1996.

                                       12
<PAGE>

         DARRELL KINSLEY has been Vice President, Store Operations since
February 2000. From June 1998 through February 2000, Mr. Kinsley was Regional
Director for the Western United States. Mr. Kinsley joined Hot Topic in February
1995 as the District Manager for the Eastern United States.

         M. REID KILLEN has been Vice President, Information Technology of the
Company since July 1998. From June 1994 to July 1998, Mr. Killen was Director of
Applications Development at The Gymboree Corporation. From September 1990 to May
1994, Mr. Killen was a Senior Business Analyst at The Gap, Inc.

             CERTAIN RISK FACTORS RELATED TO THE COMPANY'S BUSINESS

         In addition to risks identified elsewhere in this Annual Report, the
Company is subject to other risks, including the following:

         IMPLEMENTATION AND MANAGEMENT OF AGGRESSIVE GROWTH STRATEGY

         The Company's net sales and net income have grown significantly during
the past several years, primarily as a result of the opening of stores and, to a
lesser extent, the introduction of new products and categories. Fifty-four of
the Company's 212 stores opened as of January 29, 2000 had been open for less
than one full year. The Company intends to continue to pursue an aggressive
growth strategy for the foreseeable future, and its future operating results
will depend largely upon its ability to open and operate stores successfully and
to manage a larger business profitably. The Company anticipates opening
approximately 60 stores during fiscal 2000, which will result in a significant
increase in the number of stores operated by the Company. Through fiscal 1994,
all of the Company's stores were located in the Western United States. In fiscal
1995, the Company expanded into new markets by opening stores in the
Northeastern and Midwestern regions of the United States. The Company plans to
continue to enter new markets in various regions of the United States, and
approximately one-half of its stores opened in fiscal years 1996, 1997 and 1998
were in new markets. In fiscal 1999, the Company entered four new states.
Operation of a greater number of new stores and expansion into new markets may
present competitive and merchandising challenges that are different from those
currently encountered by the Company in its existing stores and markets. In
addition, there can be no assurance that the Company's expansion within its
existing markets will not adversely affect the individual financial performance
of the Company's existing stores or its overall results of operations or that
new stores will achieve sales and profitability levels consistent with existing
stores. The Company will need to continually evaluate the adequacy of its store
management and management information and distribution systems to manage its
planned expansion. There can be no assurance that the Company will anticipate
all of the changing demands that its expanding operations will impose on such
systems, and the failure to adapt its systems and procedures to such changing
demands could have a material adverse effect on the Company's business, results
of operations and financial condition. There can be no assurance that the
Company will successfully achieve its expansion targets or, if achieved, that
planned expansion will result in profitable operations.

         The Company's ability to open stores and the performance of such stores
will depend upon many factors, including, among others, the Company's ability to
identify and enter new markets, locate suitable store sites, negotiate
acceptable lease terms, hire and train store managers and sales associates and
obtain adequate capital resources on acceptable terms. Early in its history, the
Company encountered difficulties in leasing certain store sites. The Company
believes these difficulties were in part due to the Company's level of
capitalization, its limited operating history at such time, its then unproven
store concept, and apprehension on the part of mall operators concerning the
Company's teenage customers. In fiscal 1999, a major mall developer asserted

                                       13
<PAGE>

that the Company had violated a "use clause" applicable to certain or all of the
Company's leases with that developer. As a result, the developer ceased ongoing
discussions relating to potential new Hot Topic stores and told the Company that
no new leases would be entered into. Upon notice of the alleged violation, the
Company adjusted its merchandise mix in stores leased from that developer (and
to a somewhat lesser extent, in all other stores) and took certain other actions
to ensure ongoing "use clause" compliance. These actions and continuing
discussions with the developer resulted in an amended "use clause" for all
leases with the developer. In early 2000, the Company satisfied the concerns of
the developer and resumed discussions with the developer concerning potential
new stores for fiscal 2000 and beyond. During the first quarter of fiscal 2000,
the first such lease was executed with the developer for a new store to open in
fiscal 2000. There can be no assurance that the Company will not face similar
resistance from mall operators or others in the future. If the Company's
relations with mall operators or developers are ever again strained, the Company
may not grow as planned, may not reach revenue and other targets and may suffer
a decline in stock price. Any restrictions on the Company's ability to expand to
new store sites or to offer a broad assortment of merchandise could have a
material adverse effect on the Company's business, results of operations and
financial condition.

         FLUCTUATIONS IN COMPARABLE STORE SALES RESULTS

         A variety of factors affect the Company's comparable store sales
including, among others, the timing of releases of new music-related products,
music and fashion trends, the general retail sales environment, the Company's
ability to efficiently source and distribute products, changes in the Company's
merchandise mix and the Company's ability to execute its business strategy
efficiently. The Company's comparable store sales results have fluctuated
significantly in the past and the Company believes that such fluctuations may
continue. The Company's comparable store sales results for fiscal 1994, 1995,
1996, 1997, 1998 and 1999 were 20.3%, (0.9%), 8.9%, 2.2%, 0.4% and 22.8%
respectively. The Company's comparable store sales results were (0.6%), 2.0%,
9.5% and (5.9%) for the first, second, third and fourth quarters, respectively,
of fiscal 1998 and 15.3%, 16.9%, 26.1% and 27.1% for the first, second, third
and fourth quarters, respectively, of fiscal 1999. Past comparable store sales
results are no indication of future results, and there can be no assurance that
the Company's comparable store sales results will not decrease in the future.
The Company's comparable store sales results could cause the price of the Common
Stock to fluctuate substantially.

         DEPENDENCE ON AND CHANGES IN MUSIC AND FASHION TRENDS

         The Company's profitability is largely dependent upon (i) the continued
popularity of alternative and rock music, music videos, and MTV among teenagers
and college age adults, (ii) the emergence of new artists and the success of
music releases and music-related products, (iii) the continuance of a
significant level of teenage spending on music-licensed and music-influenced
products, and (iv) the Company's ability to anticipate and keep pace with the
music, fashion and merchandise preferences of its customers. The popularity of
particular types of music, artists, styles and brands is subject to change. The
Company's 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 the Company's business,
results of operations and financial condition, and on its image with its
customers.

         IMPACT OF ECONOMIC CONDITIONS; MINIMUM WAGE RATES

         Certain economic conditions affect the level of consumer spending on
merchandise offered by the Company, including, among others, business
conditions, interest rates, taxation and consumer confidence in future economic
conditions. The Company is also dependent upon the continued popularity of malls
as a shopping destination and the ability of mall anchor tenants and other
attractions to generate customer traffic for its stores. A decrease in mall

                                       14
<PAGE>

traffic would adversely affect the Company's growth, net sales, comparable store
sales results and profitability. In addition, a significant number of the
Company's stores are concentrated in the Western United States, and as a result
a deterioration in economic conditions in that region could particularly affect
the Company's business, results of operations and financial condition.

         Changes to federal minimum wage laws in each of 1996 and 1997 raised
the mandatory minimum wage. California, Washington, Massachusetts and other
states have also enacted increases in State required minimum wages that are
higher than the Federal requirements. The most recent such increases were
effective January 1, 2000 in Washington and Massachusetts where the Company
operated a total of 18 stores as of April 21, 2000. Statutory increases in
federal and state minimum wages could adversely affect the Company's
profitability. The recent state increases and any other such increases will
raise minimum wages above current wage rates of certain of the Company's
employees, and competitive factors could require corresponding increases in
higher employee wage rates, any of which would increase the Company's expenses
and adversely affect results of operations.


         QUARTERLY RESULTS AND SEASONALITY

         The Company's quarterly results of operations have and are expected to
continue to 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-related products, shifts in timing of certain
holidays, changes in the Company's merchandise mix and overall economic
conditions. The Company's business is also subject to seasonal influences, with
heavier concentrations of sales during the Christmas holiday, the back-to-school
season and other periods when school is not in session. As is the case with many
retailers of apparel, accessories and related merchandise, the Company typically
experiences lower net sales during the first fiscal quarter. The Company has
experienced quarterly losses in the past and may experience such losses in the
future. Because of these fluctuations in net sales and net income (loss), the
results of operations of any quarter are not necessarily indicative of the
results that may be achieved for a full fiscal year or any future quarter.

         DEPENDENCE ON KEY VENDORS

         The Company's performance depends on its ability to purchase current
music-related merchandise in sufficient quantities at competitive prices. The
Company has many sources of merchandise, with the largest vendor, Giant
Manufacturing, a Division of the Warner Music Group, supplying 6% of the
Company's merchandise purchases in fiscal 1999. Substantially all of the
Company's music-licensed products are available only from vendors that have
exclusive license rights. In addition, many of the Company's music-influenced
products are acquired from small, specialized vendors that create unique
products primarily for the Company. The Company's smaller vendors generally have
limited resources, production capacities and operating histories, and some of
the Company's vendors have limited the distribution of their merchandise in the
past. The Company has no long-term purchase contracts or other contractual
assurances of continued supply, pricing or access to new products. There can be
no assurance that the Company will be able to acquire desired merchandise in
sufficient quantities on terms acceptable to the Company in the future; or that
any inability to acquire suitable merchandise, or the loss of one or more key
vendors, will not have a material adverse effect on the Company's business,
results of operations and financial condition.

                                       15
<PAGE>

         DEPENDENCE ON KEY PERSONNEL

         The Company's performance depends largely on the efforts and abilities
of senior management, particularly Orval Madden, the Company's Chief Executive
Officer and founder and Elizabeth McLaughlin, the Company's President who has
been with the company since 1993. The sudden loss of Mr. Madden's or Ms.
McLaughlin's services or the services of other members of the management team
could have a material adverse effect on the Company's business, results of
operations and financial condition. The Company has a $500,000 key-man life
insurance policy on Mr. Madden. There can be no assurance that Mr. Madden, Ms.
McLaughlin and the Company's existing management team will be able to manage the
Company or its growth or that the Company will be able to attract and retain
additional qualified personnel as needed in the future.

         UNCERTAINTIES REGARDING DISTRIBUTION OF MERCHANDISE

         The Company relies upon the United Parcel Service for its product
shipments, including shipments to and from all of its stores, and accordingly is
subject to the risks, including employee strikes and inclement weather,
associated with United Parcel Service's ability to provide delivery services to
meet the Company's shipping needs. The Company is also dependent upon temporary
employees to adequately staff its distribution facility, particularly during
busy periods, such as during the Christmas season and while multiple stores are
opening. There can be no assurance that the Company will continue to receive
adequate assistance from its temporary employees, or that there will continue to
be sufficient sources of temporary employees.

         FAILURE TO AUTHENTICATE LICENSING RIGHTS

         The Company purchases licensed merchandise from a number of suppliers
who hold manufacturing and distribution rights under the terms of certain
licenses. The Company generally relies upon vendors' representations concerning
manufacturing and distribution rights and does not independently verify whether
these vendors legally hold adequate rights to licensed properties they are
manufacturing or distributing. If the Company acquires unlicensed merchandise,
it could be obligated to remove such merchandise from its stores, incur costs
associated with destruction of merchandise if the distributor is unwilling or
unable to reimburse the Company, 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 the
Company's business, results of operations and financial condition.

         COMPETITION

         The retail apparel and accessory industry is highly competitive. The
Company competes with other retailers for vendors and for teenage and college
age customers, suitable retail locations and qualified employees and management
personnel. Hot Topic currently competes with street alternative stores located
primarily in metropolitan areas and with other mall-based teenage-focused
retailers such as The Buckle, Millers Outpost, Inc., Pacific Sunwear of
California, Inc., Spencer Gifts, Inc., Urban Outfitters, Inc., The Wet Seal,
Inc., Gadzooks, Inc., and, to a lesser extent, with music stores and mail order
catalogs and Websites. Many of the Company's competitors are larger and have
substantially greater financial, marketing and other resources than the Company.
Direct competition with these and other retailers may increase significantly in
the future, which could require the Company, among other things, to lower its
prices and/or take other measures. Increased competition could have a material
adverse effect on the Company's business, results of operations and financial
condition.

         PRICE VOLATILITY

         The Common Stock is quoted on the Nasdaq National Market, which has
experienced and is likely to experience in the future significant price and
volume fluctuations which could adversely affect the market price of the Common
Stock without regard to the operating performance of the Company. In addition,
the Company believes that factors such as quarterly fluctuations in the
financial results of the Company, fluctuations in the Company's comparable store
sales, announcements by other apparel, accessory and gift item retailers, the
trading volume of the Company's Common Stock in the public market, the condition
of the overall economy and the condition of the financial markets could cause
the price of the Common Stock to fluctuate substantially.

                                       16
<PAGE>

         ANTI-TAKEOVER MATTERS

         The Company's Amended and Restated Articles of Incorporation and Bylaws
contain provisions that may have the effect of delaying, deterring or preventing
a takeover of the Company that shareholders may consider to be in their best
interests. For instance, the Company's Amended and Restated Articles of
Incorporation and Bylaws prohibit shareholder action by written consent and
include certain "fair price provisions." Additionally, the Board of Directors
has the authority to issue up to 10,000,000 shares of "blank check" preferred
stock having such rights, preferences and privileges as designated by the Board
of Directors without shareholder approval.

ITEM 2. PROPERTIES

        All of the Company's existing store locations are leased by the
Company, with lease terms expiring between 2001 and 2010. The leases for most of
the existing stores are for terms of 10 years and provide for contingent rent
based upon a percent of sales in excess of specified minimums. Leases for future
stores will likely include similar contingent rent provisions.

        The Company's headquarters office and distribution center are located
in City of Industry, California, and are occupied under the terms of a lease
covering approximately 125,000 square feet. The lease is for a five year term,
with two options to extend the lease, each for a three year period. The initial
five year term expires in April 2004. The annual base rent for the initial five
year term is approximately $525,000.

ITEM 3. LEGAL PROCEEDINGS

        The Company is not a party to any material legal proceedings.

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

        Not applicable.


                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

        The Common Stock of the Company is traded on the Nasdaq National Market
under the symbol "HOTT". A two-for-one stock split of the Company's Common Stock
became effective December 28, 1999. The stock split was effected by way of a
stock dividend. The dividend was distributed to shareholders of record as of
December 10, 1999. All share and per share amounts have been restated to reflect
the split. The Company consummated its initial public offering in September 1996
at a price of $9.00 per share. The following table sets forth, for the periods
indicated, the high and low "sales" prices of the shares of Common Stock of the
Company, as reported on the Nasdaq National Market. Such quotations represent
inter-dealer prices without retail markup, markdown or commission and may not
necessarily represent actual transactions.

                 1999                     HIGH                    LOW
                                       ------------            -------------
            First Quarter              $9    1/2               $6     3/8
            Second Quarter             $15   9/16              $8     1/2
            Third Quarter              $18   3/4               $11    29/32
            Fourth Quarter             $26   11/16             $17    3/16

                                       17
<PAGE>

                1998                      HIGH                    LOW
                                       ------------            -------------
            First Quarter              $14   7/8               $11    3/8
            Second Quarter             $14   7/16              $10
            Third Quarter              $11   1/2               $6
            Fourth Quarter             $12   5/8               $5     5/8

         On April 21, 2000, the last sales price of the Common Stock as reported
on the Nasdaq National Market was $30.00 per share. As of April 21, 2000, there
were approximately 250 holders of record of the Company's Common Stock. This
number does not reflect the actual number of beneficial holders of the Company's
Common Stock, which the Company believes to be in excess of 1,000 holders.

         The Company has not paid any cash dividends since inception and does
not anticipate paying any cash dividends in the foreseeable future.

                                       18
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

        The following selected financial 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 thereto included
elsewhere in this Annual Report on Form 10-K.

<TABLE>
HOT TOPIC, INC. AND
SUBSIDIARIES
SELECTED FINANCIAL DATA:
<CAPTION>
                                                                                Fiscal Year
                                                   ------------------------------------------------------------------------
                                                    1999            1998            1997           1996            1995
                                                    ----            ----            ----           ----            ----
                                                       (In thousands, except per share data, number of stores,
                                                       comparable store sales and sales per square foot)
STATEMENT OF OPERATIONS DATA:
<S>                                                <C>             <C>              <C>            <C>             <C>
Net sales                                          $168,949        $103,371         $70,532        $43,618         $23,632
Cost of goods sold, including
buying, distribution and occupancy costs            103,998          65,855          44,417         27,049          15,067
                                                   ---------       ---------       ---------      ---------       ---------
Gross Margin                                         64,951          37,516          26,115         16,569           8,565
Selling, general and administrative expenses         44,749          29,077          19,862         12,846           7,981
                                                   ---------       ---------       ---------      ---------       ---------
Operating income                                     20,202           8,439           6,253          3,723             584
Interest income, net                                    933             931             901            382             143
                                                   ---------       ---------       ---------      ---------       ---------
Income before income taxes                           21,135           9,370           7,154          4,105             727
Income taxes                                          7,634           3,367           2,611          1,535             291
                                                   ---------       ---------       ---------      ---------       ---------
Net income                                          $13,501          $6,003          $4,543         $2,570            $436
Net income per share:
    Basic                                             $1.46           $0.62           $0.48          $0.35           $0.07
    Diluted                                           $1.38           $0.61           $0.46          $0.33           $0.07
Weighted average shares
outstanding
    Basic                                             9,267           9,634           9,381          7,256           6,164
    Diluted                                           9,797           9,912           9,880          7,798           6,270

SELECTED OPERATING DATA:
Number of stores at year end                            212             158             108             68              42
Comparable stores sales increase (decrease)            22.8%            0.4%            2.2%           8.9%           (0.9%)
Average sales per square foot                          $623            $542            $565           $578            $572
Average sales per store (000s)                         $909            $772            $769           $748            $705
BALANCE SHEET DATA:
Working capital                                     $37,564         $28,432         $29,230        $29,247          $5,857
Total assets                                         89,022          58,764          51,953         44,033          14,959
Long-term obligations, including
current portion                                         231             120             161             48              34
Redeemable preferred stock                                -               -               -              -          11,245
Shareholders' equity                                $67,278         $48,749         $44,736        $39,069            $785

</TABLE>

                                       19
<PAGE>

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

         Hot Topic is a mall-based specialty retailer of music-licensed and
music-influenced apparel, accessories and gift items for young men and women
principally between the ages of 12 and 22. The Company opened its first store in
1989, and operated 212 stores in 42 states across the United States as of
January 29, 2000. The Company opened 18 stores during fiscal 1995, including its
first 12 stores in the Midwest and Northeast; 26 stores during fiscal 1996, most
of which are in new markets in the Midwest and Northeast adjacent to markets
entered in fiscal 1995; 40 stores during fiscal 1997, both in existing markets
and in 12 additional states, 50 stores during fiscal 1998, both in existing
markets and in 6 additional states; and, 54 stores during fiscal 1999, both in
existing markets and in 4 additional states.

         The Company operates on a 52 or 53 week fiscal year which ends on the
Saturday nearest to January 31. Fiscal 1997, 1998 and 1999 were 52-week years.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                              FISCAL YEAR
                                                           -------------------------------------------------
                                                               1999              1998              1997
                                                           ------------      ------------       ------------
<S>                                                              <C>               <C>                <C>
Net sales                                                        100.0%            100.0%             100.0%

Cost of goods sold, including buying, distribution &
 occupancy costs                                                  61.6%             63.7%              63.0%
                                                           ------------      ------------       ------------

Gross margin                                                      38.4%             36.3%              37.0%

Selling, general and
 administrative expenses                                          26.4%             28.1%              28.2%
                                                           ------------      ------------       ------------

Operating income                                                  12.0%              8.2%               8.8%

Interest income, net                                               0.6%              0.9%               1.3%
                                                           ------------      ------------       ------------

Income before income tax                                          12.6%              9.1%              10.1%

Provision for income taxes                                         4.6%              3.3%               3.7%
                                                           ------------      ------------       ------------

Net income                                                         8.0%              5.8%               6.4%
                                                           ============      ============       ============
Number of stores at year end                                       212                158               108
                                                           ============      ============       ============

Comparable store sales increase                                   22.8%              0.4%               2.2%
                                                           ============      ============       ============
</TABLE>

FISCAL 1999 COMPARED TO FISCAL 1998

         Net sales increased approximately $65.5 million, or 63%, to $168.9
million in fiscal 1999 from $103.4 million in fiscal 1998. Net sales for the 54
stores opened during fiscal 1999 and for those stores not yet qualifying as
comparable stores contributed $44.7 million of the net sales increase.
Comparable store sales increased 22.8% in fiscal 1999 and contributed $20.8
million of the increase in net sales. The average store volume increased to
$909,000 from $772,000 in fiscal 1998. The sales mix in fiscal 1999 was
approximately the same as the mix in fiscal 1998, with apparel and T-shirts
contributing approximately 48% of net sales in each fiscal year.

                                       20
<PAGE>

         Gross margin increased approximately $27.4 million to $64.9 million in
fiscal 1999 from $37.5 million in fiscal 1998. As a percentage of net sales,
gross margin increased to 38.4% in fiscal 1999 from 36.3% in fiscal 1998. The
increase, as a percentage of sales, reflected the leveraging of occupancy
expense achieved from the significant increase in the average store sales volume
and an increase in merchandise margin. Merchandise margin increased
approximately 0.4% compared to the prior year, principally from an average
higher initial mark-on and lower merchandise markdowns, as a percentage of
sales.

         Selling, general and administrative expenses increased approximately
$15.6 million to $44.7 million during fiscal 1999 from $29.1 million during
fiscal 1998, but decreased as a percentage of net sales to 26.4% in fiscal 1999
from 28.1% in fiscal 1998. The decrease as a percentage of net sales was
primarily due to a reduction of corporate overhead expense as a percentage of
net sales due to the operating leverage achieved through the Company's larger
store base and to a reduction in the store payroll and operating expenses as a
percentage of sales due to the operating leverage achieved from the higher
average store sales.

         Operating income increased approximately $11.8 million to $20.2 million
during fiscal 1999 from $8.4 million during fiscal 1998. As a percentage of net
sales, operating income increased significantly to 12.0% in fiscal 1999 from
8.2% in fiscal 1998, principally from the larger store base, higher average
store sales and higher margins.

         Interest income, net, of $933,000 during fiscal 1999 was approximately
the same as the $931,000 during fiscal 1998.

         The Company's effective tax rate was 36.1% in fiscal 1999 and 35.9% in
fiscal 1998. The variance from an expected rate of approximately 40% in both
fiscal 1999 and 1998 is a result of a significant portion of each fiscal year's
interest income being non-taxable.

FISCAL 1998 COMPARED TO FISCAL 1997

         Net sales increased approximately $32.9 million, or 46.6%, to $103.4
million in fiscal 1998 from $70.5 million in fiscal 1997. Net sales for the 50
stores opened during fiscal 1998 and for those stores not yet qualifying as
comparable stores contributed $32.7 million of the net sales increase.
Comparable store sales increased 0.4% in fiscal 1998 and contributed $200,000 of
the increase in net sales. Apparel and T-shirts increased to 48% of net sales in
fiscal 1998 from 47% of net sales in fiscal 1997.

         Gross margin increased approximately $11.4 million to $37.5 million in
fiscal 1998 from $26.1 million in fiscal 1997. As a percentage of net sales,
gross margin decreased to 36.3% in fiscal 1998 from 37.0% in fiscal 1997,
principally due to higher occupancy and distribution expenses, as a percentage
of sales.

         Selling, general and administrative expenses increased approximately
$9.2 million to $29.1 million during fiscal 1998 from $19.9 million during
fiscal 1997, but decreased slightly as a percentage of net sales to 28.1% in
fiscal 1998 from 28.2% in fiscal 1997. The decrease as a percentage of net sales
was primarily due to a reduction of corporate overhead expense as a percentage
of net sales due to the operating leverage achieved through the Company's larger
store base offset in part by an increase in store payroll expense and store
operating expenses.

         Operating income increased approximately $2.2 million to $8.4 million
during fiscal 1998 from $6.2 million during fiscal 1997. As a percentage of net
sales, operating income decreased to 8.2% in fiscal 1998 from 8.8% in fiscal
1997, principally from the lower gross margin.

                                       21
<PAGE>

         Interest income, net, increased slightly to $931,000 during fiscal 1998
from $901,000 during fiscal 1997.

         The Company's effective tax rate was 35.9% in fiscal 1998 and 36.5% in
fiscal 1997. The variance from an expected rate of approximately 40% in both
fiscal 1998 and 1997 is a result of a significant portion of each fiscal year's
interest income being non-taxable.

QUARTERLY RESULTS AND SEASONALITY

         The Company's 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-related products, shifts in timing of certain holidays, changes in the
Company's merchandise mix and overall economic conditions.

         The Company's business is also subject to seasonal influences, with
heavier concentrations of sales during the Christmas holiday, back-to-school
season, and other periods when schools are not in session. The Christmas holiday
season remains the Company's single most important selling season. The Company
believes, 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), reduces somewhat the Company's
dependence on the Christmas holiday selling season. Furthermore, summer
vacation, spring break and the back-to-school season take place at somewhat
different times in different parts of the country, spreading the impact of these
events on the Company's sales over a longer period. As is the case with many
retailers of apparel, accessories and related merchandise, the Company typically
experiences lower net sales and operating losses during the first fiscal
quarter. The Company has experienced quarterly losses in the past and may
experience such losses in the future.

                                       22
<PAGE>

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

<TABLE>
<CAPTION>
                                           FISCAL YEAR 1998                                       FISCAL YEAR 1999
                              ----------------------------------------------         ----------------------------------------------
                              FIRST        Second       Third        Fourth          First        Second       Third        Fourth
                              -----        ------       -----        ------          -----        ------       -----        ------
                                                  (In thousands, except selected operating and per share data)
<S>                           <C>          <C>          <C>          <C>             <C>          <C>          <C>          <C>
STATEMENT OF OPERATIONS DATA:

     Net sales                $17,314      $20,787      $28,708      $36,561         $28,286      $32,779      $47,964      $59,920
     Gross Margin               5,722        6,776       10,642       14,376           9,746       11,413       19,019       24,773
     Operating income (loss)     (179)         318        2,587        5,713             781        1,638        6,576       11,207
     Net income                   $45         $334       $1,758       $3,866            $635       $1,152       $4,306       $7,408

Net income per share:
     Basic                      $0.01        $0.04        $0.18        $0.40           $0.07        $0.13        $0.47        $0.80
     Diluted                    $0.01        $0.04        $0.18        $0.39           $0.07        $0.12        $0.44        $0.72

     Weighted average
       shares outstanding:

     Basic                      9,556        9,622        9,662        9,696           9,242        9,239        9,286        9,301
     Diluted                    9,958        9,968        9,888        9,832           9,424        9,632        9,839       10,294

SELECTED OPERATING DATA:

     Comparable store
          sales increase         (0.6%)        2.0%         9.5%        (5.9%)          15.3%        16.9%        26.1%        27.1%
     Stores open at end of
          period                  123          133          145          158             168          184          198          212
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

         During the last three fiscal years, the Company's primary uses of cash
have been to finance store openings and purchase merchandise inventories. In
fiscal 1999, an additional significant use was the equipment and leasehold
improvements for a new headquarters office and distribution facility. The
Company has satisfied its cash requirements principally from cash flows from
operations.

         Cash flows provided by operating activities were $25.8 million, $9.3
million, and $7.2 million in fiscal 1999, 1998 and 1997, respectively. The
increases in cash flows from operating activities in fiscal 1999 was primarily
attributable to the increase in net income and increases in accounts payable,
accrued expenses and income taxes payable, partially off-set by an increase in
inventory. The increases in cash flows from operating activities in the 1997 and
1998 fiscal years was primarily attributable to increases in the company's net
income.

         Cash flows used in investing activities were $15.8 million, $9.3
million and $8.9 million in fiscal 1999, 1998 and 1997, respectively. Cash flows
used in investing activities relate primarily to store openings and, in 1999,
approximately $4.2 million was used for equipment and leasehold improvements for
the Company's new headquarters office and distribution facility and, in 1997,
approximately $750,000 was used to expand the capacity and increase the
efficiency of the Company's distribution facility. The Company opened 54, 50 and
40 stores in fiscal 1999, 1998 and 1997, respectively.

                                       23
<PAGE>

         Cash flows provided by financing activities were $5.0 million, ($2.1)
million and $1.1 million in fiscal 1999, 1998 and 1997, respectively. In
February and March 1999, the company used $1.1 million to repurchase 138,000
shares of its Common Stock and in January 1999, used $3.0 million to repurchase
440,000 shares of its Common Stock.

         The Company anticipates that it will spend approximately $11.5 to $12.5
million to open approximately 60 stores in fiscal 2000. During fiscal 1999, the
Company's average capital expenditures to open a store, including leasehold
improvements and furniture and fixtures, totaled approximately $175,000. The
average initial gross inventory for the new 1999 stores was approximately
$75,000 (which was partially financed by trade credit) and pre-opening costs
averaged approximately $22,000 for these stores. The Company expects the average
total costs associated with opening a store to be approximately the same in
fiscal 2000. Pre-opening costs are expensed as incurred. The actual costs that
the Company will incur in connection with opening future stores cannot be
predicted with precision because such costs will vary based upon, among other
things, geographic location, the size of the stores and the extent of the
build-out required at the selected sites. Initial inventory requirements vary at
new stores depending on the season and current merchandise trends.

         To accommodate its needs in fiscal 1999 and its planned expansion, the
Company moved its headquarters office and merchandise distribution facility to a
larger leased facility during May and June 1999. The construction of the offices
and installation of the distribution equipment commenced in February 1999 and
the cost of construction, equipment, fixtures and furniture was approximately
$4.2 million. The new facility has a projected capacity of approximately 500
stores.

         During fiscal 1999, after completing an evaluation of its long-term
management information system needs, the Company selected new hardware and
software for its stores, office and distribution center. The Company is planning
to implement the host hardware and software systems at its office and
distribution center during the second half of fiscal 2000 and install certain
point of sale upgrades at its stores in fiscal 2001. The Company presently
estimates the hardware, software, modifications, training and implementation
will cost approximately $4 to $5 million. Of that amount, approximately $1.5
million was spent in fiscal 1999. The Company presently estimates the balance
will be spent in fiscal 2000 and 2001.

         The Company believes that its existing cash balances and cash generated
from operations will be sufficient to fund its operations and planned expansion
through the next 12 months.

INFLATION

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

YEAR 2000 COMPLIANCE

         In prior years, the Company discussed the nature and progress of its
plans to become Year 2000 ready. In late 1999, the Company completed remediation
and testing of its technology systems. As a result of those planning and
implementation efforts, the Company has experienced no significant disruptions
in mission critical information technology and non-information technology
systems as of April 7, 2000 and believes those systems successfully responded to
the Year 2000 date change. The Company expensed less than $100,000 during 1999
in connection with remediating its systems. The Company is not aware of any
material problems resulting from Year 2000 issues, either with its products, its
internal systems, or the products and services of third parties. The Company
will continue to monitor its mission critical computer applications and those of
its suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.

                                       24
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company's market risks relevant to disclosure pursuant to Item 7A
are not material and are therefore not required.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

         The Financial Statements of the Company listed in Item 14(a) are
included herein on pages F-1 through F-14 and are incorporated herein by
reference.

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

         Not applicable.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         See the section entitled "Executive Officers" in Part I, Item 1 hereof
for information regarding executive officers.

         The information required by this item with respect to directors is
incorporated by reference from the information under the caption "Election of
Directors," contained in the Company's Definitive Proxy Statement which will be
filed within 120 days of fiscal year-end with the Securities and Exchange
Commission pursuant to Regulation 14A in connection with the solicitation of
proxies for the Company's Annual Meeting of Shareholders to be held on June 28,
2000 (the "Proxy Statement").

ITEM 11. EXECUTIVE COMPENSATION

         The information required by this item is incorporated by reference to
the information appearing under the caption "Executive Compensation" in the
Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by this item is incorporated by reference to
the information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by this item is incorporated by reference to
the information appearing under the caption "Certain Transactions" in the Proxy
Statement.


                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K

         (a)(1) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                The 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.

                                       25
<PAGE>

                                                                            Page

Report of Ernst & Young LLP, Independent Auditors.........................   F-1
Consolidated Balance Sheets as of January 29, 2000 and January 30, 1999...   F-2
Consolidated Statements of Operations for the years ended January 29, 2000,
    January 30, 1999 and January 31, 1998.................................   F-3
Consolidated Statements of Shareholders' Equity for the years ended January
    29, 2000, January 30, 1999 and January 31, 1998.......................   F-4
Consolidated Statements of Cash Flows for the years ended January 29, 2000,
    January 30, 1999 and January 31, 1998.................................   F-5
Notes to Consolidated Financial Statements................................   F-6


         (a)(2) INDEX TO FINANCIAL STATEMENT SCHEDULES

                All schedules are omitted because they are not required, are
not applicable, or the information is included in the Financial Statements or
notes thereto.

         (a)(3) INDEX TO EXHIBITS

                See Index to Exhibits beginning on page 28.

                The following management compensatory plans and arrangements
are required to be filed as exhibits to this Report on Form 10-K pursuant to
Item 14(c):

       EXHIBIT
        NUMBER                     DESCRIPTION OF DOCUMENT
        ------                     -----------------------

         10.2     1996 Equity Incentive Plan (the "1996 Plan"). (1)

         10.3     Form of Nonstatutory Stock Option Agreement of Registrant
                  pursuant to the 1996 Plan. (1)

         10.4     Form of Incentive Stock Option Agreement of Registrant
                  pursuant to the 1996 Plan. (1)

         10.5     Non-Employee Directors' Stock Option Plan. (1)

         10.6     Employee Stock Purchase Plan. (1)

         10.11    Letter Agreement regarding Employment Terms, dated August 9,
                  1994, entered into between Registrant and Elizabeth M.
                  McLaughlin. (1)

         10.15    401(k) Defined Contribution Plan of Registrant, effective as
                  of August 1, 1995. (1)

------------
(1)      Filed as an exhibit to Registrant's Registration Statement on Form SB-2
         (No. 333-5054-LA) and incorporated herein by reference.

         (b) REPORTS ON FORM 8-K

             During the quarter ended January 29, 2000, the Registrant filed one
current report on Form 8-K. On December 2, 1999, the Registrant filed a Current
Report on Form 8-K regarding the Registrant's announcement that it's Board of
Directors approved a two-for-one stock split to be implemented as a 100% stock
dividend to each of the Registrant's shareholder of record as of December 13,
1999.

         (c) EXHIBITS

             The exhibits required by this Item are listed under Item 14(a)(3).

         (d) FINANCIAL STATEMENT SCHEDULES

             The financial statement schedules required by this Item are listed
under Item 14(a)(2).

                                       26

<PAGE>

                                    SIGNATURE

       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, in the City of Industry,
County of Los Angeles, State of California, on the 25th day of April, 2000.

                                 HOT TOPIC, INC.

                                 By:  /s/ Orval D. Madden
                                      ------------------------------------
                                      Orval D. Madden
                                      Chief Executive Officer and Director


                                POWER OF ATTORNEY

         KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Orval D. Madden and Jay A. Johnson, or
either of them, his attorney-in-fact, each with the power of substitution, for
him 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.

<TABLE>
<CAPTION>

                    NAME                                                POSITION                           DATE
-----------------------------------------------          -------------------------------------------  ---------------
<S>                                                      <C>                                          <C>
           /s/ ROBERT M. JAFFE                           Chairman of the Board                        April 25, 2000
-----------------------------------------------
               Robert M. Jaffe

           /s/ ORVAL D. MADDEN                           Chief Executive Officer and Director         April 25, 2000
-----------------------------------------------          (PRINCIPAL EXECUTIVE OFFICER)
               Orval D. Madden

           /s/ JAY A. JOHNSON                            Chief Financial Officer and Assistant        April 25, 2000
-----------------------------------------------          Secretary
               Jay A. Johnson                            (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)

           /s/ EDGAR F. BERNER                           Director                                     April 25, 2000
-----------------------------------------------
               Edgar F. Berner

           /s/ STANLEY E. FOSTER                         Director                                     April 25, 2000
-----------------------------------------------
               Stanley E. Foster

           /s/ CORRADO FEDERICO                          Director                                     April 25, 2000
-----------------------------------------------
               Corrado Federico

           /s/ ANDREW SCHUON                             Director                                     April 25, 2000
-----------------------------------------------
               Andrew Schuon

           /s/ BRUCE A. QUINNELL                         Director                                     April 25, 2000
-----------------------------------------------
               Bruce A. Quinnell
</TABLE>

                                       27
<PAGE>

                                  EXHIBIT INDEX

         3.1      Form of Amended and Restated Articles of Incorporation of
                  Registrant. (1)

         3.2      Form of amended and restated Bylaws, Registrant. (1)

         4.1      Reference is made to Exhibits 3.1 and 3.2.

         4.2      Specimen stock certificate. (1)

         10.1     Form of Indemnity Agreement to be entered into between
                  Registrant and its directors and officers. (1)

         10.2     1996 Equity Incentive Plan (the "1996 Plan"). (1)

         10.3     Form of Nonstatutory Stock Option Agreement of Registrant
                  pursuant to the 1996 Plan. (1)

         10.4     Form of Incentive Stock Option Agreement of Registrant
                  pursuant to the 1996 Plan. (1)

         10.5     Non-Employee Directors' Stock Option Plan. (1)

         10.6     Employee Stock Purchase Plan. (1)

         10.7     Letter Agreement regarding Employment Terms, dated August 9,
                  1994, entered into between Registrant and Elizabeth M.
                  McLaughlin. (1)

         10.8     401(k) Defined Contribution Plan of Registrant, effective as
                  of August 1, 1995. (1)

         10.9     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)

         10.10    Guaranty of Lease, dated December 10, 1998, entered into
                  between the Registrant and Majestic Realty Co. and Patrician
                  Associates, Inc. (2)

         23.1     Consent of Ernst & Young LLP, Independent Auditors.

         24.1     Power of Attorney. Reference is made to page 27.

         27.1     Financial Data Schedule.

------------
(1)      Filed as an exhibit to Registrant's Registration Statement on Form SB-2
         (No. 333-5054-LA) and incorporated herein by reference.

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

                                       28

<PAGE>

                         Report of Independent Auditors

The Board of Directors and Shareholders
Hot Topic, Inc.

We have audited the accompanying consolidated balance sheets of Hot Topic, Inc.
as of January 29, 2000 and January 30, 1999, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended January 29, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Hot
Topic, Inc. and subsidiaries at January 29, 2000 and January 30, 1999, and the
results of its consolidated operations and its consolidated cash flows for each
of the three years in the period ended January 29, 2000 in conformity with
generally accepted accounting principles.

                                                         /S/  Ernst & Young LLP

March 9, 2000

                                      F-1
<PAGE>
<TABLE>

                                  Hot Topic, Inc. and Subsidiaries

                                     Consolidated Balance Sheets
<CAPTION>
                                                                        JANUARY 29,       JANUARY 30,
                                                                           2000               1999
                                                                     ---------------------------------
<S>                                                                  <C>              <C>
ASSETS
Current assets:
   Cash and cash equivalents                                         $   39,549,654   $    24,573,874
   Inventory                                                             15,366,745        10,446,626
   Prepaid expenses and other                                             1,580,433         1,440,286
   Deferred tax asset (NOTE 6)                                              721,161           321,825
                                                                     ---------------------------------
Total current assets                                                     57,217,993        36,782,611

Leaseholds, fixtures and equipment, net (NOTE 2)                         31,721,478        21,895,132
Deposits and other                                                           82,986            86,922
                                                                     ---------------------------------
Total assets                                                         $   89,022,457   $    58,764,665
                                                                     =================================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                  $    6,215,011   $     2,186,462
   Accrued payroll and related expenses                                   8,452,469         4,035,805
   Accrued sales and other taxes payable                                    637,623           382,742
   Federal and state income taxes payable                                 4,288,815         1,715,559
   Current portion of obligations under capital leases                       59,736            29,629
                                                                     ---------------------------------
Total current liabilities                                                19,654,654         8,350,197

Deferred rent (NOTE 3)                                                    1,104,709           743,711
Capital lease obligations, less current portion (NOTE 3)                    170,767            89,908
Deferred tax liability (NOTE 6)                                             815,796           831,703

Shareholders' equity (NOTE 4):
   Common shares, no par value; 50,000,000 shares
     authorized; 9,660,844 and 9,308,862 shares issued
     and outstanding at January 29, 2000 and January 30,
     1999, respectively                                                  40,667,571        35,675,752
   Deferred compensation                                                     (6,727)          (42,619)
   Retained earnings                                                     26,616,687        13,116,013
                                                                     ---------------------------------
Total shareholders' equity                                               67,277,531        48,749,146
                                                                     ---------------------------------
Total liabilities and shareholders' equity                           $   89,022,457   $    58,764,665
                                                                     =================================
</TABLE>

SEE ACCOMPANYING NOTES.

                                                F-2
<PAGE>
<TABLE>

                                  Hot Topic, Inc. and Subsidiaries

                                  Consolidated Statements of Income
<CAPTION>

                                                                     YEARS ENDED
                                                  JANUARY 29,         JANUARY 30,        JANUARY 31,
                                                      2000               1999               1998
                                              ----------------------------------------------------------
<S>                                           <C>                 <C>                <C>
Net sales                                     $    168,948,553    $    103,370,683   $     70,531,592
Cost of goods sold, including buying,
   distribution and occupancy costs                103,998,031          65,854,559         44,416,873
                                              ---------------------------------------------------------
Gross margin                                        64,950,522          37,516,124         26,114,719

Selling, general and administrative expenses        44,748,988          29,077,124         19,861,808
                                              ---------------------------------------------------------
Operating income                                    20,201,534           8,439,000          6,252,911

Interest income                                       (964,826)           (951,119)          (917,348)
Interest expense                                        32,086              20,296             16,787
                                              ----------------------------------------------------------
Income before income taxes                          21,134,274           9,369,823          7,153,472

Provision for income taxes (NOTE 6)                  7,633,600           3,366,900          2,610,800
                                              ----------------------------------------------------------
Net income                                    $     13,500,674    $      6,002,923   $      4,542,672
                                              =========================================================
Net income per share:
   Basic                                      $           1.46    $           0.62   $           0.48
                                              =========================================================
   Diluted                                    $           1.38    $           0.61   $           0.46
                                              =========================================================

Shares used in computing net income
 per share:
     Basic                                           9,266,852           9,634,048          9,380,980
     Diluted                                         9,797,362           9,911,594          9,879,894

SEE ACCOMPANYING NOTES.
</TABLE>

                                                F-3
<PAGE>
<TABLE>

                                       Hot Topic, Inc. and Subsidiaries

                                Consolidated Statements of Shareholders' Equity
<CAPTION>

                                                Common Shares                                           Total
                                        ------------------------------  Deferred       Retained     Shareholders'
                                            Shares        Amount      Compensation     Earnings        Equity
                                        ---------------------------------------------------------------------------
<S>                                         <C>        <C>            <C>            <C>            <C>
Balance at February 1, 1997                 9,198,506  $  36,613,148  $    (114,403) $   2,570,418  $  39,069,163
   Exercise of stock options                  316,644        446,528              -              -        446,528
   Employee stock purchase plan                 4,062         37,692              -              -         37,692
   Amortization of deferred compensation            -              -         35,892              -         35,892
   Tax benefit from exercise of
     options                                        -        603,624              -              -        603,624
   Net income                                       -              -              -      4,542,672      4,542,672
                                        ---------------------------------------------------------------------------
   Balance at January 31, 1998              9,519,212     37,700,992        (78,511)     7,113,090     44,735,571
   Exercise of stock options                  222,154        388,728              -              -        388,728
   Employee stock purchase plan                 7,496         49,500              -              -         49,500
   Repurchase common stock                   (440,000)    (2,968,565)                                  (2,968,565)
   Amortization of deferred compensation            -              -         35,892              -         35,892
   Tax benefit from exercise of
     options                                        -        505,097              -              -        505,097
   Net income                                       -              -              -      6,002,923      6,002,923
                                        ---------------------------------------------------------------------------
Balance at January 30, 1999                 9,308,862     35,675,752        (42,619)    13,116,013     48,749,146
                                        ---------------------------------------------------------------------------
   Exercise of stock options                  482,096      4,187,278              -              -      4,187,278
   Employee stock purchase plan                 7,886         60,469              -              -         60,469
   Repurchase common stock                   (138,000)    (1,064,863)             -              -     (1,064,863)
   Amortization of deferred compensation            -              -         35,892              -         35,892
   Tax benefit from exercise of
     options                                        -      1,808,935              -              -      1,808,935
   Net income                                       -              -              -     13,500,674     13,500,674
                                        ---------------------------------------------------------------------------
Balance at January 29, 2000                 9,660,844  $  40,667,571  $      (6,727) $  26,616,687  $  67,277,531
                                        ===========================================================================
</TABLE>

SEE ACCOMPANYING NOTES.

                                                     F-4
<PAGE>
<TABLE>

                                       Hot Topic, Inc. and Subsidiaries

                                     Consolidated Statements of Cash Flows
<CAPTION>

                                                                               YEARS ENDED
                                                              JANUARY 29,      JANUARY 30,       JANUARY 31,
                                                                 2000              1999             1998
                                                           -----------------------------------------------------
<S>                                                          <C>              <C>               <C>
OPERATING ACTIVITIES
Net income                                                   $   13,500,674   $    6,002,923    $    4,542,672

Adjustments to reconcile net income to net cash
   provided by operating activities:
     Depreciation and amortization                                5,890,519        4,069,200         2,872,483
     Deferred rent                                                  360,998          234,889           189,816
     Deferred compensation                                           35,892           35,892            35,892
     Deferred taxes                                                (415,243)         124,198           104,238
     Loss on disposal of fixed assets                                10,072                -            46,071
     Changes in operating assets and liabilities:
       Inventory                                                 (4,920,119)      (2,810,030)       (2,699,378)
       Prepaid expenses and other current assets                   (140,147)        (782,537)          335,485
       Deposits and other assets                                      3,936          (46,397)           (4,982)
       Accounts payable                                           4,028,549          480,803           478,556
       Accrued payroll and related expenses                       4,601,036        1,409,150           792,152
       Accrued sales and other taxes payable                        254,881          118,883            54,077
       Income taxes payable                                       2,5736256          488,804           492,687
                                                           -----------------------------------------------------
Net cash provided by operating activities                        25,784,304        9,325,778         7,239,769

INVESTING ACTIVITIES
Purchases of property and equipment                             (15,763,802)      (9,274,002)       (8,869,800)
                                                           -----------------------------------------------------
Net cash used in investing activities                           (15,763,802)      (9,274,002)       (8,869,800)

FINANCING ACTIVITIES
Payments on capital lease obligations                               (36,541)         (31,689)          (30,031)
Repurchase common shares                                         (1,064,863)      (2,968,565)                -
Proceeds from employee stock purchases and
   exercise of stock options, including related
   tax benefit                                                    6,056,682          943,325         1,087,844
                                                           -----------------------------------------------------
Net cash provided by (used in) financing activities               4,955,278       (2,056,929)        1,057,813
                                                           -----------------------------------------------------
Increase (Decrease) in cash and cash equivalents                 14,975,780       (2,005,153)         (572,218)
Cash and cash equivalents at beginning of year                   24,573,874       26,579,027        27,151,245
                                                           -----------------------------------------------------
Cash and cash equivalents at end of year                     $   39,549,654   $   24,573,874    $   26,579,027
                                                           =====================================================

SUPPLEMENTAL INFORMATION
Cash paid during the year for interest                       $       32,086   $       20,296    $       16,787
                                                           =====================================================
Cash paid during the year for income taxes                   $    8,574,900   $    2,245,212    $    1,415,012
                                                           =====================================================
Capital lease obligations entered into for equipment         $      112,400   $            -    $      142,990
                                                           =====================================================
</TABLE>

SEE ACCOMPANYING NOTES.

                                                     F-5
<PAGE>

                        Hot Topic, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                                January 29, 2000

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS ACTIVITY

Hot Topic, Inc. (the Company) was incorporated in California in September 1988.
The Company sells music licensed and music influenced apparel, accessories and
gift items for young men and women through its retail stores. The Company
operates mall based retail stores throughout the western, mid-western,
southeastern and northeastern regions of the United States. The consolidated
financial statements include the accounts of the Company and its wholly owned
subsidiaries. All intercompany accounts have been eliminated in consolidation.

FISCAL YEAR

The Company's fiscal year is on a 52-53 week basis and ends on the Saturday
nearest to January 31. The fiscal years ended January 29, 2000, January 30, 1999
and January 31, 1998 were 52 week years.

REVENUE RECOGNITION

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

INCOME TAXES

The Company utilizes Statement of Financial Accounting Standards 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.

NET INCOME PER SHARE

Net income per share has been computed in accordance with Financial Accounting
Standards Board (FASB) Statement No. 128, "Earnings per Share" (see Note 5). A
two-for-one stock split became effective December 28, 1999. All share and per
share amounts have been restated to reflect the split.

                                      F-6
<PAGE>

                        Hot Topic, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with maturities of less than
three months when purchased to be cash equivalents. The Company is potentially
exposed to a concentration of credit risk when cash deposits in banks are in
excess of federally insured limits, and as a result of the investment of cash
equivalents at two financial institutions.

INVENTORY

Inventories and related cost of sales are accounted for by the retail method.
The cost of inventory is determined at the lower of the first-in, first-out
(FIFO) method or market.

STORE PRE-OPENING COSTS

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

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost or in the case of capitalized
leases, at the present value of future minimum lease payments. Depreciation is
provided using the straight-line method over the estimated useful lives of the
assets (3-10 years). Leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or ten years.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

LONG-LIVED ASSETS

The Company accounts for the impairment and disposition of long-lived assets in
accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" (SFAS No. 121). In accordance with SFAS No. 121, long-lived
assets to be held are reviewed for events or changes in circumstances which
indicate that their carrying value may not be recoverable. At January 29, 2000,
the Company believes there has been no impairment of the value of such assets.

                                      F-7
<PAGE>

                        Hot Topic, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK-BASED COMPENSATION

The Company accounts for stock-based awards to employees using the intrinsic
value method as prescribed by Accounting Principle Board Opinion No. 25,
"Accounting for stock issued to Employees".

2. LEASEHOLDS, FIXTURES AND EQUIPMENT

<TABLE>
Leaseholds, fixtures and equipment are summarized as follows:
<CAPTION>

                                                       JANUARY 29,       JANUARY 30,
                                                          2000              1999
                                                 --------------------------------------
<S>                                                <C>               <C>
Furniture, fixtures and equipment                  $    25,396,222   $    17,709,670
Leasehold improvements                                  21,419,124        14,725,529
                                                 --------------------------------------
                                                        46,815,346        32,435,199
Less accumulated depreciation and amortization         (15,093,868)      (10,540,067)
                                                 --------------------------------------
                                                   $    31,721,478   $    21,895,132
                                                 ======================================
</TABLE>

3. COMMITMENTS

LEASES

The Company has entered into lease agreements for retail and office space under
primarily noncancelable leases with terms ranging from three to approximately
ten years. In December 1998, a wholly-owned subsidiary of the Company entered
into a lease for a building for a new office and distribution facility. The
lease provides for a five year term and two three year lease extensions. The
retail space leases provide for rents based upon the greater of the minimum
annual rental amounts or 6% to 8% of annual sales volume. Certain of the leases
provide for increasing minimum annual rental amounts. Rent expense is recorded
evenly over the term of the lease. 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 agreement. Total rent
expense for the years ended January 29, 2000, January 30, 1999 and January 31,
1998 was $10,364,345, $7,505,514 and $5,138,226, respectively, including
contingent rentals of $1,221,200, $293,759 and $272,900, respectively.

                                      F-8
<PAGE>

                        Hot Topic, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

3. COMMITMENTS (CONTINUED)

LEASES (CONTINUED)

The Company leases certain equipment under capital lease obligations. Cost and
accumulated depreciation of equipment under capital leases were $291,151 and
$49,440, respectively, at January 29, 2000, $168,930 and $49,137, respectively,
at January 30, 1999 and $186,489 and $41,243, respectively, at January 31, 1998.

Annual future minimum lease payments under operating and capital leases as of
January 29, 2000 are as follows:

<TABLE>
<CAPTION>
                                                                OPERATING           CAPITAL
Fiscal year                                                       LEASES            LEASES
------------                                                ------------------------------------
<S>                                                           <C>               <C>
2001                                                          $    11,647,694   $        81,429
2002                                                               11,589,796            56,413
2003                                                               11,500,756            98,743
2004                                                               11,305,950            29,116
2005                                                               10,820,425
Thereafter                                                         35,836,889
                                                            ------------------------------------
Total minimum lease payments                                  $    92,701,510           265,701
                                                            ===================
Less amounts representing interest                                                       35,198
                                                                                ----------------

Present value of future minimum capital lease payments                                  230,503
Less amounts due in one year                                                             59,736
                                                                                ----------------

Long-term portion of obligations under capital leases                           $       170,767
                                                                                ================
</TABLE>

4. SHAREHOLDERS' EQUITY

STOCK OPTIONS

Under the Company's long-term incentive plans (the Plans) the Company may grant
stock options to employees, directors or consultants of the Company as deemed
appropriate by the Board of Directors. The exercise price of options granted
under the Plan shall be determined by the Board of Directors at the date of
grant and shall not be lower than (i) 100% of the fair market value of the
Company's common stock on the date of grant for incentive stock options, (ii)
85% of the fair market value of the Company's common stock on the date of grant
for non-statutory stock options, and (iii) 110% of the fair market value of the
Company's common stock on the date of grant for persons possessing 10% or more

                                      F-9
<PAGE>

                        Hot Topic, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

4. SHAREHOLDERS' EQUITY (CONTINUED)

STOCK OPTIONS (CONTINUED)

of the total combined voting power of all classes of stock of the Company.
Unless the Board of Directors declares otherwise, options vest over four years
and generally expire ten years from the date of grant. An aggregate of 2,660,000
shares of common stock may be issued pursuant to the plans. As of January 29,
2000, 308,688 shares were available for future grants.

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 300,000 shares of common stock to employees of the Company. Under the
Stock Purchase Plan, 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 withdraw from participation in an offering
at any time during the purchase period for such offering. 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.

Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1999,
1998 and 1997: weighted-average risk-free interest rates of 6%; dividend yields
of 0%; weighted-average volatility factors of the expected market price of the
Company's common stock of 0.80 for 1999, 0.79 for 1998 and 0.53 for 1997; and a
weighted average expected life of the option of 5 years. The weighted average
fair value of options granted during the year is $10.02, $7.33 and $6.44 per
share for fiscal 1999, 1998 and 1997, respectively.

                                      F-10
<PAGE>

                        Hot Topic, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

4. SHAREHOLDERS' EQUITY (CONTINUED)

STOCK OPTIONS (CONTINUED)

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:

<TABLE>
<CAPTION>
                                                   1999              1998             1997
                                            ---------------------------------------------------
<S>                                         <C>                <C>              <C>
Pro forma net income                        $   11,303,530     $    4,495,809   $    3,888,986
Pro forma earnings per share
       Basic                                         $1.22              $0.47            $0.42
       Diluted                                       $1.20              $0.46            $0.41
</TABLE>

A summary of the Company's stock option activity and related information
follows:

<TABLE>
<CAPTION>
                                       JANUARY 29, 2000         JANUARY 30, 1999        JANUARY 31, 1998
                                    -------------------------------------------------------------------------
                                                 WEIGHTED                 WEIGHTED                WEIGHTED
                                                 AVERAGE                  AVERAGE                  AVERAGE
                                                 EXERCISE                 EXERCISE                EXERCISE
                                      OPTIONS     PRICE       OPTIONS      PRICE       OPTIONS      PRICE
                                    -------------------------------------------------------------------------
<S>                                  <C>           <C>       <C>            <C>      <C>             <C>
Outstanding at beginning of year     1,398,302     $10.23    1,124,620       $8.22     798,244        $2.11
   Granted                             512,200      $7.37      573,176      $10.81     672,704       $12.19
   Exercised                          (482,096)     $8.69     (222,154)      $1.75    (316,644)       $1.42
   Canceled                           (101,844)    $10.43      (77,340)      $9.61     (29,684)       $6.52
                                    -------------------------------------------------------------------------
Outstanding at end of year           1,326,562      $9.67    1,398,302      $10.23   1,124,620        $8.22
                                    =========================================================================

Exercisable at end of year             273,142     $10.88      392,570       $8.55     242,300        $2.04
</TABLE>

Exercise prices for options outstanding as of January 29, 2000 ranged from $1.25
to $13.94. Of the 1,326,562 options outstanding at January 29, 2000, 44,638 have
exercise prices ranging from $1.25 to $2.50, 592,812 have exercise prices
ranging from $6.82 to $9.63 and 689,112 have exercise prices ranging from $10.00
to $13.94. The weighted average remaining contractual life of those options is 8
years.

                                      F-11
<PAGE>

                        Hot Topic, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

5. NET INCOME PER SHARE

The Company computes net income per share pursuant to Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). Basic net income
per share is computed based on the weighted average number of common shares
outstanding for the period. Diluted net income per share is computed based on
the weighted average number of common and potentially dilutive common stock
equivalents outstanding for the period.

A reconciliation of the numerator and denominator of basic earnings per share
and diluted earnings per share for the year ended, is as follows:

<TABLE>
<CAPTION>
                                                 JANUARY 29,        JANUARY 30,      JANUARY 31,
                                                    2000               1999             1998
                                            ------------------------------------------------------
<S>                                           <C>                <C>              <C>
Basic EPS Computation:
   Numerator                                  $   13,500,674     $    6,002,923   $    4,542,672
   Denominator:
     Weighted average common shares
       outstanding                                 9,266,852          9,634,048        9,380,980
                                            ------------------------------------------------------
     Total shares                                  9,266,852          9,634,048        9,380,980
                                            ------------------------------------------------------
Basic EPS                                     $         1.46     $         0.62   $         0.49
                                            ======================================================

Diluted EPS Computation:
   Numerator                                  $   13,500,674     $    6,002,923   $    4,542,672
   Denominator:
     Weighted average common shares
       outstanding                                 9,266,852          9,634,048        9,380,980
     Incremental shares from assumed
       conversion of options                         530,510            277,546          498,914
                                            ------------------------------------------------------
     Total shares                                  9,797,362          9,911,594        9,879,894
                                            ------------------------------------------------------
Diluted EPS                                   $         1.38     $         0.61   $         0.46
                                            ======================================================
</TABLE>

                                      F-12
<PAGE>

                        Hot Topic, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

6. INCOME TAXES

Following is the composition of the provision for income taxes for the years
ended:

<TABLE>
<CAPTION>
                                                 JANUARY 29,       JANUARY 30,      JANUARY 31,
                                                    2000              1999             1998
                                             -----------------------------------------------------
  <S>                                           <C>               <C>              <C>
  Current:
     Federal                                    $   6,873,075     $    2,770,434   $    2,042,664
     State                                          1,183,325            472,268          463,898
                                             -----------------------------------------------------
                                                    8,056,400          3,242,702        2,506,562
  Deferred:
     Federal                                         (393,151)           127,057           89,336
     State                                            (29,649)            (2,859)          14,902
                                             -----------------------------------------------------
                                                     (422,800)           124,198          104,238
                                             -----------------------------------------------------
  Total income tax expense                      $   7,633,600     $    3,366,900   $    2,610,800
                                             =====================================================
</TABLE>

Significant components of the Company's deferred tax assets and liabilities:

<TABLE>
<CAPTION>
                                                                  JANUARY 29,      JANUARY 30,
                                                                     2000              1999
                                                              ------------------------------------
<S>                                                             <C>                <C>
Current deferred tax assets:
   Accrued vacation and other                                   $      227,759     $      230,496
   Inventory                                                           445,380            291,499
   State taxes                                                         258,895             78,833
   Other liabilities                                                  (196,373)          (264,503)
                                                              ------------------------------------
Total deferred tax assets                                              735,661            336,325
Valuation allowance for deferred tax assets                            (14,500)           (14,500)
                                                              ------------------------------------
Net current deferred tax assets                                        721,161            321,825

Noncurrent deferred tax liabilities:
   Depreciation                                                     (1,176,467)        (1,033,235)
   Deferred rent                                                       360,671            201,532
                                                              ------------------------------------
Total noncurrent deferred tax liabilities                             (815,796)          (831,703)
                                                              ------------------------------------
Net deferred tax (liability) asset                              $      (94,635)    $     (509,878)
                                                              ====================================
</TABLE>

                                      F-13
<PAGE>

                        Hot Topic, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

6. INCOME TAXES (CONTINUED)

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

<TABLE>
<CAPTION>
                                               JANUARY 29,       JANUARY 30,       JANUARY 31,
                                                   2000              1999             1998
                                            ---------------------------------------------------
<S>                                               <C>               <C>               <C>
Statutory federal rate                            35.0%             34.0%             34.0%
Permanent differences                             (1.3)             (2.9)             (3.9)
State and local taxes, net of federal
   benefit                                         2.8               3.3               4.4
Change in valuation allowance and other
   items                                          (0.5)              1.5               2.0
                                            ---------------------------------------------------
Effective income tax rate                         36.1%             35.9%             36.5%
                                            ===================================================
</TABLE>

7. EMPLOYEE BENEFIT PLAN

Effective January 1, 1995, the Company adopted the Hot Topic 401(k) Retirement
Savings Plan (the 401(k) Plan). All employees who have been employed by the
Company for at least one year of service (provided that such service represents
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 20% of their current compensation, subject to a statutorily prescribed annual
limit. The Company may in its discretion contribute certain amounts to eligible
employees' accounts. The Company has not made any contributions to the 401(k)
Plan.

                                      F-14