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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K



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

For the fiscal year ended January 31, 2009

OR



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

For the transition period from                     
to

Commission
File 0-28784





HOT TOPIC, INC.

(Exact name of
Registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|California                                                     |  | 77-0198182                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|18305 E. San Jose Ave. City of Industry, California            |  | 91748                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

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

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



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

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

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

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

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

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

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



|                                                                       |  |                             
|---------------------------------------------------------------------- |  | ----------------------------
|Large accelerated filer   ̈                                             |  | Accelerated filer  x        
|Non-accelerated filer   ̈ (Do not check if a smaller reporting company) |  | Smaller reporting company   ̈

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

The aggregate market value of Common Stock held by non-affiliates of the Registrant as of August 2, 2008, the last business day of the Registrants most recently completed second fiscal quarter, was
approximately $278,201,766 based on the closing price on that date of the Registrants Common Stock on the Nasdaq Stock Market. All outstanding shares of voting stock, except for shares held by executive officers and members of the Board of
Directors and their affiliates are deemed to be held by non-affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of the Registrants Common Stock was 43,951,326 as of March 23, 2009.

Documents Incorporated By Reference

Certain portions of the Registrants Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 9, 2009 to be filed with the Securities and Exchange Commission (the SEC) no later than 120 days
after January 31, 2009, are incorporated by reference into Part III of this Form 10-K (Items 10 through 14).









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HOT TOPIC, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE

FISCAL YEAR ENDED JANUARY 31, 2009

TABLE OF CONTENTS



|         |  |                                                                                                              |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|         |  |                                                                                                              |  | Page
|         |  | PART I                                                                                                       |  |     
|Item 1.  |  | Business                                                                                                     |  | 1   
|Item 1A. |  | Risk Factors                                                                                                 |  | 14  
|Item 1B. |  | Unresolved Staff Comments                                                                                    |  | 26  
|Item 2.  |  | Properties                                                                                                   |  | 26  
|Item 3.  |  | Legal Proceedings                                                                                            |  | 26  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 26  
|         |  |                                                                                                             
|         |  | PART II                                                                                                      |  |     
|Item 5.  |  | Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities |  | 27  
|Item 6.  |  | Selected Financial Data                                                                                      |  | 29  
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 30  
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 41  
|Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 42  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 42  
|Item 9A. |  | Controls and Procedures                                                                                      |  | 42  
|Item 9B. |  | Other Information                                                                                            |  | 45  
|         |  |                                                                                                             
|         |  | PART III                                                                                                     |  |     
|Item 10. |  | Directors, Executive Officers and Corporate Governance                                                       |  | 47  
|Item 11. |  | Executive Compensation                                                                                       |  | 47  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters               |  | 47  
|Item 13. |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 47  
|Item 14. |  | Principal Accountant Fees and Services                                                                       |  | 47  
|         |  |                                                                                                             
|         |  | PART IV                                                                                                      |  |     
|Item 15. |  | Exhibits and Financial Statement Schedules                                                                   |  | 48  



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Cautionary Statement Regarding Forward-Looking Disclosure

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

PART I



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

General

We are a mall- and web-based specialty retailer operating the Hot Topic® and Torrid® concepts, as well as the e-space music discovery concept, ShockHoundTM. At Hot Topic, our business strategy is built on the foundation of pop culture and its relevance to our target teen customer. Within pop culture, we believe music plays a primary and integral role in the minds,
activities and preferences of our target customers. We believe we have made significant strides in achieving our comprehensive music strategy developed in early fiscal 2007, which encompasses a high level of focus on the in-store music experience.
We have also adopted strategies to focus on music and music/pop culture-oriented merchandise, operate a fundamentally regular price business and continue to emphasize superior customer service. At Hot Topic, we sell a selection of music/pop
culture-licensed and music/pop culture-influenced apparel, accessories, music and gift items for young men and women principally between the ages of 12 and 22. At Torrid, we sell apparel, lingerie, shoes and accessories designed for various
lifestyles for plus-size females principally between the ages of 15 and 29. At ShockHound, music lovers of all ages can come together and purchase MP3s and music merchandise, share their music interests, read the latest music news and enjoy
exclusive editorial content about their favorite artists. We were incorporated in California in 1988. We opened our first Hot Topic store in 1989 and our first Torrid store in 2001. We launched ShockHound during the third quarter of fiscal 2008. We
sell merchandise on our websites www.hottopic.com and www.torrid.com, which reflect the Hot Topic and Torrid store concepts and sell merchandise similar to that sold in the respective stores. We sell music merchandise and MP3s on our website
www.shockhound.com. Throughout this report, the terms our, we and us refer to Hot Topic, Inc. and its subsidiaries.

At the end of fiscal 2008 (the 52-week fiscal year ended January 31, 2009), we operated 681 Hot Topic stores throughout the United States and Puerto Rico, and 159 Torrid stores in 36 states, compared to 690 Hot
Topic stores and 151 Torrid stores at the end of fiscal 2007. During fiscal 2008, we opened 4 new Hot Topic stores and 11 new Torrid stores, and closed 13 Hot Topic stores and 3 Torrid stores. We also remodeled or relocated 14 existing Hot Topic
stores during fiscal 2008. We plan to remodel or relocate approximately 25 existing Hot Topic stores and to close approximately 10 Hot Topic and 5 Torrid stores during fiscal 2009 (the fiscal year ending January 30, 2010).

Our Markets

We developed Hot Topic, Torrid and
ShockHound, in each case after recognizing a large, but specialized market niche, not widely serviced by national retail chains or online music providers.



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

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

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

Hot Topics target customers are young men and women between the ages of 12 and
22 who are passionate about music and pop culture. We believe our music/pop culture-influenced merchandise appeals to teenagers from diverse socio-economic backgrounds and that our customers are broadly representative of the teenage population in
the United States.

Our second retail concept, Torrid, was developed based upon feedback from plus-size female Hot Topic customers who
wanted a store that catered to women like them. We concluded there were a significant number of young women consumers who were plus-size and unable to find and buy a broad enough selection of fashion forward clothes in comparison to their smaller
sized friends. We launched Torrid in the first half of fiscal 2001, with the opening of six locations across the country, and a website, www.torrid.com. Our Torrid store target customers are plus-size females aged 15 to 29, who are primarily
influenced by fashion trends and by pop culture. We believe our Torrid store assortment allows young customers wearing sizes 12 to 26 to match the style, excitement and selection available at other non-plus-size fashion retailers.

Our e-space music discovery concept, ShockHound, was launched during the third quarter of fiscal 2008. ShockHound encompasses multiple music genres and
offers four core elements: online music downloads, a music merchandise retail store, exclusive editorial and video content, and social networking.

Hot
Topic Business Strategy

Our business strategy is built on the foundation of pop culture and its relevance to our target teen customer.
Within pop culture, we believe music plays a primary and integral role in the minds, activities and preferences of our target customers. Elements of Hot Topics business strategy include:



| |  |  | Focus on Music, the Differentiating Cornerstone of our Brand
| | - |  | ------------------------------------------------------------

We continue to be committed to positioning ourselves firmly at the forefront of rock music, the core of our business. Music has continually evolved and
the move to digital formats has impacted how teens learn about and access music. Todays teenagers have diverse tastes across all genres of rock music. At Hot Topic, we continue to position our brand to be the authentic, credible voice for new
music. Our music strategy has evolved to be much less dependent on major artists and now focuses on a wide offering of band merchandise through the support of emerging rock artists. Many of these new artists are initially identified by our
associates and customers. Our music assortment reflects this declining dependency on major artists with most of our products now focused on emerging and mid-tier bands.



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

We believe that fashion and products associated with popular music artists and pop culture trends have a significant influence on our customers. We have developed a unique strategy focused exclusively on offering
music/pop culture-licensed and music/pop culture-influenced merchandise in shopping malls, lifestyle centers



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and entertainment centers around the country as well as on the Internet. Accordingly, we believe we are well positioned to capitalize on the growing teenage
population and demand for music/pop culture-influenced merchandise.



| |  |  | Continue to Operate a Fundamentally Regular Price Business
| | - |  | ----------------------------------------------------------

Our strategy of reducing the number of our promotional events reinforced the integrity of our regular prices during fiscal 2008. Consistent with the past
fiscal year, our strategy continues to be to limit the number of promotions that drive short-term sales increases, and to remain committed to controlling the number of promotionally priced items in order to preserve the integrity of our product
offerings and prices.



| |  |  | Continue to Uphold Ourselves as a Merchandise Item Destination with a Primary Focus on Tees
| | - |  | ---------------------------------------------------------------------------------------------

Consistent with the past fiscal year, we continue to selectively invest in merchandise classifications that we consider to be key items that are
fundamental to our business and we maintain a high in-stock position in those items. We believe that our in-stock position in key alternative classifications results in fewer missed sales and creates an impression in customers minds that Hot
Topic is the destination where they can consistently find unique items typically unavailable at other retailers. We also have allocated a more significant portion of our inventory to tee shirts, both licensed and non-licensed, to reinforce that Hot
Topic is the destination for music, novelty and fashion tees.



| |  |  | Continue to Actively Manage our Inventory
| | - |  | -----------------------------------------

Our disciplined approach to the management of inventory has resulted in overall inventory levels remaining the same as in the previous fiscal year. Through diligently managing inventory and the merchandise mix of
categories, we are able to capitalize on emerging trends and licenses. A significant reduction in our obsolete inventory has enabled us to maintain a fresh merchandise assortment.



| |  |  | Emphasize Superior Customer Service
| | - |  | -----------------------------------

Our associates are trained to provide a value-added customer experience. Sales associates are encouraged to engage with customers, provide information about new music and fashion trends and stimulate the
customers interest in, and knowledge of, the Hot Topic product offerings. We believe that a high level of employee product knowledge and a commitment to music and fashion create credibility with our customers and differentiate Hot Topic from
other teen-focused retailers. In addition, we regularly test new merchandise in select Hot Topic stores before chain-wide distribution and order a majority of our merchandise not more than 60 to 90 days before delivery, which allows us to react
quickly to emerging trends.

Torrid Business Strategy

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



| |  |  | Focus on the Assortment of Current Fashion Trends
| | - |  | -------------------------------------------------

Our Torrid merchandising team focuses on providing a fashion forward merchandise assortment that reflects the influence of current fashion and pop culture trends. These influences provide the inspiration for hip,
trendy apparel and accessories to which our customers relate. We believe that Torrid is the first shopping mall concept to offer a complete store assortment of fashion forward apparel for plus-size young women and we are committed to having the
right assortment for our customers.



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

Torrid buyers actively solicit customer feedback through frequent visits to store locations, in-store comment cards, emails and postings. We use this input, along with other fashion market intelligence, to interpret new fashion trends and
pop culture influences as we develop the fashion forward merchandise assortments that reflect the Torrid brand. We test new trends and styles frequently to gauge customer response.



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

We provide training and coaching for Torrid store associates that emphasize one-on-one service for our customers. We reward sales associates who achieve and surpass sales goals in a variety of ways throughout the
year. We believe that many plus-size customers have been unable to find sufficient quantities and selections of fashionable apparel in line with current trends. Through our focus on customer service and leading-edge fashion, we seek to create a
compelling shopping environment that the young plus-size customer is looking for. We believe that the warm greeting, extensive fashion offerings and helpful suggestive selling by our team members create a welcoming and exciting store environment
that will be attractive to, and preferred by, the Torrid customer.

ShockHound Business Strategy

At ShockHound, we offer a compelling online vehicle that enables our customers to discover music in an entirely new way. We recognize that the way
everyone is learning and acquiring music has changed and we believe we can meet customers appetite for a wide variety of digital music while offering a more comprehensive online music experience. Typical with a concept in its very early stage,
we are focused on reaching a wide audience.



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Store Locations

As of January 31, 2009, we operated 681 Hot Topic stores throughout the United States and Puerto Rico and 159 Torrid stores in 36 states in both metropolitan and middle markets. The following chart shows, as of
January 31, 2009, the number of Hot Topic and Torrid stores operated in each state and Puerto Rico:

Hot Topic, Inc. Stores



|               |  |                  |  |               |  |              
|-------------- |  | ---------------- |  | ------------- |  | -------------
|               |  | Hot Topic Stores |  | Torrid Stores |  | Total Company
|Alabama        |  | 7                |  |              |  | 7            
|Alaska         |  | 3                |  | 1             |  | 4            
|Arizona        |  | 17               |  | 7             |  | 24           
|Arkansas       |  | 6                |  |              |  | 6            
|California     |  | 80               |  | 50            |  | 130          
|Colorado       |  | 14               |  | 2             |  | 16           
|Connecticut    |  | 9                |  | 3             |  | 12           
|Delaware       |  | 2                |  |              |  | 2            
|Florida        |  | 42               |  | 6             |  | 48           
|Georgia        |  | 14               |  | 3             |  | 17           
|Hawaii         |  | 5                |  |              |  | 5            
|Idaho          |  | 4                |  | 1             |  | 5            
|Illinois       |  | 21               |  | 9             |  | 30           
|Indiana        |  | 15               |  | 1             |  | 16           
|Iowa           |  | 10               |  | 1             |  | 11           
|Kansas         |  | 7                |  |              |  | 7            
|Kentucky       |  | 9                |  | 1             |  | 10           
|Louisiana      |  | 8                |  | 2             |  | 10           
|Maine          |  | 3                |  |              |  | 3            
|Maryland       |  | 15               |  | 4             |  | 19           
|Massachusetts  |  | 19               |  | 2             |  | 21           
|Michigan       |  | 23               |  | 2             |  | 25           
|Minnesota      |  | 10               |  | 1             |  | 11           
|Mississippi    |  | 4                |  |              |  | 4            
|Missouri       |  | 14               |  | 3             |  | 17           
|Montana        |  | 4                |  |              |  | 4            
|Nebraska       |  | 4                |  | 1             |  | 5            
|Nevada         |  | 7                |  | 2             |  | 9            
|New Hampshire  |  | 5                |  | 1             |  | 6            
|New Jersey     |  | 16               |  | 5             |  | 21           
|New Mexico     |  | 7                |  | 1             |  | 8            
|New York       |  | 31               |  | 6             |  | 37           
|North Carolina |  | 15               |  | 3             |  | 18           
|North Dakota   |  | 4                |  |              |  | 4            
|Ohio           |  | 27               |  | 5             |  | 32           
|Oklahoma       |  | 8                |  |              |  | 8            
|Oregon         |  | 7                |  | 4             |  | 11           
|Pennsylvania   |  | 35               |  | 3             |  | 38           
|Rhode Island   |  | 1                |  |              |  | 1            
|South Carolina |  | 7                |  | 1             |  | 8            
|South Dakota   |  | 2                |  | 1             |  | 3            
|Tennessee      |  | 13               |  | 1             |  | 14           
|Texas          |  | 56               |  | 13            |  | 69           
|Utah           |  | 9                |  | 2             |  | 11           
|Vermont        |  | 1                |  |              |  | 1            
|Virginia       |  | 20               |  | 2             |  | 22           
|Washington     |  | 19               |  | 7             |  | 26           
|West Virginia  |  | 5                |  |              |  | 5            
|Wisconsin      |  | 11               |  | 2             |  | 13           
|Wyoming        |  | 1                |  |              |  | 1            
|Puerto Rico    |  | 5                |  |              |  | 5            
|Total          |  | 681              |  | 159           |  | 840          



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Real Estate Strategy

We have modified our store designs several times in the companys history. During fiscal 2008, the 4 new and 14 remodeled or relocated Hot Topic stores were opened with our current store design, which presents
the look of a downtown street store and was developed to be more representative of the wide range of customers rock music preferences. In fiscal 2009, we plan to remodel, or relocate to another location within the shopping mall, approximately
25 Hot Topic stores utilizing our current store design. These 25 stores will primarily be those locations that have an upcoming lease expiration and will require a new commitment during the year.

Prior to fiscal 2007, our strategy had been one of aggressive new Hot Topic store growth in both new and existing markets throughout the United States.
With a mature store base of 681 Hot Topic stores at the end of fiscal 2008, we believe we can more effectively improve company profitability by managing this existing store fleet rather than continuing to open a significant number of new Hot Topic
stores, which could over-saturate the market and divert sales away from our existing stores. Accordingly and consistent with the prior fiscal year, our Hot Topic growth strategy will be very minimal and we will be highly selective in our decisions
to open any new Hot Topic stores in fiscal 2009. In addition, we plan to keep our Torrid store growth at the bare minimum until the overall womens apparel retail sector improves in the United States. Overall, we will be very opportunistic in
any potential new store openings in fiscal 2009.

A majority of Hot Topic stores are in traditional enclosed shopping malls, although more
recent openings have been in lifestyle and entertainment centers. We will thoroughly review any future new store openings in lifestyle and entertainment centers as results in these centers were sometimes not as favorable as those in shopping malls.
We opened 4 new Hot Topic and 11 new Torrid stores in fiscal 2008. We expect to open a Hot Topic store in Canada in fiscal 2010.

We
evaluate the financial performance of all our stores and have closed, and will continue to close, stores that do not meet minimum thresholds of profitability. Many of the store leases contain early termination options that allow us to close the
stores within a specified time period without owing the landlord any termination fees, particularly in the early years of a lease, if specified sales levels are not achieved. We may also choose to close a particular store upon the lease expiration.
We closed 16 stores during fiscal 2008, consisting of 13 Hot Topic and 3 Torrid stores and plan to close approximately 10 Hot Topic and 5 Torrid stores in fiscal 2009.

We evaluate potential Hot Topic and Torrid store locations based on a variety of criteria relevant to our merchandising strategy, including: the sales of the shopping mall and anchor stores, sales of teenage-oriented
and plus-size stores, age demographics in the trade area, median family income and other economic factors. With respect to potential remodels or relocations of existing stores, we also look at historical sales trends at the existing store, and the
attractiveness of various design features and locations within the shopping mall. We have a real estate committee that meets regularly to evaluate and approve new store locations, potential store closings and lease renewals which typically involve
remodels or relocations. Our Hot Topic stores currently average 1,755 square feet, and our Torrid stores currently average 2,500 square feet.

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



|                                                   |  |                    |   |  |      |   |  |      |   |  |      |   |  |      |  
|-------------------------------------------------- |  | ------------------ | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | -
|                                                   |  | Fiscal Year        |  
|                                                   |  | 2004               |   |  | 2005 |   |  | 2006 |   |  | 2007 |   |  | 2008 |  
|                                                   |  | (Number of Stores) |  
|Stores at beginning of year                        |  | 554                |   |  | 668  |   |  | 783  |   |  | 825  |   |  | 841  |  
|                                                   |  |                    |   |  |     
|Hot Topic stores opened                            |  | 91                 |   |  | 71   |   |  | 34   |   |  | 9    |   |  | 4    |  
|Hot Topic stores closed                            |  | (1                 | ) |  | 0    |   |  | (3   | ) |  | (13  | ) |  | (13  | )
|Torrid stores opened                               |  | 24                 |   |  | 46   |   |  | 12   |   |  | 23   |   |  | 11   |  
|Torrid stores closed                               |  | 0                  |   |  | (2   | ) |  | (1   | ) |  | (3   | ) |  | (3   | )
|                                                   |  |                    |   |  |      |   |  |      |   |  |      |   |  |      |  
|Stores at end of year                              |  | 668                |   |  | 783  |   |  | 825  |   |  | 841  |   |  | 840  |  
|                                                   |  |                    |   |  |      |   |  |      |   |  |      |   |  |      |  
|Hot Topic and Torrid stores remodeled or relocated |  | 10                 |   |  | 17   |   |  | 22   |   |  | 71   |   |  | 14   |  
|                                                   |  |                    |   |  |      |   |  |      |   |  |      |   |  |      |  



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Store-Level Economics

During fiscal 2008, average sales per Hot Topic store were $0.8 million and average sales per square foot of store space were $480. Average sales per Torrid store were $0.8 million and average sales per square foot of
store space were $334 during the same year. We cannot guarantee that these results will continue or that future average store-level sales will not vary from historical results.

Hot Topic Merchandising

Our Hot Topic stores serve as a focal point for music/pop culture-licensed
and music/pop culture-influenced apparel, accessories, music and gift items. Music/pop culture-licensed merchandise includes tee shirts, hats, posters, stickers, patches, postcards, books, novelty accessories, CDs and DVDs. Music/pop
culture-influenced merchandise includes womens and mens apparel and accessories, such as woven and knit tops, skirts, pants, shorts, jackets, shoes, costume jewelry, body jewelry, sunglasses, cosmetics, leather accessories and gift
items. Approximately half of Hot Topics products are music/pop culture-licensed, and the other half are music/pop culture-influenced. A key strategy of our Hot Topic stores is to offer a diverse product assortment that customers cannot find in
other stores. We have more than 25 distinct merchandise categories or departments. Over 180 different licensed band tee shirts are represented in Hot Topic stores from current artists such as AFI, Avenged Sevenfold, Bullet for my
Valentine, My Chemical Romance, Chiodos, Disturbed, Dropkick Murphys, Flogging Molly, Panic at the Disco, Paramore, HIM, Insane Clown Posse, Slipknot and Tokio Hotel, to classic rock artists such as The Ramones, Nirvana, Bob Marley, The Rolling
Stones, Metallica and Led Zeppelin. New items and categories are regularly tested to stay current with customer demand and new product trends.

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

To complement our merchandising staff and their efforts, we have a Chief Music Officer who we believe has helped us stay further ahead of the music curve. With this addition, we believe we have been able to propel our
music strategy forward, primarily through: the discovery and support of new bands, which are reflected in our assortment mix; fair pricing of CDs and rock tees, most of which are exclusive to us; and by creating an in-store music presence at all
times, an experience that we hope to make personal for each customer.

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

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



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Torrid Merchandising

Our Torrid stores serve as a destination for current trends in fashion apparel and accessories for plus-size young women. We believe that our Torrid customer wants to wear the same types of merchandise as her
smaller-sized peers. Torrid apparel is sized 12-26. Torrid merchandise includes both casual and dressy offerings with particular emphasis on jeans, fashion tops, sweaters, pants, jackets and dresses. We also carry hosiery, shoes, intimate apparel
and fashion accessories. As appropriate, our merchandise is specifically proportioned for plus-size customers. Torrid buyers work closely with vendor partners to monitor and maintain our unique apparel fit specifications for young women. Likewise,
we strategically share certain research on current fashion trends and customer input with key vendors so that we can maintain high standards of quality and fashion leadership. We believe that our brand mix gives our Torrid customer an opportunity to
buy the same or similar hottest styles and brands as her non-plus-size counterparts.

Torrids merchandising staff includes divisional
merchandise managers, a buying team, a product development team, sourcing team, a fit and quality assurance team as well as an Internet team. Customer and store associate feedback influences our merchandising decisions. The merchandising team spends
considerable time on fashion research from a variety of international sources that are relevant to our young, fashion forward customer. This process includes retail research in the United States and international fashion hot spots, entertainment and
pop culture venues and trade shows.

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

Planning and Allocation of Merchandise

Planning and
allocation of our inventory is done by merchandise classification and Stock Keeping Unit, or SKU, using integrated third-party software. Most merchandise is ordered in bulk and then allocated to each store based on sales and inventory plans and SKU
performance. Our buyers, merchandise planners and allocation analysts determine SKU reorder quantities by using this proprietary automated software program that considers sales history, projected sales, planned inventories, store demographics,
geographic preferences, store openings and planned markdown dates.

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

All merchandise is delivered to
our distribution centers, where it is inspected, allocated, picked, prepared and boxed for shipment to our stores. We ship merchandise to stores each weekday, providing our Hot Topic and Torrid stores with a steady flow of new and reordered
merchandise. We also fulfill our Internet orders, including ShockHound sales, from our distribution centers. Minimal back stock is maintained in our distribution centers and stores, so that most of our merchandise is available for sale on the
selling floors of our stores. No single vendor accounted for more than 10% of our merchandise purchases during fiscal 2008.

Hot Topic and Torrid Store
Operations

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



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

At Hot Topic, we
strive to create a store environment that customers will consider their place to shop with friends. We seek to hire sales associates who are energetic, knowledgeable and passionate about music and pop culture. Additionally, in return for
feedback on trends, we reimburse Hot Topic store associates for the cost of attending concerts. They are also encouraged to directly communicate customer feedback, as well as their own merchandise and product ideas, to the buyers and management. Our
culture and our direct interaction with, and respect for, sales associates are significant factors in attracting these associates to work for us.

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

At Torrid, we create a store environment that is fun, friendly and focused on fashion. We understand the importance of focusing
on the preferences and opinions of our target customers. We seek to hire associates who are passionate about fashion and understand and appreciate the plus-size customer. We provide our sales associates with information on trends and key looks for
each season. We also provide coaching and training on fit and quality, which are especially important to our Torrid customers.

District
managers, along with all members of the store teams, have a base pay rate and may qualify to receive certain bonus payouts. All of our employees who meet certain eligibility criteria may participate in our Employee Stock Purchase Plan and the Hot
Topic 401(k) Plan. We believe that our continued success is dependent in part on our ability to attract, retain and motivate qualified associates. In particular, the success of our growth will be dependent on our ability to promote and/or recruit
talented district and store managers.

Hot Topic Marketing and Promotion

We reach out to new customers using a unique combination of live music sponsorships and hosting in-store events. In the live music space, we provide
exclusive experiences either in-store or at special closed venues, across various genres of music for customers. These live experiences are exclusively available through Hot Topic. By working closely with record labels, motion picture studios and
artist management, we are able to bring major talent into the mall space to meet their fans. Our in-store event programs frequently generate major media visibility by connecting customers with their music and pop culture idols, resulting in deeply
personal interactions. From breaking, unsigned bands to global A-list celebrities, our tiered approach to live music and in-store events allows us to provide customers access to all levels of artists throughout the year.

We also rely on our customers, associates, store design and exciting music to attract new customers to our Hot Topic stores. We actively solicit and
encourage customer feedback, both to generate enthusiasm and passion for our offerings as well as to allow us to quickly respond to customer needs, which in turn helps us to remain current in merchandising our stores.

We sell gift cards as a convenient alternative for gift giving by our customers. Our Hot Topic gift cards do not expire. Gift card styles and colors
periodically change and are designed to appeal to customer preferences. Gift cards can be redeemed for merchandise at any Hot Topic store location and at www.hottopic.com for any amount up to the current balance. Unused amounts remain on the card
until redeemed by the customer. Customers may add to outstanding amounts on their existing gift cards in our stores and at www.hottopic.com.



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In fiscal 2004, we established the Hot Topic Foundation. The Foundations objective is to support
programs and organizations that specifically focus on encouraging and educating young people in music and the arts. The Foundation has been funded through donations from our employees, our company and our customers. As of January 31, 2009,
approximately $6.3 million had been raised for the benefit of the Foundation. We are proud of the meaningful contributions the Foundation has made to school music programs and other initiatives, and we believe these activities have a positive
influence on young people.

Torrid Marketing and Promotion

We seek to make a strong connection to young plus-size women by building our Torrid brand through our fashion forward marketing message. We conduct activities to increase awareness of and interest in our brand, our
mission and our objectives, such as national model search contests, where we solicit involvement of our existing customers and future customers.

Our Torrid loyalty program, divastyle®, offers us the chance to communicate directly and often with our most frequent and highest spending Torrid customers. These program members are rewarded throughout the year with special offers, promotions,
information and updates on new products and current trends available at Torrid.

We sell gift cards as a convenient alternative for gift
giving by our customers. Our Torrid gift cards do not expire. Gift card styles and colors periodically change and are designed to appeal to customer preferences. Gift cards can be redeemed for merchandise at any Torrid store location and at
www.torrid.com for any amount up to the current balance. Unused amounts remain on the card until redeemed by the customer. Customers may add to outstanding amounts on their existing gift cards at our stores and at www.torrid.com.

During the second quarter of fiscal 2008, we launched our private label Torrid credit card
program, divastatusSM, and we believe that through this and our other marketing and promotional efforts, our close relationship with our customers
will continue to grow.

Hot Topic Internet Sales

Our www.hottopic.com website provides a convenient and expanded shopping experience for our Hot Topic customers. Hot Topic Internet sales increased by 32.0% from $22.8 million in fiscal 2007 to $30.1 million in fiscal
2008, and contributed approximately 5.0% of total Hot Topic sales in fiscal 2008 compared to approximately 3.9% in fiscal 2007. In addition to our broad selection of merchandise for sale, including some Internet-only items, our Hot Topic website
offers content such as tour dates, contests, job postings, store locations and community features such as band reviews and pod casts.

In
the third quarter of fiscal 2008, we launched a redesigned website, which provides a new look and feel to visitors to www.hottopic.com.

Torrid Internet
Sales

Our www.torrid.com website provides a convenient and expanded shopping experience for our customers. Torrid Internet sales in
fiscal 2008 increased by 34.7% from $17.6 million in fiscal 2007 to $23.7 million in fiscal 2008, and contributed approximately 15.7% of total Torrid sales in fiscal 2008 compared to 13.0% in fiscal 2007.

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

In the second
quarter of fiscal 2008, we launched a redesigned www.torrid.com website, which provides a faster, more efficient shopping experience to visitors. We believe that a strong connection between the website and our stores is an essential part of our
brand growth and as we continue to grow our Torrid store concept, we



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believe that www.torrid.com will continue to provide an increasingly important portal for plus-size customers. To accommodate this trend and increase
Internet sales, we will continue to focus on developing our Torrid Internet business in the coming year.

Information Technology

Our information systems provide integration of store, merchandising, distribution, financial and human resources records and data. Software licensed from
Escalate Retail Systems (formerly known as GE Retail Systems) is used for SKU and classification inventory tracking, purchase order management, open-to-buy, merchandise allocation, automated ticket making and sales audit. Our integrated financial
systems are licensed from Lawson Software and are used for general ledger, accounts payable, human resources information systems, payroll and asset management. Sales are updated daily in the merchandising reporting systems by polling sales
information from each stores point-of-sale, or POS, terminals. Our POS system, using software licensed from SAP, consists of registers providing price look-up, time and attendance, email and credit card/check/gift card authorization. Through
automated nightly two-way electronic communication with each store, sales information and payroll hours are uploaded to the host system. The host system downloads price changes, performs system maintenance and provides software updates to the
stores. We evaluate information obtained through nightly polling to implement merchandising decisions, including product purchasing/reorders, markdowns and allocation of merchandise on a daily basis. Both our California and Tennessee distribution
centers operate using software that is licensed from Manhattan Associates. Our internet fulfillment centers in both California and Tennessee operate using Ecometry software from Escalate Retail Systems. The www.hottopic.com, www.torrid.com and
www.shockhound.com websites operate using Blue Martini web commerce software from Escalate Retail Systems.

Our wide area network, or WAN,
has been in place using Frame Relay circuits since fiscal 2003. The WAN is used to connect all store locations with real-time email and several Intranet applications. In addition, this technology has improved operating efficiency in areas such as
credit card and gift card authorization, store-to-store transfers, product lookup, product location and several other applications to eliminate paperwork. During fiscal 2007 and 2008, stores were converted from Frame Relay to Digital Subscriber
Line, or DSL, circuits. The conversion to DSL provides substantial performance improvement at a significantly reduced cost.

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

Trademarks

We have registered on the Principal Register of the United States Patent and Trademark Office our retail store and/or online retail store service marks Hot Topic®, ShockHound®, Torrid®, Torrid and Design® (in various forms)
and the Torrid logo Flaming Heart. We have also registered various trademarks for other goods and services such as Divastyle®, Everything About the Music®, Hot Topic Rock®, HT Rock®, Music=Life®, Morbid Make-Up®, Morbid Metals®, Neighborhood Noise®, Rock the Arts®, Sensuous Plunge®, Sizzling Strapless®, Social Collision®, Sultry Balconette® and Torrid Bride®. Each federal registration is renewable indefinitely if the mark is in continued use. We have the following trademark applications on file with the USPTO, for which we hope to obtain registration in the future: Color
Fiend, Divanation, Divastatus, Everything About New Music, Glamour Fiend, HT, Music Unleashed, ShockHound.com, ShockHound and Design (in various forms), ShockHound logos (in various forms), Shock
TV and Torrid Diva.

In addition, we have common law rights to certain trademarks, service marks and trade names used in our
business from time to time. We are unaware of the use of any of our marks raising any claims of infringement or other challenges to our right to use our marks in the United States. We also have additional registrations and pending applications in
foreign jurisdictions.



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All trademarks, trade names and service marks of the third parties referenced in this report and in our
stores are the property of their respective owners.

Seasonality

Our business, particularly the Hot Topic division, is subject to seasonal influences, with heavier concentrations of sales during the back-to-school, Halloween and holiday (defined as the week of Thanksgiving through
the first few days of January) seasons, and other periods when schools are not in session. The holiday season remains our single most important selling season. As is the case with many retailers of apparel, accessories and related merchandise, we
typically experience lower first fiscal quarter net sales relative to other quarters. In addition, seasonal influences near quarter-end dates may cause year-over-year comparisons to be impacted by the one-week shift in our fiscal calendar that
occurs on a periodic basis.

Hot Topic Competition

We compete with other retailers for vendors, customers, suitable retail locations and qualified associates. Our Hot Topic stores currently compete with street alternative and vintage clothing stores located primarily
in metropolitan areas and with other shopping mall-based teenage-focused retailers such as Abercrombie & Fitch, Aeropostale, American Eagle Outfitters, Bebe, Inc., Charlotte Russe Holdings, Inc., Claires Stores, Inc., Gap, Inc.,
Forever 21, Pacific Sunwear of California, Inc., Spencer Gifts, Inc., H&M, The Buckle, Tweenbrands, Inc., Wet Seal, Inc., Urban Outfitters, Inc. and Zumiez, Inc. We also compete with big-box discount stores such as Target Corporation and
Wal-Mart Stores, Inc.; and with music stores such as Barnes & Noble, Inc., Best Buy Co., Inc. and Borders Group, Inc. Some of our competitors are larger and have substantially greater financial, marketing and other resources than us. The
principal factors of competition are merchandise selection, connection to the music industry, customer service, store location and price.

Torrid
Competition

Based on direct customer research we have conducted, we believe that plus-size female teens and young women have
historically shopped for apparel at department stores, discount stores such as Target and specialty stores such as Lane Bryant. Though a source of competition, we believe such stores generally target more mature customers, which is also reflected in
their store environments. Our Torrid stores compete with traditional department stores, local specialty stores and junior teen retailers that offer a combination of junior and plus-sizes, such as Charming Shoppes, Inc. and Deb Shops. Our Torrid
stores also compete with traditional plus-size catalogs and websites that carry both junior and junior plus-sizes. Many companies compete for junior customers and additional competitors may enter the plus-size female market.

ShockHound Competition

ShockHound faces substantial
competition from companies such as eMusic, MySpace music, Apple Inc. and Amazon.com Inc. that have significant technical, marketing, distribution and other resources, as well as established hardware, software and digital content supplier
relationships. Some current and potential competitors have substantial resources and experience, and they may be able to provide music discovery content at little or no profit or even at a loss.

Employees

As of January 31, 2009, we employed
approximately 2,500 full-time and 6,700 part-time employees, which we refer to as associates. Of our 9,200 associates, approximately 900 were headquarters and distribution center personnel and the remainder were field management and store
associates. The number of part-time associates changes with seasonal needs. None of our associates are covered by collective bargaining agreements.



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Executive Officers

Our executive officers and their ages are as follows:



|                     |  |     |  |                                                    
|-------------------- |  | --- |  | ---------------------------------------------------
|Name                 |  | Age |  | Position                                           
|Elizabeth McLaughlin |  | 48  |  | Chief Executive Officer and Director               
|Gerald Cook          |  | 56  |  | Chief Operating Officer                            
|Christopher Daniel   |  | 51  |  | President, Torrid                                  
|James McGinty        |  | 46  |  | Chief Financial Officer                            
|Tom Beauchamp        |  | 56  |  | Senior Vice President and Chief Information Officer
|Robin Elledge        |  | 50  |  | Senior Vice President, Human Resources             
|John Kirkpatrick     |  | 40  |  | Senior Vice President, Chief Music Officer         
|George Wehlitz, Jr.  |  | 48  |  | Vice President, Finance                            

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

Gerald Cook has served as Chief
Operating Officer since June 2008. From November 2005 through June 2008, he served as President, Hot Topic Inc. From September 2003 to October 2005, he was President of the Hot Topic division. From February 2001 to September 2003, he was Chief
Operating Officer. From February 1999 until joining us, he was the President and Chief Operating Officer of Travel 2000, Inc. From 1995 to 1998, Mr. Cook was Senior Vice President, Operations for The Bombay Company, Inc. and from 1989 to 1995,
Mr. Cook was the Vice President, Stores and the Vice President, General Merchandising Manager of Womans World Stores. Prior to 1989, he held management positions with Barnes & Noble/B Dalton, The Gap Stores and the Limited, Inc.
Mr. Cook holds a B.S. degree in Business Administration from the University of Minnesota.

Christopher Daniel has served as
President of our Torrid division since November 2006. From September 2006 to November 2006, he was Senior Vice President, Chief Merchandising Officer for Torrid and from October 2004 to August 2006, he was Vice President, General Merchandise Manager
for Torrid. From September 1996 until September 2004, he was the Vice President of Design and Product Development for Mervyns, a division of Target Corporation. Prior to that, Mr. Daniel held management positions in merchandising and
product development with Structure, a division of Limited, Inc., Charming Shoppes, and Dayton-Hudson. Mr. Daniel holds a B.A. degree in English Literature from the University of Richmond in Richmond, Virginia.

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

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



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Montgomery Ward, Limited, Inc., Millers Outpost, and The Broadway. Mr. Beauchamp has a B.A. degree in Sociology from the University of Redlands and an
M.B.A. from the University of California at Fullerton.

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

John Kirkpatrick joined us in April 2007 as Senior Vice President, Chief Music Officer of our Hot Topic division. From 2004 to 2007,
Mr. Kirkpatrick served as Senior Vice President, Music and Creative Affairs at Paramount Pictures. Prior to that, Mr. Kirkpatrick served as Senior Vice President, A&R / Soundtracks at Elektra Records from 1996 to 2004. From 1990 to
1996, he held various management positions at Laffitte Entertainment Division. Mr. Kirkpatrick attended the University of South Florida.

George Wehlitz Jr.joined us in April 2008 as Vice President, Finance. From November 2005 to January 2008, Mr. Wehlitz was Chief Financial Officer at Cycle Gear, Inc., a specialty retailer of motorcycle apparel and accessories.
Mr. Wehlitz previously joined us as Vice President, Controller in February 2002, and then served as Vice President, Finance from August 2003 to November 2005. From August 2000 to February 2002, Mr. Wehlitz was Chief Financial Officer at
The Popcorn Factory, a catalog company for gourmet popcorn gifts. From 1987 to 2000, Mr. Wehlitz held various financial-related positions, at the divisional and corporate level, for The Bombay Company, Inc. Mr. Wehlitz holds a B.A. degree
in Accounting from Texas Christian University and is a Certified Public Accountant.

Compliance with Environmental Regulations

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

Internet Website

We
make available free of charge through our investor relations website at investorrelations.hottopic.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission, or the SEC. We also make available our
Standards of Business Ethics at that website.



|ITEM1A. | RISK FACTORS
|------- | ------------

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

Economic conditions, such as the recent global economic downturn, and the deteriorating financial condition of shopping mall operators could reduce
our sales or increase our expenses.

Certain economic conditions could affect the level of consumer spending on merchandise we offer,
including, among others, employment levels; salary and wage levels; interest rates; availability of consumer



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credit; taxation; and consumer confidence in future economic conditions. For example, the current credit crisis and global economic downturn have
significantly reduced consumer spending levels in general and diminished the ability of shopping mall operators to operate profitably. We are also dependent upon the continued popularity of malls as a shopping destination, the ability of shopping
mall anchor tenants and other attractions to generate customer traffic and the development of new shopping malls. The continuing slowdown in the United States economy or an uncertain economic outlook could continue to cause lower consumer spending
levels, curtail new shopping mall development, decrease shopping mall traffic, reduce the number of hours that shopping mall operators keep their shopping malls open or force them to cease operations entirely, each of which could adversely affect
our sales results and financial performance.

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

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

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

A variety of factors affect our comparable store sales including, among others,
the timing of new music releases, music/pop culture-related products and related promotional events; music and fashion trends; the general retail sales environment and the effect of the overall economic environment, including the current credit
crisis and economic downturn; our ability to efficiently source and distribute products; changes in our merchandise mix; our ability to attain certain pop culture-related licenses including on an exclusive basis; competition from other retailers;
calendar shifts of holiday or seasonal periods; and our ability to execute our business strategy efficiently. The following table shows our comparable store sales results for fiscal 2008 and other recent periods:



|            |  |      |    |  |      |    |  |      |   
|----------- |  | ---- | -- |  | ---- | -- |  | ---- | --
|Fiscal Year |  | 2008 |    |  | 2007 |    |  | 2006 |   
|Total Year  |  | 1.0  | %  |  | (4.4 | )% |  | (6.6 | )%
|1st Quarter |  | (2.8 | )% |  | (2.3 | )% |  | (9.6 | )%
|2nd Quarter |  | (0.9 | )% |  | (5.8 | )% |  | (5.5 | )%
|3rd Quarter |  | 1.0  | %  |  | (2.6 | )% |  | (6.8 | )%
|4th Quarter |  | 5.2  | %  |  | (6.3 | )% |  | (5.3 | )%

Past comparable store sales results are not an indicator of future results, and our comparable
store sales results may not maintain their current upward trend in the future. Changes in our comparable store sales results could cause our stock price to fluctuate substantially.

Expanding our operations to include new concepts, including ShockHound, presents risks we have faced with our existing concepts, but also new risks
due to differences in concept objectives and strategies and the diversion of managements attention from our existing concepts.

Since our inception, we have expanded our business beyond the Hot Topic concept to include our Torrid concept and more recently, our new e-space music discovery concept called ShockHound. We may implement



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other new concepts in the future. Starting and operating new concepts presents new and challenging risks and uncertainties, including, among others,
unanticipated operational problems; lack of experience; lack of customer acceptance; the inability to market a new concept effectively; new vendor relationships; competition from existing and new retailers; and diversion of managements
attention from our existing concepts. If we do not operate ShockHound or any new concept effectively, it could materially impact our business.

ShockHound is subject to the general risks for new concepts described above as well as its own particular risks and uncertainties, such as risks related to maintaining access to third party digital content, maintaining adequate information
technology and data security systems, increasing customer brand awareness, differentiating product and content from that of our competitors, and marketing and driving traffic to www.shockhound.com. ShockHound faces substantial competition from
companies such as eMusic, MySpace music, Apple Inc. and Amazon.com Inc. that have significant technical, marketing, distribution and other resources, as well as established hardware, software and digital content supplier relationships. Moreover,
some current and potential competitors have substantial resources and experience, and they may be able to provide music discovery content at little or no profit or even at a loss. We cannot assure you that we will be able to effectively compete with
these companies. Also, this new concept requires us to contract with third party owners, providers and/or distributors to offer digital content through ShockHound. We could also be required to pay substantial fees to obtain or renew the rights to
this content. Typically, licensing arrangements are short-term and do not guarantee the continuation or renewal of these arrangements on reasonable terms. Some third-party content providers currently, or may in the future, offer competing products
and services and could take action to make it more difficult or impossible for us to license their content in the future. Other digital content owners, providers or distributors may lose their rights to distribute digital content, seek to limit our
access to, or increase the total cost of, such content. If we were unable to offer a wide variety of music content at reasonable prices with acceptable usage rules, our financial condition and operating results could be adversely affected.

Our reliance on third-party providers and/or distributors of digital content and related merchandise may present risks that could
negatively impact our future results.

We may enter into contracts with third-party providers and/or distributors to offer their digital
content and related merchandise for sale on-line. We may be negatively impacted by a number of factors, including among others: the malfunction of third-party sites, hardware, software and other equipment; service outages of third-party sites;
third-party claims of data privacy and security breaches and intellectual property infringements; and poor integration of our technology into their software and services. If we are unable to prevent one or more of these occurrences, our results
could be negatively impacted.

We may not be able to maintain good relationships with shopping mall operators which could hinder our
ability to negotiate our leases, expand, remodel or relocate certain sites or offer certain products.

The success of our business
depends on establishing and maintaining good relationships with shopping mall operators and developers, and problems with those relationships could make it more difficult for us to expand, remodel or relocate to certain sites or offer certain
products. Any restrictions on our ability to expand to new store sites, remodel or relocate stores where we feel it necessary or to offer a broad assortment of merchandise could have a material adverse effect on our business, results of operations
and financial condition. If our relations with shopping mall operators or developers become strained, or we otherwise encounter difficulties in leasing store sites, we may not grow as planned and may not reach certain revenue levels and other
operating targets. Risks associated with these relationships are more acute given recent consolidation in the shopping mall operation and development industry and the current negative economic climate, and we have seen certain increases in expenses
as a result of such consolidation that could continue.



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

In order to open, remodel and relocate
stores, among other things, we will need to locate suitable store sites, negotiate acceptable lease terms, obtain or maintain adequate capital resources on acceptable terms, source sufficient levels of inventory, hire and train store managers and
sales associates, integrate new or relocated stores into our existing operations and maintain adequate distribution center space and information technology and other operations systems. Achieving and maintaining operating efficiencies in multiple
distribution centers is subject to numerous risks and uncertainties.

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

Our strategy of remodeling, relocating or
closing existing stores, and opening new stores, may not achieve its anticipated benefits and could create challenges we may not be able to adequately meet.

Prior to fiscal 2007, our net sales grew primarily as a result of the opening of new stores and, to a lesser extent, the introduction of new products. We intend to evolve our existing business by remodeling,
relocating or closing certain existing stores and to a much lesser extent in the future, continuing to open and operate new stores. We plan to remodel or relocate approximately 25 existing Hot Topic stores and plan to close approximately 10 Hot
Topic and 5 Torrid stores in fiscal 2009.

Our future operating results will depend substantially upon our ability to successfully maintain
our existing store base, improve the performance of our remodeled and relocated stores, and to a lesser extent in the future, open and operate new stores. Moving or expanding store locations and operating stores in new markets may present
competitive and merchandising challenges that are different from those currently encountered by us in our existing stores and markets. There can be no assurance that our strategy will not adversely affect the individual financial performance of our
existing stores or our overall results of operations. In the event that the number of our stores increases, we may face risks associated with market saturation of our products and concepts.

Similarly, there can be no assurance that remodeling or relocating existing stores will not adversely affect either the individual financial performance
of the store prior to the change, or our overall results of operations. Further, there can be no assurance that we will successfully achieve our remodel or expansion targets or, if achieved, that planned remodel or expansion will result in
profitable operations.

Our profitability could be adversely affected by volatile petroleum prices.

The profitability of our business depends to a certain degree upon the price of petroleum products, both as a component of the transportation costs for
delivery of inventory from our vendors to our stores and as a raw material used in the production of our merchandise. During fiscal 2008, petroleum prices were volatile and rose to historic or near historic highs. We are unable to predict what the
price of crude oil and the resulting petroleum products will be in the future. We may be unable to pass along to our customers the increased costs that would result from higher petroleum prices. Therefore, any such increase could have a material
adverse impact on our business and profitability.



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Significant fluctuation in the value of the U.S. dollar or foreign exchange rates may increase our
costs and reduce our supply of merchandise.

Historically, substantially all of our foreign purchases of merchandise have been
negotiated and paid for in U.S. dollars. As a result, our sourcing operations also may be adversely affected by significant fluctuation in the value of the U.S. dollar against foreign currencies, restrictions on the transfer of funds and other
trade disruptions.

Continued negative conditions in the global capital and credit markets may materially impair the liquidity of a
portion of our cash and investment portfolio.

We hold investments in AAA/Aaa/A3-rated auction rate securities and account for them as
available for sale. They are backed by pools of student loans guaranteed by the U.S. Department of Education. Our auction rate securities are debt instruments with maturities that range from 25 to 32 years and with interest rates that are reset
through an auction process, most commonly at intervals of 7, 28 and 35 days. This same auction process is designed to provide a means by which these securities can be sold and historically has provided a liquid market for them. Negative market
conditions continue to indicate uncertainty in the global credit and capital markets. This uncertainty has resulted in the failure of auctions representing the auction rate securities we hold as the amount of securities submitted for sale in those
auctions exceed the amount of bids. While we have continued to earn and receive interest on our auction rate securities through the date of this report, we concluded that their estimated fair value no longer approximates par value as of the end of
fiscal 2008. Due to the lack of availability of observable market quotes on our auction rate securities, the fair market value of these securities was initially determined in the first quarter of fiscal 2008 based on a valuation model prepared by
the broker-dealer that holds these securities on our behalf. We reviewed and found reasonable the valuation model and methodologies used by the broker-dealer. In addition, we have continued to update the model using current assumptions throughout
fiscal 2008.

As of January 31, 2009 and February 2, 2008, the fair value of our auction rate securities was $8.4 million and
$21.2 million, respectively. The decrease represents a $10.8 million liquidation in the first quarter of fiscal 2008 and a decline in fair value of $2.0 million from February 2, 2008. This $2.0 million decline is deemed temporary as we have the
intent and ability to hold these investments until anticipated full or substantial recovery in fair value occurs. Accordingly, we have recorded an unrealized loss of $2.0 million ($1.2 million net of tax) in accumulated other comprehensive income
reflected in the shareholders equity section of the consolidated balance sheet. If uncertainties in the credit and capital markets continue, we may incur additional losses, some of which may be other-than-temporary, which could negatively
affect our financial condition or results of operations. In addition, in the event that we decide not to hold these investments until full or substantial recovery, we may be required to recognize impairment charges against income.

Cash used primarily for working capital purposes is maintained with various major financial institutions in amounts which are in excess of the Federal
Deposit Insurance Corporation, or FDIC, insurance limits. Excess cash and cash equivalents, which represent the majority of our cash and cash equivalents balance, are held primarily in diversified money market funds. We also have short-term
investments which are primarily in highly rated municipal bonds. Although the money market funds and municipal bonds are highly rated and are comprised of high-quality, liquid instruments, if the financial markets trading the underlying assets
experience a disruption, we may need to temporarily rely on other forms of liquidity.

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

Based on our review of certain underperforming stores, we recorded $1.2 million, $1.6 million and $3.4 million in impairment charges during fiscal 2008,
fiscal 2007 and fiscal 2006, respectively. There can be no assurance that we will not incur future impairment charges for underperforming stores, which could have a



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significant negative impact on our operating results. In addition, we closed 13 Hot Topic stores and 3 Torrid stores during fiscal 2008. Although the stores
that closed in fiscal 2008 had been underperforming as compared with our other Hot Topic and Torrid stores, there is no assurance these store closures will have a significant positive impact on our operating results. We expect to close approximately
10 Hot Topic and 5 Torrid stores in fiscal 2009. We also expect to identify and close additional underperforming stores in the future, which also could adversely affect our operating results.

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

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

Government or consumer concerns about product safety could result in regulatory actions, recalls or changes to laws, which could harm our reputation,
increase costs or reduce sales.

We are subject to regulation by the Consumer Product Safety Commission and similar state and
international regulatory authorities, and our products could be subject to involuntary recalls and other actions by these authorities. We purchase merchandise from suppliers domestically as well as outside the United States. One or more of
our suppliers might not adhere to product safety requirements or our quality control standards, and we might not identify the deficiency before merchandise ships to our stores. Any issues of product safety could result in a recall of our
products. Additionally, the U.S. legislature, as well as various states and regulatory agencies, including the Consumer Product Safety Commission, have undertaken reviews of product safety, specifically for lead content in jewelry, and other
consumer products, and have enacted or are considering various proposals for additional more stringent laws and regulations. In particular, the U.S. Congress has enacted the Consumer Product Safety Improvement Act of 2008, which imposes significant
new requirements on the retail industry as well as enhancing the penalties for noncompliance. Some of these new mandates could result in lost sales, the rejection of our products by consumers, damage to our reputation or material increases in
our costs, and may have a material adverse effect on our business. Moreover, individuals may assert claims that they have sustained injuries from products we sell, and we may be subject to lawsuits relating to these claims. There is a risk that
these claims or liabilities may exceed, or fall outside of the scope of our insurance coverage. Any of the issues mentioned above could result in damage to our reputation, diversion of development and management resources, reduction of sales and an
increase in costs and liabilities, any of which could have a material adverse effect on our reputation or financial performance.

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

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

In addition, seasonal influences near quarter-end dates may cause financial results for given periods to be impacted by shifts in our fiscal year, which
is on a 52- or 53-week basis. For example, the fiscal years ended January 31, 2009 and February 2, 2008 were 52-week fiscal years, and the fiscal year ended February 3, 2007



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was a 53-week fiscal year. The 53rd week in fiscal 2006 caused a one-week shift in our fiscal 2007 calendar, resulting in the end of fiscal 2007 being
shifted later by one week relative to the corresponding year-ending date in fiscal 2006.

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

We depend on a small number of key licensed products for a portion of our earnings and lower than expected sales of those products or the inability
to obtain new licensed products could adversely affect our revenues.

We license from others the rights to produce and/or sell certain
products that contain a third partys trademarks, designs and other intellectual property. If the popularity of those licensed products diminishes, consumer acceptance of and demand for those licensed products could decline. Furthermore, if we
are unable to obtain new licensed products with comparable consumer demand, our sales could decline. A decrease in customer demand for any of these products could have a material adverse effect on our results of operations and financial condition.

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

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

Changes in business conditions, including new legislative and regulatory requirements, may increase
costs and further affect our relationship with vendors.

Changes in our vendor compliance and certification procedures may delay
delivery of merchandise and increase costs. Our relationships with our vendors may be adversely affected as a result of these changes, making us more dependent on a smaller number of vendors. Some vendors may choose not to continue to do business
with us to the extent that they have done in the past. In addition, we may not be able to depend upon the cooperation of our vendors to meet market demand for products in a timely manner. There can be no assurance that existing and future events
will not require us to adopt additional requirements and incur additional costs, and impose those requirements and costs on our vendors, which may adversely affect our relationship with those vendors.



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A disruption of imports from our foreign suppliers may increase our costs and reduce our supply of
merchandise.

We do not own or operate any production or manufacturing facilities, and we depend on independent contractors and vendors
to manufacture our merchandise. We receive apparel and other merchandise from foreign sources, both purchased directly in foreign markets and indirectly through domestic vendors with foreign sources. As a result of our reliance on
international vendors and manufacturers, we are subject to the risks generally associated with global trade and doing business abroad, which include foreign laws and regulations, political unrest, disruptions or delays in cross-border shipments and
changes in economic conditions in countries in which our merchandise is manufactured. In addition, disease outbreaks, terrorist acts and military conflict have increased the risks of doing business with foreign suppliers. We cannot predict the
effect that such factors will have on our business arrangements with foreign manufacturing sources. These factors, among others, could affect our ability to have our merchandise manufactured abroad, our ability to import merchandise, and our
cost of doing business.

To the extent that any of our vendors are located overseas or rely on overseas sources for a large portion of their
products, any event causing a disruption of imports, including the imposition of import restrictions, could harm our, or our vendors, ability to source product. This disruption could materially limit the merchandise that we would have
available for sale and reduce our revenues and earnings. Trade restrictions in the form of tariffs or quotas, or both, that are applicable to the products that we sell also could affect the import of those products and could increase the cost
and reduce the supply of products available to us. Further, changes in tariffs or quotas for merchandise imported from individual foreign countries could lead us to shift our sources of supply among various countries. Any shift we might
undertake in the future could result in a disruption of our sources of supply and lead to a reduction in our revenues and earnings. Supply chain security initiatives undertaken by the United States government that impede the normal flow of
product could also negatively impact our business.

Risks associated with contracting directly with manufacturers for merchandise could
hinder our financial performance.

We expect to source a greater percentage of our merchandise directly from manufacturers in the
future. We have limited experience in sourcing and importing merchandise directly from manufacturers. We may encounter administrative challenges and operational difficulties with our direct manufacturers that we use to source our
merchandise. Operational difficulties could include reductions in the availability of production capacity, errors in complying with merchandise specifications, insufficient quality control and failures to meet production deadlines. A
manufacturers failure to ship merchandise to us on a timely basis or to meet the required quality standards could cause supply shortages that could result in lost sales. As a result of any of these events or circumstances, delays and
unexpected costs may occur, which could result in our not realizing all or any of the anticipated benefits of contracting directly with manufacturers.

Failure of our vendors to use acceptable ethical business practices could negatively impact our business.

We expect our vendors to operate in compliance with applicable laws, rules and regulations regarding working conditions, employment practices, environmental compliance and trademark and copyright licensing. However, we do not control
their labor and other business practices. Further, we do not inspect our manufacturers overseas operations and would not be immediately aware of any noncompliance by our vendors with applicable domestic or international laws, or certain of the
standards set forth in our vendor manual. If one of our vendors violates labor or other laws or implements labor or other business practices that are regarded as unethical, the shipment of merchandise to us could be interrupted, orders could be
canceled, relationships could be terminated and our reputation could be damaged. Any of these events could have a material adverse effect on our business, results of operations and financial condition.



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We could acquire merchandise without full rights to sell it, which could lead to disputes or
litigation and hurt our financial performance.

We purchase licensed merchandise from vendors that hold, or represent that they hold,
manufacturing and distribution rights under the terms of certain licenses. We also contract directly with licensors to obtain the manufacturing and distribution rights. We currently purchase a majority of our licensed merchandise from vendors, where
we rely upon the vendors representations concerning manufacturing and distribution rights and do not independently verify whether these vendors legally hold adequate rights to the licensed properties they are manufacturing or distributing. If
we acquire either directly, or through our vendors, licensed merchandise to which we have not legally obtained rights, we could be obligated to remove such merchandise from our stores, incur costs associated with destruction of merchandise (if the
vendor is unwilling or unable to reimburse us in situations where we relied on the vendor to hold the manufacturing and distribution rights) and be subject to liability under various civil and criminal causes of action, including actions to recover
unpaid royalties and other damages. As we expand our efforts to contract directly with manufacturers and licensors for licensed merchandise, we may incur difficulties securing the necessary manufacturing and distribution rights. Any of these results
could have a material adverse effect on our business, results of operations and financial condition.

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

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

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

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

In addition, our systems are not fully redundant and could be subject to failure at any single point. Moreover, our disaster recovery planning may not be
sufficient and we may not have inadequate insurance coverage to compensate us for any related losses. Any of these events could damage our reputation and be expensive to remedy.



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

Over the past several years, we have made improvements to existing hardware and software systems, as well as implemented new systems. For example, we have
invested approximately $6 million dollars to enhance the functionality of our current Escalate Retail Systems software and to implement new financial and human resources systems software from Lawson Software. In addition, we invested approximately
$10 million in the implementation of a new warehouse management software system, a new internet order management system, new customer loyalty software and merchandise planning software. We expect to significantly increase our reliance on these
systems throughout fiscal 2009. If these information systems and software do not work effectively, we may experience delays or failures in our operations. These delays or failures could adversely impact the promptness and accuracy of our merchandise
distribution, transaction processing, financial accounting and reporting and ability to properly forecast earnings and cash requirements. To manage growth of our operations and personnel, we will need to continue to improve our operational and
financial systems, transaction processing and procedures and controls, and in doing so, we could incur substantial additional expenses.

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

Our ability to
achieve and maintain operating efficiency and to anticipate and effectively respond to changing trends and consumer preferences depends in part on our ability to retain and attract senior management and other key personnel in our operations,
merchandising, music and other departments. Competition for these personnel is intense, and we cannot be sure that we will be able to retain or attract qualified personnel as needed. In particular, the sudden loss of the services of Elizabeth
McLaughlin, our Chief Executive Officer, who has been with us since 1993, or the services of other key people could have a material adverse effect on our business, results of operations and financial condition.

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

We have historically used stock options as a component of our total employee compensation program in order to align employees interests with the
interests of our shareholders, encourage employee retention and provide competitive compensation and benefit packages. As a result of the decline in our stock price that took place prior to fiscal 2008, many of our employee stock options have
exercise prices in excess of our current stock price, which reduces their value and could affect our ability to retain present, or attract prospective employees. There are other forms of stock-based compensation available to us, but these are
similarly less attractive when a companys stock price has declined. In addition, in accordance with Statement of Financial Accounting Standards, or SFAS, No. 123R Share Based Payments, we began recording expenses for
stock-based payments, including stock options, in the first quarter of fiscal 2006. As a result, we now incur increased compensation costs associated with our stock-based compensation programs. Moreover, difficulties relating to obtaining
shareholder approval of equity compensation plans could make it harder or more expensive for us to grant stock-based payments to employees in the future. Like other companies, we review our equity compensation strategy in light of regulatory and
competitive environments, and we may decide to reduce the total number of options granted, or the form of stock awards, to employees, or reduce the number of employees who receive stock-based payments. Due to this change in our stock-based
compensation strategy, we may find it difficult to attract, retain and motivate employees, and any such difficulty could materially adversely affect our business.

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

Our reliance on Federal Express for shipments is subject to risks associated with its ability to provide delivery services that adequately meet our
shipping needs, as well as factors such as weather and transportation prices.



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We are also dependent upon temporary associates to adequately staff our distribution centers,
particularly during busy periods such as the holiday season and while multiple stores are opening. There can be no assurance that we will continue to receive adequate assistance from our temporary associates, or that there will continue to be
sufficient sources of temporary associates.

We operate distribution centers in California and Tennessee, and as a result we face risks and
uncertainties associated with achieving and maintaining operating efficiencies in two distribution centers that are located approximately 2,000 miles apart. Additionally, certain products we offer in our stores are imported and subject to delivery
delays based on availability and port capacity.

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

The retail apparel and accessory industry is highly
competitive. We compete with other retailers for vendors, teenage and young adult customers, suitable store locations and qualified associates and management personnel. Our Hot Topic stores currently compete with street alternative stores located
primarily in metropolitan areas; with other shopping mall-based teenage-focused retailers and their subsidiaries such as Abercrombie & Fitch, Aeropostale, American Eagle Outfitters, Bebe, Inc., Charlotte Russe, Claires Stores, Inc.,
Gap, Inc., Forever 21, Pacific Sunwear of California, Inc., Spencer Gifts, Inc., H&M, The Buckle, Tweenbrands, Inc., Wet Seal, Inc., Urban Outfitters, Inc. and Zumiez, Inc. We also compete with big-box discount stores such as Target Corporation
and Wal-Mart Stores, Inc.; with music stores such as Barnes & Noble, Inc., Best Buy Co., Inc. and Borders Group, Inc.; and with mail order catalogs and websites. Torrid has additional competitors, such as Alloy, Inc., Charming Shoppes,
Inc., Deb Shops, Delias Corp. and plus-size departments in department stores and discount stores as well as numerous potential competitors who may begin or increase efforts to market and sell products competitive with Torrid products.
ShockHound faces substantial competition from companies such as eMusic, MySpace music, Apple Inc. and Amazon.com Inc. Some of our competitors are larger and may have greater financial, marketing and other resources. Direct competition with these and
other retailers may increase significantly in the future, which could require us, among other things, to lower our prices. Increased competition could have a material adverse effect on our business, results of operations and financial condition.

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

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

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

There are numerous risks that could cause our stock price to fluctuate substantially and we may be at risk of securities class action litigation due
to such fluctuations.

Our common stock is quoted on the Nasdaq Stock Market, which has experienced and is likely to experience in the
future, significant price and volume fluctuations, which could adversely affect our stock price without regard to our financial performance. In addition, we believe that factors such as quarterly fluctuations in



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our financial results and comparable store sales; announcements by other apparel, accessory, music and gift item retailers; the trading volume of our stock;
changes in estimates of our performance by securities analysts; litigation; overall economic and political conditions, including the current economic downturn; the condition of the financial markets, including the credit crisis; and other events or
factors outside of our control could cause our stock price to fluctuate substantially, including significant declines in our stock price. In the past, shareholders have brought securities class action litigation against a company following a decline
in the market price of its securities. To date, we have not been subject to securities class action litigation. However, we may in the future be the target of such litigation, which could result in substantial costs and divert our managements
attention and resources, and could harm our business.

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

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

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

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

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

There are other regulations and standards associated with our business operations. These regulations may include more stringent accounting
standards, taxation requirements, (including changes in applicable income tax rate, new tax laws and revised tax law interpretations), trade restrictions, regulations regarding financial matters, privacy and data security, environmental regulations,
advertising, safety and product liability. For example, an independent standards-setting organization working with credit card companies has developed regulations concerning payment card account security throughout the transaction process,
called the Payment Card Industry (PCI) Data Security Standard. All merchants and service providers that store, process and transmit payment card data are required to comply with the regulations as a condition to accepting credit cards. The
organization may levy fines on companies that are non-compliant, and though we attained full compliance during the third quarter of fiscal 2008, there is no guarantee we will not incur fines for our future inability to comply.

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



25



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##### Table of Contents

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

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



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

None.



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

We lease all of our
existing store locations, with lease terms expiring between 2009 and 2019. At January 31, 2009, we had a total of approximately 1,196,000 leased store square feet for Hot Topic and approximately 397,000 leased store square feet for Torrid, with
an average store size of 1,755 square feet and 2,500 square feet for Hot Topic and Torrid stores, respectively. The leases for most of the existing stores are for approximately ten-year terms and provide for minimum rent payments as well as
contingent rent based upon a percent of sales in excess of the specified minimums. Leases for future stores will likely include similar contingent rent provisions.

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



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

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



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

Not applicable.



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##### Table of Contents

PART II



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

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



|                          |  |      |       |     |   |      
|------------------------- |  | ---- | ----- | --- | - | -----
|2008 Fiscal Year Quarters |  | High |       | Low
|First Quarter             |  | $    | 6.18  |     | $ | 4.04 
|Second Quarter            |  | $    | 7.10  |     | $ | 4.68 
|Third Quarter             |  | $    | 7.73  |     | $ | 4.61 
|Fourth Quarter            |  | $    | 9.50  |     | $ | 5.09 
|                          |  |     
|2007 Fiscal Year Quarters |  | High |       | Low
|First Quarter             |  | $    | 12.11 |     | $ | 10.11
|Second Quarter            |  | $    | 11.87 |     | $ | 8.16 
|Third Quarter             |  | $    | 9.00  |     | $ | 7.01 
|Fourth Quarter            |  | $    | 7.75  |     | $ | 3.90 

On March 20, 2009, the last sales price of our common stock as reported on the Nasdaq Stock
Market was $9.50 per share. As of March 20, 2009, there were approximately 189 holders of record of our common stock. This number does not reflect the actual number of beneficial holders of our common stock, which we believe is significantly
higher.

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

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



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PERFORMANCE MEASUREMENT COMPARISON

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

The following graph shows a comparison of
five-year cumulative total returns to shareholders for Hot Topic, the NASDAQ Composite Index and the NASDAQ Retail Trade Index for the period that commenced January 31, 2004 and ended on January 31, 2009. The graph assumes an initial
investment of $100 and that all dividends have been reinvested (there have been no dividends declared by us other than stock dividends).

LOGO



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##### Table of Contents

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

The following table summarizes selected financial data for each of the five fiscal years in the period ended January 31, 2009. This data should be read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations and the consolidated financial statements and Notes included elsewhere in this annual report on Form 10-K.



|                                                                       |  |                                                                                                          |         |   |      |   |         |      |  |   |         |    |  |      |         |    |  |   |         |   
|---------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -- |  | ---- | ------- | -- |  | - | ------- | --
|                                                                       |  | Fiscal Year                                                                                              |        
|                                                                       |  | 2008                                                                                                     |         |   | 2007 |   |         | 2006 |  |   | 2005    |    |  | 2004 |        
|                                                                       |  | (In thousands, except per share data, number of stores,comparable store sales and sales per square foot) |        
|Statement of Income Data:                                              |  |                                                                                                          |         |   |      |   |         |      |  |   |         |    |  |      |         |    |  |   |         |   
|Net sales                                                              |  | $                                                                                                        | 761,074 |   |      | $ | 728,121 |      |  | $ | 751,558 |    |  | $    | 725,142 |    |  | $ | 656,468 |   
|Cost of goods sold, including buying, distribution and occupancy costs |  |                                                                                                          | 487,769 |   |      |   | 476,677 |      |  |   | 502,408 |    |  |      | 488,948 |    |  |   | 422,712 |   
|                                                                       |  |                                                                                                          |         |   |      |   |         |      |  |   |         |    |  |      |         |    |  |   |         |   
|Gross margin                                                           |  |                                                                                                          | 273,305 |   |      |   | 251,444 |      |  |   | 249,150 |    |  |      | 236,194 |    |  |   | 233,756 |   
|Selling, general and administrative expenses                           |  |                                                                                                          | 242,483 |   |      |   | 227,147 |      |  |   | 227,580 |    |  |      | 203,995 |    |  |   | 170,384 |   
|                                                                       |  |                                                                                                          |         |   |      |   |         |      |  |   |         |    |  |      |         |    |  |   |         |   
|Income from operations                                                 |  |                                                                                                          | 30,822  |   |      |   | 24,297  |      |  |   | 21,570  |    |  |      | 32,199  |    |  |   | 63,372  |   
|Other income and interest, net                                         |  |                                                                                                          | 1,670   |   |      |   | 1,934   |      |  |   | 1,450   |    |  |      | 3,999   |    |  |   | 919     |   
|                                                                       |  |                                                                                                          |         |   |      |   |         |      |  |   |         |    |  |      |         |    |  |   |         |   
|Income before income taxes                                             |  |                                                                                                          | 32,492  |   |      |   | 26,231  |      |  |   | 23,020  |    |  |      | 36,198  |    |  |   | 64,291  |   
|Provision for income taxes                                             |  |                                                                                                          | 12,750  |   |      |   | 10,219  |      |  |   | 9,394   |    |  |      | 13,779  |    |  |   | 24,618  |   
|                                                                       |  |                                                                                                          |         |   |      |   |         |      |  |   |         |    |  |      |         |    |  |   |         |   
|Net income                                                             |  | $                                                                                                        | 19,742  |   |      | $ | 16,012  |      |  | $ | 13,626  |    |  | $    | 22,419  |    |  | $ | 39,673  |   
|                                                                       |  |                                                                                                          |         |   |      |   |         |      |  |   |         |    |  |      |         |    |  |   |         |   
|Earnings per share:                                                    |  |                                                                                                          |         |   |      |   |         |      |  |   |         |    |  |      |         |    |  |   |         |   
|Basic                                                                  |  | $                                                                                                        | 0.45    |   |      | $ | 0.36    |      |  | $ | 0.31    |    |  | $    | 0.50    |    |  | $ | 0.86    |   
|Diluted                                                                |  | $                                                                                                        | 0.45    |   |      | $ | 0.36    |      |  | $ | 0.30    |    |  | $    | 0.49    |    |  | $ | 0.83    |   
|Weighted average shares outstanding:                                   |  |                                                                                                          |         |   |      |   |         |      |  |   |         |    |  |      |         |    |  |   |         |   
|Basic                                                                  |  |                                                                                                          | 43,789  |   |      |   | 44,005  |      |  |   | 44,167  |    |  |      | 44,924  |    |  |   | 46,379  |   
|Diluted                                                                |  |                                                                                                          | 43,913  |   |      |   | 44,132  |      |  |   | 44,752  |    |  |      | 45,877  |    |  |   | 47,875  |   
|                                                                       |  |                                                                                                          |         |   |     
|Selected Operating Data:                                               |  |                                                                                                          |         |   |      |   |         |      |  |   |         |    |  |      |         |    |  |   |         |   
|Number of stores at year end                                           |  |                                                                                                          | 840     |   |      |   | 841     |      |  |   | 825     |    |  |      | 783     |    |  |   | 668     |   
|Comparable stores sales increase (decrease)                            |  |                                                                                                          | 1.0     | % |      |   | (4.4    | )%   |  |   | (6.6    | )% |  |      | (3.4    | )% |  |   | (2.9    | )%
|Average store sales per square foot                                    |  | $                                                                                                        | 444     |   |      | $ | 441     |      |  | $ | 477     |    |  | $    | 521     |    |  | $ | 571     |   
|Average store sales per store                                          |  | $                                                                                                        | 841     |   |      | $ | 827     |      |  | $ | 887     |    |  | $    | 959     |    |  | $ | 1,034   |   
|                                                                       |  |                                                                                                          |         |   |     
|Balance Sheet Data:                                                    |  |                                                                                                          |         |   |      |   |         |      |  |   |         |    |  |      |         |    |  |   |         |   
|Cash and short- and long-term investments                              |  | $                                                                                                        | 105,912 |   |      | $ | 53,281  |      |  | $ | 55,490  |    |  | $    | 37,674  |    |  | $ | 66,339  |   
|Working capital                                                        |  |                                                                                                          | 125,582 |   |      |   | 97,796  |      |  |   | 91,267  |    |  |      | 70,623  |    |  |   | 87,221  |   
|Total assets                                                           |  |                                                                                                          | 370,571 |   |      |   | 332,101 |      |  |   | 318,271 |    |  |      | 299,435 |    |  |   | 278,395 |   
|Shareholders equity                                                   |  | $                                                                                                        | 258,426 |   |      | $ | 235,153 |      |  | $ | 221,457 |    |  | $    | 201,061 |    |  | $ | 187,562 |   



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

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

OVERVIEW

We are a mall- and web-based specialty retailer operating the Hot Topic and Torrid concepts, as well as the e-space music discovery
concept, ShockHound. At Hot Topic, we sell a selection of music/pop culture-licensed and music/pop culture-influenced apparel, accessories, music and gift items for young men and women principally between the ages of 12 and 22. At Torrid, we sell
apparel, lingerie, shoes and accessories designed for various lifestyles for plus-size females principally between the ages of 15 and 29. At ShockHound, music lovers of all ages can come together and purchase MP3s and music merchandise, share their
music interests, read the latest music news and enjoy exclusive editorial content about their favorite artists. We were incorporated in California in 1988. We opened our first Hot Topic store in 1989 and our first Torrid store in 2001. We launched
ShockHound during the third quarter of fiscal 2008 (the 52-week fiscal year ended January 31, 2009). We sell merchandise on our websites www.hottopic.com and www.torrid.com, which reflect the Hot Topic and Torrid store concepts and sell
merchandise similar to that sold in the respective stores. We sell music merchandise and MP3s on our website www.shockhound.com. We currently have one reportable segment given the similarities of the economic characteristics among the Hot Topic and
Torrid concepts, and the very early stage of business operations of our ShockHound concept. Throughout this report, the terms our, we and us refer to Hot Topic, Inc. and its subsidiaries.

At Hot Topic, our business strategy is built on the foundation of pop culture and its relevance to our target teen customer. Within pop culture, we
believe music plays a primary and integral role in the minds, activities and preferences of our target customers. We believe we have made great strides in achieving our comprehensive music strategy developed in early fiscal 2007, which encompasses a
high level of focus on the in-store music experience. We have also adopted strategies to focus on music and music/pop culture-oriented merchandise, operate a fundamentally regular price business and continue to emphasize superior customer service.
During fiscal 2008, we ramped up our efforts to host unique in-store events such as live local band performances, celebrity signings and appearances, and we sponsored live band performances at special closed venues around the United States
exclusively available to Hot Topic customers. We believe these live experiences connect customers with their music and pop culture idols, resulting in deeply personal interactions.

Our Torrid division focuses on fashion forward apparel and accessories for plus-size young women.
Our target customers have a youthful attitude and desire to reflect current fashion trends in their dress. Elements of Torrids business strategy include focusing on current fashion trends, listening to the customer and emphasizing customer
service and the in-store experience. We believe that we continue to make significant progress in the development of our Torrid brand. During the second quarter of fiscal 2008, we rolled out our private label Torrid credit card program, divastatusSMand together with consistent marketing, the growth of our loyalty program, divastyle®, in-store operational improvements, and the refocus of the assortment to reflect more of our customers attitudes and preferences, we believe that the recognition of our Torrid brand and the close relationships
with our customers will continue to grow.

As part of our ongoing and evolving music strategy, we developed and launched ShockHound during
the third quarter of fiscal 2008. ShockHound represents all music genres and includes a vast selection of MP3s, band merchandise, exclusive editorial content and original programming. We encourage our members to be part of the ShockHound experience
by offering them the opportunity to join in the musical dialogue via a social networking



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platform. We recognize that our customers learn about and acquire music differently than they have in the past and we believe we can meet their needs by
providing a more comprehensive, authentic online music discovery experience.

In fiscal 2008, comparable store sales were up 1.0%,
consisting of a Hot Topic division comparable store sales increase of 1.8% and a Torrid division comparable store sales decrease of 2.4%. Our decision to adopt a regular price strategy significantly reduced the amount of promotional activity in
fiscal 2008 compared to fiscal 2007 and, along with the success of a major license, is a contributing factor to the overall comparable sales increase in the Hot Topic division. The increase is also due to continued improvement in fashion
accessories, driven by beauty and intimate apparel. Increases in womens and mens bottoms and womens novelty tees were offset by weak sales of mens novelty tees and mens and womens fashion tops. Although the music
category experienced a slight decline in comparable sales, primarily due to declines in rock tee-shirts, we continued to see improvement in the sales of rock apparel and CDs. The comparable store sales decline at our Torrid division was mainly due
to declines in apparel, particularly in pants and novelty and fashion tops, partially offset by increases in dresses and sweaters.

At the
end of fiscal 2008, we operated 681 Hot Topic stores throughout the United States and Puerto Rico and 159 Torrid stores in 36 states, compared to 690 Hot Topic stores and 151 Torrid stores at the end of fiscal 2007. During fiscal 2008, we opened 4
new Hot Topic stores and 11 new Torrid stores, and closed 13 Hot Topic stores and 3 Torrid stores. We also remodeled or relocated 14 existing Hot Topic stores during fiscal 2008. We plan to remodel or relocate approximately 25 existing Hot Topic
stores and to close approximately 10 Hot Topic and 5 Torrid stores during fiscal 2009 (the fiscal year ending January 30, 2010).

We
operate on a 52- or 53-week fiscal year, which ends on the Saturday nearest to January 31. Fiscal 2008 and 2007 were 52-week fiscal years, while fiscal 2006 was a 53-week year. Our fiscal year 2009 is a 52-week year ending on January 30,
2010.

The 53rd week in fiscal 2006 caused a one-week shift in our 2007 fiscal calendar, referred to below as the Retail Calendar
Shift, resulting in the end of our quarters during fiscal 2007 being shifted later by one week relative to the corresponding quarter-ending dates in fiscal 2006. Seasonal influences near these quarter-end dates may cause year-over-year
comparisons to be impacted by the Retail Calendar Shift. Our reported comparable store results for fiscal 2007, both in this Form 10-K and in our other public disclosures, have been adjusted for the shift.

We consider a store comparable after it has been open for 15 full months. If a store is closed during a period, it is included in the computation of
comparable store sales for that fiscal month, quarter and year-to-date period, only for the days in which the store was operating as compared to the full month in the comparable period. At the end of fiscal 2008, 665 of the 681 Hot Topic stores were
included in the comparable store base, compared to 654 of the 690 stores open at the end of fiscal 2007. At the end of fiscal 2008, 136 of the 159 Torrid stores were included in the comparable store base, compared to 123 of the 151 stores open at
the end of fiscal 2007.



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



|                                              |  |             |         |   |      |   |         |      |  |   |         |   
|--------------------------------------------- |  | ----------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | --
|                                              |  | Fiscal Year |        
|                                              |  | 2008        |         |   | 2007 |   |         | 2006 | 
|Net sales (in millions)                       |  | $           | 761.1   |   |      | $ | 728.1   |      |  | $ | 751.6   |   
|Total store count at end of period            |  |             | 840     |   |      |   | 841     |      |  |   | 825     |   
|Comparable store sales count at end of period |  |             | 801     |   |      |   | 777     |      |  |   | 720     |   
|Net sales growth                              |  |             | 4.5     | % |      |   | (3.1    | )%   |  |   | 3.6     | % 
|Comparable store sales growth                 |  |             | 1.0     | % |      |   | (4.4    | )%   |  |   | (6.6    | )%
|Net store sales per average square foot       |  | $           | 444     |   |      | $ | 441     |      |  | $ | 477     |   
|Gross margin (in millions)                    |  | $           | 273.3   |   |      | $ | 251.4   |      |  | $ | 249.2   |   
|Income from operations (in millions)          |  | $           | 30.8    |   |      | $ | 24.3    |      |  | $ | 21.6    |   
|Diluted earnings per share                    |  | $           | 0.45    |   |      | $ | 0.36    |      |  | $ | 0.30    |   
|Store square footage (in thousands)           |  |             | 1,593.3 |   |      |   | 1,587.6 |      |  |   | 1,541.3 |   

We also repurchase our common stock from time to time in the open market when we feel market
conditions make repurchases attractive. We completed share repurchase plans announced in each of fiscal 2004, 2005 and 2007. We repurchased 4,000,000, 1,435,000 and 870,470 shares of our common stock during these three years, respectively. We did
not repurchase any shares of our common stock during fiscal 2006 or 2008.

Our ability to achieve business objectives in fiscal 2009 and
beyond will be dependent on many factors, known and unknown, such as those outlined in the sections entitled Cautionary Statement Regarding Forward Looking Disclosure and Risk Factors.

RESULTS OF OPERATIONS

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



|                                                                     |  |             |   |  |       |   |  |       |  
|-------------------------------------------------------------------- |  | ----------- | - |  | ----- | - |  | ----- | -
|                                                                     |  | Fiscal Year |  
|                                                                     |  | 2008        |   |  | 2007  |   |  | 2006  |  
|Net Sales                                                            |  | 100.0       | % |  | 100.0 | % |  | 100.0 | %
|Cost of goods sold, including buying, distribution & occupancy costs |  | 64.1        | % |  | 65.5  | % |  | 66.8  | %
|                                                                     |  |             |   |  |       |   |  |       |  
|Gross margin                                                         |  | 35.9        | % |  | 34.5  | % |  | 33.2  | %
|Selling, general and administrative expenses                         |  | 31.9        | % |  | 31.2  | % |  | 30.3  | %
|                                                                     |  |             |   |  |       |   |  |       |  
|Income from operations                                               |  | 4.0         | % |  | 3.3   | % |  | 2.9   | %
|Interest and other income, net                                       |  | 0.3         | % |  | 0.3   | % |  | 0.2   | %
|                                                                     |  |             |   |  |       |   |  |       |  
|Income before income tax                                             |  | 4.3         | % |  | 3.6   | % |  | 3.1   | %
|Provision for income taxes                                           |  | 1.7         | % |  | 1.4   | % |  | 1.2   | %
|                                                                     |  |             |   |  |       |   |  |       |  
|Net income                                                           |  | 2.6         | % |  | 2.2   | % |  | 1.9   | %
|                                                                     |  |             |   |  |       |   |  |       |  



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Fiscal 2008 Compared to Fiscal 2007

Net sales increased approximately $33.0 million, or 4.5%, to $761.1 million in fiscal 2008 from $728.1 million in fiscal 2007. The components of this $33.0 million increase in net sales are as follows:



|                  |   |  |                                                                                                                                                                
|----------------- | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|Amount (millions) |   |  | Description                                                                                                                                                    
|$15.5             |   |  | Increase in net sales from new Torrid stores opened since the fourth quarter of the prior year and Torrid stores not yet qualifying as
comparable stores.      
|13.4              |   |  | Increase in Internet sales.                                                                                                                                    
|9.3               |   |  | Increase in comparable net sales from Hot Topic stores in fiscal 2008 compared to the previous fiscal year.                                                    
|5.8               |   |  | Increase in net sales from new Hot Topic stores opened since the fourth quarter of the prior year and Hot Topic stores not yet qualifying as
comparable stores.
|1.3               |   |  | Increase in net sales during fiscal 2008 from 14 expanded or relocated Hot Topic stores, not yet qualifying as comparable
stores.                              
|(2.7              | ) |  | Decrease in comparable net sales from Torrid stores in fiscal 2008 compared to the previous fiscal year.                                                       
|(9.6              | ) |  | Decrease in net sales due to the closure of 13 Hot Topic stores and 3 Torrid stores during fiscal 2008.                                                        
|                  |   |  |                                                                                                                                                                
|$33.0             |   |  | Total                                                                                                                                                          
|                  |   |  |                                                                                                                                                                

In fiscal 2008, Hot Topic and Torrid each had annual average store volumes, excluding Internet
sales, of $0.8 million, compared to $0.8 million and $0.9 million for Hot Topic and Torrid, respectively, in fiscal 2007. Hot Topic division sales of apparel category merchandise, as a percentage of total net sales, was 55% in fiscal 2008 compared
to 57% in fiscal 2007. Torrid division sales of apparel category merchandise, as a percentage of total net sales, was 78% in fiscal 2008 compared to 79% in fiscal 2007.

Gross margin increased approximately $21.9 million to $273.3 million in fiscal 2008 from $251.4 million in fiscal 2007. As a percentage of net sales, gross margin increased to 35.9% in fiscal 2008 from 34.5% in fiscal
2007. The components of this 1.4 percentage point increase in gross margin as a percentage of net sales are as follows:



|    |   |  |                                                                                                                                                                                            
|--- | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|%   |   |  | Description                                                                                                                                                                                
|0.5 |   |  | Increase in merchandise margin as a result of higher realized initial markups and shrink, partially offset by higher
markdowns.                                                            
|0.3 |   |  | Decrease in distribution expenses primarily due to productivity improvements, lower usage of outside personnel and lower
depreciation.                                                     
|0.4 |   |  | Decrease in store depreciation primarily due to lower accelerated depreciation expense of leasehold improvements as a result of fewer
relocations and remodels prior to lease terminations.
|0.2 |   |  | Decrease in store occupancy expense, primarily due to renegotiated rents.                                                                                                                  
|    |   |  |                                                                                                                                                                                            
|1.4 | % |  | Total                                                                                                                                                                                      
|    |   |  |                                                                                                                                                                                            



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Selling, general and administrative expenses increased approximately $15.4 million to $242.5 million in
fiscal 2008 from $227.1 million in fiscal 2007. As a percentage of net sales, selling, general and administrative expenses were 31.9% in fiscal 2008 compared to 31.2% in fiscal 2007. The total dollar increase in selling, general and administrative
expenses was primarily attributable to an increase in the performance-based bonus for fiscal 2008, partially offset by a decrease in other store expenses. The components of this 0.7 percentage point increase in selling, general and administrative
expenses as a percentage of net sales are as follows:



|     |   |  |                                                                                                                                     
|---- | - |  | ------------------------------------------------------------------------------------------------------------------------------------
|%    |   |  | Description                                                                                                                         
|1.1  |   |  | Increase in general and administrative expense primarily due to performance based bonuses and payroll costs.                        
|0.3  |   |  | Increase in marketing expenses primarily due to marketing efforts for our websites and music related sponsorships.                  
|(0.1 | ) |  | Decrease in depreciation primarily due to certain assets fully depreciating in fiscal 2008.                                         
|(0.1 | ) |  | Decrease in store payroll primarily due to the leverage on higher sales, partially offset by higher store performance based
bonuses.
|(0.1 | ) |  | Decrease in impairment and loss on disposal of fixed assets.                                                                        
|(0.4 | ) |  | Decrease in other store expenses primarily due to savings related to reduced telecommunication costs.                               
|     |   |  |                                                                                                                                     
|0.7  | % |  | Total                                                                                                                               
|     |   |  |                                                                                                                                     

Income from operations increased to $30.8 million in fiscal 2008 from $24.3 million in fiscal
2007. As a percentage of net sales, income from operations was 4.0% in fiscal 2008 compared to 3.3% in fiscal 2007. Operating income on an average store basis was approximately $37,000 in fiscal 2008 compared to $29,000 in fiscal 2007. Net income
included net losses from our ShockHound concept of $2.3 million in fiscal 2008. ShockHound did not impact our net income in fiscal 2007.

Interest income, net of interest expense, and other income as a percentage of sales remained the same at 0.3% in both fiscal 2008 and fiscal 2007.

Our effective tax rate was 39.2% and 39.0% in fiscal 2008 and 2007, respectively. The increase was primarily due to a decrease in non-taxable income arising from lower interest rate yields, an increase in
non-deductible expense arising from deferred compensation investment losses and an increase in the liability associated with unrecognized tax benefits. The increase was partially offset by the benefit obtained from federal and state tax research and
development credits.

Fiscal 2007 Compared to Fiscal 2006

Net sales decreased approximately $23.5 million, or 3.1%, to $728.1 million in fiscal 2007 from $751.6 million in fiscal 2006. Approximately $11.0 million of this decrease was due to the fact that 53-week fiscal 2006
had an extra week of sales that we did not have in fiscal 2007. The components of this $23.5 million decrease in net sales are as follows:



|                 |       |   |             |                                                                                                                                                 
|---------------- | ----- | - | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------
|Amount(millions) |       |   | Description
|$                | (28.4 | ) |             | 4.4% decrease in comparable store net sales in fiscal 2007 compared to fiscal 2006.                                                             
|                 | (11.0 | ) |             | Decrease in net sales due to the 53rd week in fiscal 2006.                                                                                      
|                 | (4.3  | ) |             | Decrease in net sales due to 16 Hot Topic and Torrid store closures during fiscal 2007.                                                         
|                 | 4.0   |   |             | Net increase in Internet sales.                                                                                                                 
|                 | 6.2   |   |             | Net sales from new Hot Topic stores opened since the fourth quarter of fiscal 2006 and Hot Topic stores not yet qualifying as comparable
stores.
|                 | 10.0  |   |             | Net sales from new Torrid stores opened since the fourth quarter of fiscal 2006 and Torrid stores not yet qualifying as comparable stores.      
|                 |       |   |             |                                                                                                                                                 
|$                | (23.5 | ) |             | Total                                                                                                                                           
|                 |       |   |             |                                                                                                                                                 



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The annual average Hot Topic and Torrid store volumes in fiscal 2007, excluding Internet sales, were $0.8
million and $0.9 million, respectively, compared to $0.9 million for each of the divisions, in fiscal 2006. Hot Topic division sales of apparel category merchandise, as a percentage of total net sales, was 57% in fiscal 2007 compared to 55% in
fiscal 2006. Torrid division sales of apparel category merchandise, as a percentage of total net sales, was 79% in fiscal 2007 compared to 77% in fiscal 2006.

Gross margin increased approximately $2.2 million to $251.4 million in fiscal 2007 from $249.2 million in fiscal 2006. As a percentage of net sales, gross margin increased to 34.5% in fiscal 2007 from 33.2% in fiscal
2006. The components of this 1.3 percentage point increase in gross margin as a percentage of net sales are as follows:



|     |   |  |                                                                                                                                                                                                               
|---- | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|%    |   |  | Description                                                                                                                                                                                                   
|2.9  |   |  | Increase in merchandise margin primarily due to higher initial markup, lower markdowns, lower cost of goods sold and a reduction in shrink.                                                                   
|0.3  |   |  | Decrease in distribution expenses primarily due to lower outside temporary personnel expenses and lower freight expenses to
stores.                                                                           
|(0.1 | ) |  | Increase in buying costs due to higher payroll expenses.                                                                                                                                                      
|(1.8 | ) |  | Increase in store occupancy and depreciation expenses, primarily due to deleveraging store expenses over lower comparable store sales and
the higher costs from relocating and remodeling 71 Hot Topic stores.
|     |   |  |                                                                                                                                                                                                               
|1.3  | % |  | Total                                                                                                                                                                                                         
|     |   |  |                                                                                                                                                                                                               

Selling, general and administrative expenses decreased approximately $0.5 million to $227.1
million in fiscal 2007 from $227.6 million in fiscal 2006. As a percentage of net sales, selling, general and administrative expenses were 31.2% in fiscal 2007 compared to 30.3% in fiscal 2006. The total dollar decrease in selling, general and
administrative expenses was primarily attributable to a reduction in the performance-based bonus for fiscal 2007, partially offset by additional store payroll and other expenses due to increases in wage rates and additional costs required to support
store growth from 825 stores at the end of fiscal 2006 to 841 stores at the end of fiscal 2007. The components of this 0.9 percentage point increase in selling, general and administrative expenses as a percentage of net sales are as follows:



|     |   |  |                                                                                                                                                                                                          
|---- | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|%    |   |  | Description                                                                                                                                                                                              
|0.8  |   |  | Increase in store payroll expense due to increases in wage rates as a result of higher minimium wages, increases in medical expenses and
deleveraging of payroll costs over lower comparable store sales.
|0.2  |   |  | Increase in other general and administrative expense mainly due to increased payroll expense.                                                                                                            
|0.2  |   |  | Increase in marketing expenses primarily due to print advertising.                                                                                                                                       
|(0.3 | ) |  | Decrease in performance based bonus.                                                                                                                                                                     
|     |   |  |                                                                                                                                                                                                          
|0.9% |   |  | Total                                                                                                                                                                                                    
|     |   |  |                                                                                                                                                                                                          

Income from operations increased to $24.3 million in fiscal 2007 from $21.6 million in fiscal
2006. As a percentage of net sales, operating income was 3.3% in fiscal 2007 compared to 2.9% in fiscal 2006. Operating income on an average store basis was approximately $29,000 in fiscal 2007 compared to $26,000 in fiscal 2006.

Interest income, net of interest expense, and other income as a percentage of sales was 0.3% in fiscal 2007 compared to 0.2% in fiscal 2006.

Our effective tax rate was 39.0% and 40.8% in fiscal 2007 and 2006, respectively. The decrease was partly due to an increase in non-taxable income
arising from investing in tax exempt financial instruments along with a reduction in the non-deductible portion of stock-based compensation expense. The decrease was partially offset by an increase in state and local taxes.



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QUARTERLY RESULTS AND SEASONALITY

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

Our business, particularly the Hot Topic division, is also subject to seasonal influences, with
heavier concentrations of sales during the back-to-school, Halloween and holiday (defined as the week of Thanksgiving through the first few days of January) seasons, and other periods when schools are not in session. The holiday season remains our
single most important selling season. We believe, however, that the importance of the summer vacation and back-to-school season (which affect operating results in the second and third quarters, respectively) and to a lesser extent, the spring break
season (which affects operating results in the first quarter) as well as Halloween (which affects operating results in the third quarter), all reduce our dependence on the holiday season. Furthermore, summer vacation, back-to-school season and
spring break season take place at somewhat different times in different parts of the country, spreading the impact of these events on our sales over a longer period. As is the case with many retailers of apparel, accessories and related merchandise,
we typically experience lower first fiscal quarter net sales relative to other quarters. In addition, seasonal influences near quarter-end dates may cause year-over-year comparisons to be impacted by the Retail Calendar Shift.

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



|                                     |  |                                                              |         |    |                  |   |         |       |  |   |         |   |  |       |         |   |        |   |         |       |  |   |         |    |  |   |         |    |  |   |         |   
|------------------------------------ |  | ------------------------------------------------------------ | ------- | -- | ---------------- | - | ------- | ----- |  | - | ------- | - |  | ----- | ------- | - | ------ | - | ------- | ----- |  | - | ------- | -- |  | - | ------- | -- |  | - | ------- | --
|                                     |  | Fiscal Year 2008                                             |         |    | Fiscal Year 2007 |  
|                                     |  | First                                                        |         |    | Second           |   |         | Third |  |   | Fourth  |   |  | First |         |   | Second |   |         | Third |  |   | Fourth  |   
|                                     |  | (In thousands, except selected operating and per share data) |        
|Statements of Operations Data:       |  |                                                              |         |    |                  |   |         |       |  |   |         |   |  |       |         |   |        |   |         |       |  |   |         |    |  |   |         |    |  |   |         |   
|Net sales                            |  | $                                                            | 158,978 |    |                  | $ | 166,814 |       |  | $ | 197,309 |   |  | $     | 237,973 |   |        | $ | 157,282 |       |  | $ | 161,684 |    |  | $ | 188,462 |    |  | $ | 220,694 |   
|Gross margin                         |  |                                                              | 51,625  |    |                  |   | 55,568  |       |  |   | 74,181  |   |  |       | 91,931  |   |        |   | 51,587  |       |  |   | 50,956  |    |  |   | 68,468  |    |  |   | 80,433  |   
|(Loss) income from operations        |  |                                                              | (2,688  | )  |                  |   | (1,154  | )     |  |   | 11,759  |   |  |       | 22,904  |   |        |   | (1,817  | )     |  |   | (3,357  | )  |  |   | 10,507  |    |  |   | 18,964  |   
|Net (loss) income                    |  | $                                                            | (1,406  | )  |                  | $ | (450    | )     |  | $ | 7,438   |   |  | $     | 14,160  |   |        | $ | (809    | )     |  | $ | (1,729  | )  |  | $ | 6,675   |    |  | $ | 11,875  |   
|                                     |  |                                                              |         |    |                  |   |         |      
|Earnings per share:                  |  |                                                              |         |    |                  |   |         |       |  |   |         |   |  |       |         |   |        |   |         |       |  |   |         |    |  |   |         |    |  |   |         |   
|Basic                                |  | $                                                            | (0.03   | )  |                  | $ | (0.01   | )     |  | $ | 0.17    |   |  | $     | 0.32    |   |        | $ | (0.02   | )     |  | $ | (0.04   | )  |  | $ | 0.15    |    |  | $ | 0.27    |   
|Diluted                              |  | $                                                            | (0.03   | )  |                  | $ | (0.01   | )     |  | $ | 0.17    |   |  | $     | 0.32    |   |        | $ | (0.02   | )     |  | $ | (0.04   | )  |  | $ | 0.15    |    |  | $ | 0.27    |   
|                                     |  |                                                              |         |    |                  |   |         |      
|Weighted average shares outstanding: |  |                                                              |         |    |                  |   |         |       |  |   |         |   |  |       |         |   |        |   |         |       |  |   |         |    |  |   |         |    |  |   |         |   
|Basic                                |  |                                                              | 43,717  |    |                  |   | 43,756  |       |  |   | 43,810  |   |  |       | 43,873  |   |        |   | 44,245  |       |  |   | 44,349  |    |  |   | 43,788  |    |  |   | 43,638  |   
|Diluted                              |  |                                                              | 43,717  |    |                  |   | 43,756  |       |  |   | 43,972  |   |  |       | 44,209  |   |        |   | 44,245  |       |  |   | 44,349  |    |  |   | 44,112  |    |  |   | 43,820  |   
|                                     |  |                                                              |         |    |                  |   |         |      
|Selected Operating Data:             |  |                                                              |         |    |                  |   |         |       |  |   |         |   |  |       |         |   |        |   |         |       |  |   |         |    |  |   |         |    |  |   |         |   
|Comparable store sales               |  |                                                              | (2.8    | )% |                  |   | (0.9    | )%    |  |   | 1.0     | % |  |       | 5.2     | % |        |   | (2.3    | )%    |  |   | (5.8    | )% |  |   | (2.6    | )% |  |   | (6.3    | )%
|Stores open at end of period         |  |                                                              | 840     |    |                  |   | 842     |       |  |   | 841     |   |  |       | 840     |   |        |   | 826     |       |  |   | 826     |    |  |   | 842     |    |  |   | 841     |   



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LIQUIDITY AND CAPITAL RESOURCES

During the last three fiscal years, our primary uses of cash have been to purchase merchandise inventories, improve our information technology
infrastructure and finance store remodels, relocations and to a lesser extent recently, new store openings. In the past we have also made periodic repurchases of our common stock. In recent years, we have satisfied our cash requirements principally
from cash flows from operations and to a lesser extent, proceeds from the exercise of stock options. We also maintain a $5.0 million unsecured credit agreement for issuing letters of credit for inventory purchases. There were letters of credit for
$446,000 and $133,000 outstanding at January 31, 2009 and February 2, 2008, respectively. At the end of fiscal 2008, we had $105.9 million in cash, cash equivalents and short- and long-term investments, an increase of $52.6 million, or
98.7%, compared to $53.3 million at the end of fiscal 2007.

Cash and cash equivalents are held primarily in diversified money market
funds. Our short-term investments were $7.4 million at January 31, 2009, consist primarily of highly rated municipal bonds, have maturities in excess of three months and are accounted for as available for sale. At January 31, 2009, our
long-term investments consisted of AAA/Aaa/A3-rated auction rate securities. These auction rate securities are accounted for as available for sale and backed by pools of student loans guaranteed by the U.S. Department of Education. Our auction rate
securities are debt instruments with maturities that range from 25 to 32 years and with interest rates that are reset through an auction process, most commonly at intervals of 7, 28 and 35 days. This same auction process is designed to provide a
means by which these securities can be sold and historically has provided a liquid market for them. Negative market conditions continue to indicate uncertainty in the global credit and capital markets. This uncertainty has resulted in the failure of
auctions representing the auction rate securities we hold as the amount of securities submitted for sale in those auctions exceed the amount of bids. While we have continued to earn and receive interest on our auction rate securities through the
date of this report, we concluded that their estimated fair value no longer approximates par value as of the end of fiscal 2008. Due to the lack of availability of observable market quotes on our auction rate securities, the fair market value of
these securities has been determined based on a valuation model prepared by the broker-dealer that holds these securities on our behalf. We have reviewed and found reasonable the valuation model and methodologies used by the broker-dealer, and have
continued to update the same using current assumptions.

As of January 31, 2009 and February 2, 2008, the fair value of our
auction rate securities was $8.4 million and $21.2 million, respectively. The decrease represents a $10.8 million liquidation in the first quarter of fiscal 2008 and a decline in fair value of $2.0 million from February 2, 2008. This $2.0
million decline is deemed temporary as we have the intent and ability to hold these investments until anticipated full or substantial recovery in fair value occurs. Accordingly, we have recorded an unrealized loss of $2.0 million ($1.2 million, net
of tax) in accumulated other comprehensive income reflected in the shareholders equity section of the consolidated balance sheet. If uncertainties in the credit and capital markets continue, we may incur additional losses, some of which may be
other-than-temporary, which could negatively affect our financial condition or results of operations. In addition, in the event we decide not to hold these investments until full or substantial recovery, we may be required to recognize impairment
charges against income. During the first quarter of fiscal 2008, we reclassified all of our auction rate securities from current assets to non-current assets on our consolidated balance sheet, as we do not expect them to successfully auction and
recover their full or par value within the next 12 months.

While the auction failures will limit our ability to liquidate these
investments for some period of time, we do not believe the auction failures will impact our ability to fund our working capital needs, capital expenditures or other business requirements.

Working capital was $125.6 million and $97.8 million for fiscal 2008 and 2007, respectively. The increase in working capital from fiscal 2007 to 2008 is
primarily attributable to higher levels of cash and cash equivalents, partially offset by higher income tax payable and accrued liabilities at the end of fiscal 2008 compared to fiscal 2007.



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Net cash flows provided by operating activities were $77.0 million and $51.6 million in fiscal 2008 and
2007, respectively. The $25.4 million increase in cash flows from operating activities in fiscal 2008 as compared to fiscal 2007 was primarily attributable to increases in income tax payable, accrued liabilities and net income along with a decrease
in inventory. The increase in cash flows from operating activities was partially offset by a decrease in deferred rent and a decrease in depreciation and amortization expense.

Net cash flows used in investing activities were $4.3 million and $34.1 million in fiscal 2008 and 2007, respectively. The $29.8 million decrease in net
cash used in investing activities in fiscal 2008 as compared to fiscal 2007 was attributable to a $4.3 million increase in proceeds from the sale of short- and long-term investments, net of purchases and a $25.5 million decrease in purchases of
property and equipment.

Net cash flows provided by financing activities were $1.1 million in fiscal 2008 compared to net cash flows used
in financing activities of $5.0 million in fiscal 2007. The $6.1 million increase in fiscal 2008 compared to fiscal 2007 was principally as a result of the $7.2 million used to repurchase our common stock in fiscal 2007, offset by a $0.9 million
decrease related to proceeds from employee stock purchases and exercise of stock options.

We anticipate we will spend approximately $30.0
to $32.0 million on capital expenditures in fiscal 2009. Of the $30.0 to $32.0 million, we plan to spend approximately $6.0 to $8.0 million for store construction, including the remodel or relocation of approximately 25 existing Hot Topic stores. We
plan to spend the remaining capital expenditures on various improvements in our information technology infrastructure, including technological improvements at the store level, the purchase of new computer hardware and software and the development
and improvement of our Internet sites.

During fiscal 2008, our average gross capital expenditures for new and remodeled Hot Topic and
Torrid stores, including leasehold improvements and furniture and fixtures, totaled approximately $247,000 and $349,000, respectively. Hot Topic stores were an average of 1,755 square feet compared to Torrid stores, which averaged 2,500 square feet.
The average initial gross inventory for the new Hot Topic stores opened in 2008 was approximately $117,000 compared to $63,000 for new Torrid stores. The average pre-opening costs for a new Hot Topic and a new Torrid store were approximately $15,500
and $21,500, respectively. Initial inventory requirements vary at new stores depending on the season and current merchandise trends.

In
August 2007, our board of directors approved the repurchase of up to $40.0 million of our outstanding common stock. During fiscal 2007, we repurchased 870,470 shares for approximately $7.2 million, which represents an average price of $8.23 per
share. This share repurchase program expired at the end of fiscal 2007.

The following table summarizes our contractual obligations as of
January 31, 2009, and the timing and effect that such commitments are expected to have on our liquidity and capital requirements in future periods:



|                                        |  |                                       |         |                 |   |           |  |           |         |                  |   |        |  |   |       
|--------------------------------------- |  | ------------------------------------- | ------- | --------------- | - | --------- |  | --------- | ------- | ---------------- | - | ------ |  | - | ------
|                                        |  | Payments due by period (in thousands)
|                                        |  | Total                                 |         | Less Than1 Year |   | 2-3 Years |  | 4-5 Years |         | More than5 Years
|Contractual obligations                 |  |                                       |         |                 |   |           |  |           |         |                  |   |        |  |   |       
|                                        |  |                                       |         |                 |  
|Operating leases1                       |  | $                                     | 317,357 |                 | $ | 55,601    |  | $         | 102,070 |                  | $ | 81,405 |  | $ | 78,281
|Purchase obligations                    |  |                                       | 41,657  |                 |   | 41,657    |  |           |        |                  |   |       |  |   |      
|Letters of credit and other obligations |  |                                       | 1,361   |                 |   | 1,361     |  |           |        |                  |   |       |  |   |      
|Income tax audit settlements2           |  |                                       | 706     |                 |   | 706       |  |           |        |                  |   |       |  |   |      
|                                        |  |                                       |         |                 |   |           |  |           |         |                  |   |        |  |   |       
|Total contractual obligations           |  | $                                     | 361,081 |                 | $ | 99,325    |  | $         | 102,070 |                  | $ | 81,405 |  | $ | 78,281
|                                        |  |                                       |         |                 |   |           |  |           |         |                  |   |        |  |   |       



|(1) | See Note 7 to our consolidated financial statements for additional disclosure related to operating lease obligations.
|--- | ---------------------------------------------------------------------------------------------------------------------



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|(2) | The $0.7 million of income tax audit settlements are gross unrecognized tax benefits as determined under Financial Accounting Standards Board, or FASB, Interpretation No. 48,
or FIN 48, Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement 109, for which the statutes of limitations are expected to expire in fiscal 2009; and for final settlement in fiscal 2009 of certain open
audits. Due to the uncertainty regarding the timing of future cash outflows associated with other noncurrent unrecognized tax benefits of $1.5 million, we are unable to make a reliable estimate of the periods of cash settlement with the respective
tax authorities and have not included such amount in the contractual obligations table above.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We believe our current cash
balances and cash generated from operations will be sufficient to fund our operations and planned expansion through at least the next 12 months.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

We believe the following critical accounting policies affect the more significant judgments and
estimates used in the preparation of our consolidated financial statements. For a further discussion about the application of these and other accounting policies, refer to Note 1 to our consolidated financial statements included elsewhere in this
report.

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

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



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

Revenue Recognition: Revenue is recognized at our retail store locations at the point at which the customer receives and pays for the merchandise
at the register. For online sales, revenue is recognized at the time of shipment, which we refer to as the date of purchase by the customer. Sales are recognized net of merchandise returns, which are reserved for based on historical experience. For
the years ended January 31, 2009, February 2, 2008 and February 3, 2007, merchandise returns were $23.7 million, $22.6 million and $27.9 million, respectively. Revenue from gift cards, gift certificates and store merchandise
credits is recognized at the time of redemption. Shipping and handling revenues from our websites are included as a component of net sales.

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

Vendor
Allowances: We receive certain allowances from our vendors primarily related to damaged merchandise, markdowns and, for our Torrid division, new store openings. Allowances received from vendors related to damaged merchandise and new Torrid store
openings are reflected as a reduction of inventory in the period they are received and allocated to cost of sales during the period in which the items are sold. Markdown allowances received from vendors are reflected as reductions to cost of sales
in the period they are received as these allowances are received after goods have been sold or marked down. For the years ended January 31, 2009, February 2, 2008 and February 3, 2007, we received vendor allowances of $8.4
million, $9.5 million and $6.9 million, respectively, of which $8.2 million, $9.3 million and $6.9 million, respectively, were accounted for as a reduction of cost of goods sold. Most of the vendor allowances that we receive are based on on-going
agreements and negotiations with vendors. We receive vendor allowances from substantially all of our vendors.

Stock-Based Payments:
We estimate the fair value of stock options granted using the Black-Scholes option-pricing formula and a single option award approach. This fair value is then amortized over the requisite service periods of the awards. This option-pricing model
requires the input of highly subjective assumptions, including the options expected life, price volatility of the underlying stock, risk free interest rate and expected dividend rate. As stock-based compensation expense is based on awards
ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those
estimates. Forfeitures are estimated based on historical experience.

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

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



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Income Taxes: We account for income taxes using the liability method in accordance with SFAS
No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting bases and tax bases of assets and liabilities and are measured using the
enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. Deferred tax assets are reduced by valuation allowances if we believe it is more likely than not
that some portion or the entire asset will not be realized.

We adopted the provisions of FIN 48 on February 4, 2007. FIN 48
prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more
likely than not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

We include interest and penalties related to uncertain tax positions in income tax expense.

INFLATION

We do not believe that
inflation has had a material adverse effect on our net sales or results of operations in the past. However, we cannot assure that our business will not be affected by inflation in the future.



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

We are not a party to any derivative financial instruments. Our exposure to market risk primarily relates to changes in
interest rates on our investments with maturities of less than three months (which are considered to be cash and cash equivalents) and short- and long-term investments with maturities in excess of three months. A 100 basis point change in interest
rates over a three month period would not have a material impact on the fair value of our investment portfolio as of January 31, 2009.

We hold long-term investments in AAA/Aaa/A3-rated auction rate securities. These auction rate securities are accounted for as available for sale and backed by pools of student loans guaranteed by the U.S. Department of Education. Our
auction rate securities are debt instruments with maturities that range from 25 to 32 years and with interest rates that are reset through an auction process, most commonly at intervals of 7, 28 and 35 days. This same auction process is designed to
provide a means by which these securities can be sold and historically has provided a liquid market for them. Negative market conditions continue to indicate uncertainty in the global credit and capital markets. This uncertainty has resulted in the
failure of auctions representing the auction rate securities we hold as the amount of securities submitted for sale in those auctions exceed the amount of bids. While we have continued to earn and receive interest on our auction rate securities
through the date of this report, we concluded that their estimated fair value no longer approximates par value as of the end of fiscal 2008. Due to the lack of availability of observable market quotes on our auction rate securities, the fair market
value of these securities has been determined based on a valuation model prepared by the broker-dealer that holds these securities on our behalf. We have reviewed and found reasonable the valuation model and methodologies used by the broker-dealer
and have continued to update the same using current assumptions.

As of January 31, 2009 and February 2, 2008, the fair value of
our auction rate securities was $8.4 million and $21.2 million, respectively. The decrease represents a $10.8 million liquidation in the first quarter of fiscal 2008 and a decline in fair value of $2.0 million from February 2, 2008. This $2.0
million decline is deemed temporary as we have the intent and ability to hold these investments until anticipated full or substantial recovery in fair value occurs. Accordingly, we have recorded an unrealized loss of $2.0 million ($1.2 million net
of tax) in accumulated other comprehensive income reflected in the shareholders equity section of the consolidated balance sheet. If uncertainties in the credit and capital markets continue, we may incur additional losses, some of which may be
other-than-temporary, which could negatively affect our financial condition or results of operations. In addition, in the event that we decide not to hold these investments until full or substantial recovery,



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we may be required to recognize impairment charges against income. During the first quarter of fiscal 2008, we reclassified all of our auction rate
securities from current assets to non-current assets on our consolidated balance sheet, as we do not expect them to successfully auction and recover their full or par value within the next 12 months.

While the auction failures will limit our ability to liquidate these investments for some period of time, we do not believe the auction failures will
impact our ability to fund our working capital needs, capital expenditures or other business requirements.



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

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



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

Not applicable.



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

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

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

We have carried out an evaluation, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of
the design and operation of our disclosure controls and procedures as of January 31, 2009. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
Exchange Act) are effective as of January 31, 2009.

Report of Management on Internal Control Over Financial Reporting

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

Our management assessed the effectiveness of our internal
control over financial reporting as of January 31, 2009. In making this assessment, we used the criteria set forth by COSO in Internal Control-Integrated Framework. Our management concluded that, as of January 31, 2009, our internal
control over financial reporting was effective based on the criteria set forth by COSO in Internal Control-Integrated Framework.



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Changes in Internal Control Over Financial Reporting

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

Ernst & Young LLP, the independent registered public
accounting firm that audited the financial statements included in this Annual Report on Form 10-K, has issued an attestation report on our internal control over financial reporting.



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Report of Independent Registered Public Accounting Firm

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

We have audited Hot Topic, Inc.s internal control over financial reporting as of January 31, 2009, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Hot Topic, Inc.s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the companys internal control over financial reporting based on our audit.

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

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

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

In our opinion, Hot Topic, Inc. maintained, in all material respects,
effective internal control over financial reporting as of January 31, 2009, based on the COSO criteria.

We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Hot Topic, Inc. as of January 31, 2009 and February 2, 2008, and the related consolidated statements of
income, shareholders equity, and cash flows for each of the three years in the period ended January 31, 2009 of Hot Topic, Inc. and our report dated March 23, 2009, expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Los
Angeles, California

March 23, 2009



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|ITEM9B. | OTHER INFORMATION
|------- | -----------------

On
March 18, 2009, the Board, upon the recommendation of our Compensation Committee, awarded bonuses to certain of our executive officers and established the fiscal 2009 base salaries, equity grants and annual bonus plan for our executive
officers.

The following table sets forth the bonus amounts awarded to certain of our named executive officers:



|                        |  |                         |  |               
|----------------------- |  | ----------------------- |  | --------------
|Named Executive Officer |  | Title                   |  | Cash Bonus ($)
|Elizabeth McLaughlin    |  | Chief Executive Officer |  | 1,000,000     
|Gerald Cook             |  | Chief Operating Officer |  | 500,000       
|Christopher Daniel      |  | President, Torrid       |  | 85,000        
|James McGinty           |  | Chief Financial Officer |  | 300,000       

Ms. McLaughlins, Mr. Cooks and Mr. McGintys bonuses were a
combination of bonuses awarded based on parameters established by the Board in March 2008 with respect to our financial performance in fiscal 2008 and additional discretionary bonuses awarded in recognition of their contributions to the company.
Mr. Daniels bonus was a discretionary bonus, awarded in recognition of his contribution to the company.

The following table
sets forth the fiscal 2009 base salaries established for, and equity compensation granted to, our named executive officers (as more fully described below):



|                        |  |                         |  |                 |  |                            |  |                          
|----------------------- |  | ----------------------- |  | --------------- |  | -------------------------- |  | -------------------------
|Named Executive Officer |  | Title                   |  | Base Salary ($) |  | Stock Options(# of shares) |  | Stock AwardMaximum Shares
|Elizabeth McLaughlin    |  | Chief Executive Officer |  | 850,000         |  | 250,000                    |  | 200,000                  
|Gerald Cook             |  | Chief Operating Officer |  | 525,000         |  | 100,000                    |  | 50,000                   
|Christopher Daniel      |  | President, Torrid       |  | 450,000         |  | 85,000                     |  | 70,000                   
|James McGinty           |  | Chief Financial Officer |  | 400,000         |  | 75,000                     |  | 50,000                   

The stock options described above (i) were granted pursuant to our 2006 Equity Incentive
Plan, or the 2006 Plan, as amended, (ii) terminate ten years after the date of grant, or earlier in the event the optionholders service to the company is terminated and (iii) have an exercise price per share of $9.56, or the closing
price of our common stock as reported on the Nasdaq Stock Market for Wednesday, March 18, 2009. Subject to the optionholders continuous service to the company, 25% of the shares of common stock subject to such stock options vest on the
first anniversary of the date of grant, and the remaining shares vest quarterly over the following three years.

The stock awards described
above were granted pursuant to a Performance Share Award Program, which the Board adopted under the 2006 Plan to diversify equity grants and provide aggregate awards that, in the opinion of the Board, appropriately align long-term incentives of our
management with significant company long-term objectives. The stock awards granted have target awards that are 50% of the maximum awards indicated above. The target awards and the maximum awards may be earned based on achievement of enumerated
performance goals during an established performance period, and in all cases the award of shares is subject to the officers continuous service to the company. The shares will remain unissued until earned, if at all. The awards granted in
fiscal 2009 under the Performance Share Award Program provide for a three-year measurement period, with awards based on fiscal 2011 operating income for Hot Topic, Inc. compared to a target goal (with potential adjustment due to extraordinary or
nonrecurring events such as significant acquisitions).

With respect to potential annual bonuses, the Compensation Committee annually
establishes target profitability levels for the ensuing fiscal year in conjunction with our annual financial plan, in order to reflect the Compensation Committees belief that a significant portion of the annual compensation of each executive
officer



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should be contingent upon our performance and officer contribution to that performance. Accordingly, our fiscal 2009 bonus plan provides for cash bonus
targets based upon the achievement of certain specified financial goals for the fiscal year. The performance targets range from a minimum (or threshold) level to a maximum level, with a target level in between. Upon the achievement of various
increasing levels of financial performance above the minimum level, varying amounts are awardable; however, the Compensation Committee may choose to recommend increasing bonuses above the original bonus targets, or to recommend awarding less than
the target bonuses, or no bonuses. The Board, upon receiving the Compensation Committees recommendations, makes awards as warranted. The financial performance targets attributable to particular executive officers are varied to align the
officers duties with the appropriate metrics that best reflect the officers impact on the company and our performance.

The
following table details the general nature of the fiscal 2009 annual bonus performance targets attributable to our named executive officers:



|                        |  |                         |  |                                          
|----------------------- |  | ----------------------- |  | -----------------------------------------
|Named Executive Officer |  | Title                   |  | Performance Target Fiscal 2009 (1)       
|Elizabeth McLaughlin    |  | Chief Executive Officer |  | 100% net income for Hot Topic, Inc.      
|Gerald Cook             |  | Chief Operating Officer |  | 100% net income for Hot Topic, Inc.      
|Christopher Daniel      |  | President, Torrid       |  | 75% Torrid divisional operating income;  
|                        |  |                         |  | 25% Hot Topic divisional operating income
|James McGinty           |  | Chief Financial Officer |  | 100% net income for Hot Topic, Inc.      



|(1) | Represents cash bonuses eligible to be earned in fiscal 2009 and paid in fiscal 2010.
|--- | -------------------------------------------------------------------------------------

In addition, on March 18, 2009, the Board confirmed that the target goals for fiscal 2008 set for performance share awards granted in fiscal 2006 had not been met, and therefore all such awards terminated and are
of no further force or effect.



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PART III



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

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

The information required by this item with respect to directors is incorporated by reference to the information appearing under the caption
Election of Directors, contained in our Definitive Proxy Statement which will be filed with the SEC within 120 days of January 31, 2009 pursuant to Regulation 14A in connection with the solicitation of proxies for our Annual Meeting
of Shareholders to be held on June 9, 2009, or the Proxy Statement.

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

We have adopted Standards of Business Ethics that apply to all of our officers, directors and employees. The Standards of Business Ethics is available on our investor relations website at
investorrelations.hottopic.com. If we make any substantive amendments to the Standards of Business Ethics or grant any waiver from a provision of the Standards of Business Ethics to any executive officer or director, we will promptly disclose the
nature of the amendment or waiver on our website, as well as via any other means then required by Nasdaq listing standards or applicable law.



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

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



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

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



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

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



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

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



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PART IV



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



| | (a)(1) | Consolidated Financial Statements
| | ------ | ---------------------------------

The following
consolidated financial statements required by this item are submitted in a separate section beginning on page F-1 of this Annual Report on Form 10-K:



|                                                                                                                             |  |     
|---------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                             |  | Page
|Report of Independent Registered Public Accounting Firm                                                                      |  | F-1 
|Consolidated Balance Sheets as of January 31, 2009 and February 2, 2008                                                      |  | F-2 
|Consolidated Statements of Income for the years ended January 31, 2009, February 
2, 2008 and February 3, 2007               |  | F-3 
|Consolidated Statements of Shareholders Equity for the years ended January 31, 2009, February 
2, 2008 and February 3, 2007 |  | F-4 
|Consolidated Statements of Cash Flows for the years ended January 31, 2009, February 
2, 2008 and February 3, 2007           |  | F-5 
|Notes to Consolidated Financial Statements                                                                                   |  | F-6 



| | (a)(2) | Financial Statement Schedules
| | ------ | -----------------------------



| | Schedule | IIValuation and Qualifying Accounts
| | -------- | ------------------------------------

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

For the Fiscal Years Ended January 31, 2009, February 2, 2008 and February 3, 2007



|                            |  |                            |     |                             |   |     |                       |  |                       |   |  |   |    
|--------------------------- |  | -------------------------- | --- | --------------------------- | - | --- | --------------------- |  | --------------------- | - |  | - | ---
|                            |  | Balance atBeginning ofYear |     | Charged toCosts andExpenses |   |     | Deductions/Write-offs |  | Balance atEnd of Year
|Fiscal 2008                 |  |                            |     |                             |   |     |                       |  |                       |   |  |   |    
|Allowance for sales returns |  | $                          | 399 |                             | $ | (6  | )                     |  | $                     |  |  | $ | 393
|                            |  |                            |     |                             |   |     |                       |  |                       |   |  |   |    
|                            |  |                            |     |                            
|Fiscal 2007                 |  |                            |     |                             |   |     |                       |  |                       |   |  |   |    
|Allowance for sales returns |  | $                          | 495 |                             | $ | (96 | )                     |  | $                     |  |  | $ | 399
|                            |  |                            |     |                             |   |     |                       |  |                       |   |  |   |    
|                            |  |                            |     |                            
|Fiscal 2006                 |  |                            |     |                             |   |     |                       |  |                       |   |  |   |    
|Allowance for sales returns |  | $                          | 558 |                             | $ | (63 | )                     |  | $                     |  |  | $ | 495
|                            |  |                            |     |                             |   |     |                       |  |                       |   |  |   |    



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



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

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



|               |  |                                                                                                                                                                                                                                                       
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Document                                                                                                                                                                                                                               
|3.1            |  | Amended and Restated Articles of Incorporation. (Filed as an exhibit to Registrants Registration Statement on Form SB-2 (333-5054-LA) and incorporated herein by
reference.)                                                                         
|               | 
|3.2            |  | Certificate of Amendment of Amended and Restated Articles of Incorporation. (Filed as Exhibit 3.2 to Registrants Annual Report on Form 10-K for the year ended January 29, 2005 and
incorporated herein by reference.)                               
|               | 
|3.3            |  | Amended and Restated Bylaws, as amended. (Filed as Exhibit 3.3 to Registrants Annual Report on Form 10-K for the year ended January 29, 2005 and incorporated herein by
reference.)                                                                  
|               | 
|4.1            |  | Reference is made to Exhibits 3.1, 3.2 and 3.3.                                                                                                                                                                                                       
|               | 
|4.2            |  | Specimen stock certificate. (Filed as an exhibit to Registrants Registration Statement on Form SB-2 (333-5054-LA) and incorporated herein by reference.)                                                                                             
|               | 
|10.1a          |  | Form of Indemnity Agreement entered into between Registrant and its directors and officers. (Filed as an exhibit to Registrants Registration Statement on Form SB-2 (333-5054-LA) and
incorporated herein by reference.)                             
|               | 
|10.2a          |  | 2006 Equity Incentive Plan (the 2006 Plan), as amended. (Filed as Exhibit 10.2a to Registrants Annual Report on Form 10-K for the year ended February 3, 2007 and
incorporated herein by reference.)                                               
|               | 
|10.3a          |  | Form of Nonstatutory Stock Option Agreement of Registrant pursuant to the 2006 Plan. (Filed as Exhibit 99.3 to Registrants Current Report on Form 8-K filed on June 15, 2006 and
incorporated herein by reference.)                                  
|               | 
|10.4a          |  | Form of Incentive Stock Option Agreement of Registrant pursuant to the 2006 Plan. (Filed as Exhibit 99.2 to Registrants Current Report on Form 8-K filed on June 15, 2006 and
incorporated herein by reference.)                                     
|               | 
|10.5a          |  | 1996 Non-Employee Directors Stock Option Plan, as amended. (Filed as Exhibit 10.1 to Registrants Current Report on Form 8-K filed on June 13, 2008 and incorporated herein by
reference.)                                                           
|               | 
|10.6a          |  | Employee Stock Purchase Plan, as amended. (Filed as Exhibit 10.6a to Registrants Annual Report on Form 10-K for the year ended February 3, 2007 and incorporated herein by
reference.)                                                               
|               | 
|10.7a          |  | Hot Topic 401(k) Plan of Registrant, effective as of August 1, 1995, as amended. (Filed as Exhibit 10.7a to Registrants Annual Report on Form 10-K for the year ended
January 29, 2005 and incorporated herein by reference.)                        
|               | 
|10.8a          |  | Form of Restricted Stock Bonus Agreement between the Registrant and each of its non-employee directors. (Filed as Exhibit 10.13 to Registrants Quarterly Report on Form 10-Q for the quarter
ended May 5, 2001 and incorporated herein by reference.)
|               | 
|10.9a          |  | Form of Performance Share Award Agreement and Program, under the 1996 Equity Incentive Plan. (Filed as Exhibit 10.1 to Registrants Quarterly Report on Form 10-Q for the quarter ended
April 29, 2006 and incorporated herein by reference.)         
|               | 
|10.10a         |  | Hot Topic, Inc. Deferred Compensation Plan. (Filed as Exhibit 99.1 to Registrants Current Report on Form 8-K filed on July 6, 2006 and incorporated herein by
reference.)                                                                            



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|               |  |                                                                                                                                                                                                                                                                                                                                                                              
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Document                                                                                                                                                                                                                                                                                                                                                      
|10.11a         |  | 2009 Executive Officer Salary, Bonus and Equity Compensation Summary. (Included in Item 9B. of Registrants Annual Report on Form 10-K for the year ended January 31, 2009 and
incorporated herein by reference.)                                                                                                                                                            
|               | 
|10.12a         |  | Board Compensation Summary. (Filed as Exhibit 10.27a to Registrants Annual Report on Form 10-K for the year ended February 2, 2008 and incorporated herein by
reference.)                                                                                                                                                                                                   
|               | 
|10.13a         |  | Performance Share Award Agreement and Program, under the 2006 Plan. (Filed as Exhibit 10.28a to Registrants Annual Report on Form 10-K for the year ended February 3, 2007 and
incorporated herein by reference.)                                                                                                                                                           
|               | 
|10.14a         |  | Form of Stock Option Cancellation Agreement. (Filed as Exhibit 10.1 to Registrants Current Report on Form 8-K filed on December 12, 2007 and incorporated herein by reference.)                                                                                                                                                                                             
|               | 
|10.15a         |  | Stock Option Cancellation Agreement dated July 7, 2008 between Registrant and Elizabeth McLaughlin. (Filed as Exhibit 10.1 to Registrants Current Report on Form 8-K filed on July 8,
2008 and incorporated herein by reference.)                                                                                                                                           
|               | 
|10.16a         |  | Amended and Restated Employment Letter Agreement dated November 24, 2008 between the Registrant and Gerald Cook. (Filed as Exhibit 10.1a to Registrants Quarterly Report on Form 10-Q for
the quarter ended November 1, 2008 and incorporated herein by reference.)                                                                                                         
|               | 
|10.17a         |  | Amended and Restated Employment Letter Agreement dated November 24, 2008 between the Registrant and James McGinty. (Filed as Exhibit 10.2a to Registrants Quarterly Report on
Form 10-Q for the quarter ended November 1, 2008 and incorporated herein by reference.)                                                                                                       
|               | 
|10.18a         |  | Amended and Restated Employment Letter Agreement dated November 24, 2008 between the Registrant and Christopher Daniel. (Filed as Exhibit10.3a to Registrants Quarterly Report on
Form 10-Q for the quarter ended November 1, 2008 and incorporated herein by reference.)                                                                                                   
|               | 
|10.19a         |  | Form of Performance Share Award Cancellation Agreement. (Filed as Exhibit 10.1 to Registrants Current Report on Form 8-K filed on December 18, 2008 and incorporated herein by
reference.)                                                                                                                                                                                  
|               | 
|10.20          |  | 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. (Filed as Exhibit 10.18 to Registrants Annual Report on Form 10-K for the year ended January 30, 1999 and incorporated herein by reference.)
|               | 
|10.21          |  | Guaranty of Lease, dated December 10, 1998, entered into between the Registrant and Majestic Realty Co. and Patrician Associates, Inc. (Filed as Exhibit 10.19 to Registrants Annual
Report on Form 10-K for the year ended January 30, 1999 and incorporated herein by reference.)                                                                                         
|               | 
|10.22          |  | First Amendment to Industrial Real Estate Lease, dated March 19, 2001, by and between MajesticFullerton Road, LLC, PFG Fullerton Limited Partnership, and Hot Topic Administration,
Inc. (Filed as Exhibit 10.10 to Registrants Annual Report on Form 10-K for the year ended February 3, 2001 and incorporated herein by reference.)                                      
|               | 
|10.23          |  | Third Amendment to Industrial Real Estate Lease, dated February 25, 2004, by and among Majestic-Fullerton Road, LLC, PFG Fullerton Limited Partnership, and Hot Topic Administration, Inc.
(Filed as Exhibit 10.1 to Registrants Quarterly Report on Form 10-Q for the quarter ended May 1, 2004 and incorporated herein by reference.)                                     
|10.24          |  | Centre Pointe Distribution Park Lease, dated June 1, 2004, by and among Crescent Resources, LLC and Hot Topic, Inc. (Filed as Exhibit 10.1 to Registrants Quarterly Report on Form
10-Q for the quarter ended July 31, 2004 and incorporated herein by reference.)                                                                                                          
|               | 
|10.25          |  | Purchase and sale agreement between the Registrant and Crescent Resources, LLC. (Filed as Exhibit 99.1 to Registrants Current Report on Form 8-K filed on June 20, 2005 and
incorporated herein by reference.)                                                                                                                                                              



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|               |  |                                                                                                                                                                                 
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Document                                                                                                                                                         
|10.26          |  | Union Bank of California Trust Agreement. (Filed as Exhibit 99.2 to Registrants Current Report on Form 8-K filed on July 6, 2006 and incorporated herein by
reference.)        
|               | 
|21             |  | Hot Topic, Inc. List of Subsidiaries. (Filed as Exhibit 21 to Registrants Annual Report on Form 10-K for the year ended February 3, 2007 and incorporated herein by
reference.)
|               | 
|23.1           |  | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.                                                                                                    
|               | 
|24.1           |  | Power of Attorney is contained on the signature page.                                                                                                                           
|               | 
|31.1           |  | Certification, dated March 24, 2009, of Registrants Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.                                         
|               | 
|31.2           |  | Certification, dated March 24, 2009, of Registrants Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.                                         
|               | 
|32.1           |  | Certifications, dated March 24, 2009, of Registrants Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.            



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



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

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



51



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##### Table of Contents

SIGNATURES

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



HOT TOPIC, INC.By:

/s/    ELIZABETH
MCLAUGHLINElizabeth McLaughlinChief Executive Officer and Director


March 24, 2009

POWER OF ATTORNEY

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

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



|                                                 |  |                                                                                        |  |               
|------------------------------------------------ |  | -------------------------------------------------------------------------------------- |  | --------------
|Name                                             |  | Position                                                                               |  | Date          
|/s/    ELIZABETH
MCLAUGHLIN Elizabeth McLaughlin |  | Chief Executive Officer and Director (Principal Executive Officer)                     |  | March 24, 2009
|                                                 |  |                                                                                       
|/s/    JAMES
MCGINTY James McGinty               |  | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |  | March 24, 2009
|                                                 |  |                                                                                       
|/s/    BRUCE
QUINNELL Bruce Quinnell             |  | Chairman of the Board                                                                  |  | March 24, 2009
|                                                 |  |                                                                                       
|/s/    EVELYN
DAN Evelyn DAn                   |  | Director                                                                               |  | March 24, 2009
|                                                 |  |                                                                                       
|/s/    LISA M.
HARPER Lisa M. Harper             |  | Director                                                                               |  | March 24, 2009
|                                                 |  |                                                                                       
|/s/    W. SCOTT
HEDRICK W. Scott Hedrick         |  | Director                                                                               |  | March 24, 2009
|                                                 |  |                                                                                       
|/s/    ANDREW
SCHUON Andrew Schuon               |  | Director                                                                               |  | March 24, 2009
|                                                 |  |                                                                                       
|/s/    THOMAS
VELLIOS Thomas Vellios             |  | Director                                                                               |  | March 24, 2009



52



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets of Hot Topic, Inc. as of January 31, 2009 and February 2, 2008, and the related consolidated statements of income, shareholders equity, and cash flows for each of
the three years in the period ended January 31, 2009. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hot Topic, Inc. at January 31, 2009 and February 2, 2008, and the
consolidated results of its operations and its cash flows for each of the three years in the period ended January 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Notes 1 and 8 to the consolidated financial statements, in 2007 the Company changed its method of accounting for income taxes.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Hot Topic, Inc.s internal
control over financial reporting as of January 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 23,
2009 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Los Angeles, California

March 23, 2009



F-1



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##### Table of Contents

Hot Topic, Inc. and Subsidiaries

Consolidated Balance Sheets

(In
thousands, except share amounts)



|                                                                                                                                                                           |  |                 |         |   |                 |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | - | --------------- | - | ------- | -
|                                                                                                                                                                           |  | January 31,2009 |         |   | February 2,2008 |  
|Assets                                                                                                                                                                     |  |                 |         |   |                 |   |         |  
|Current assets:                                                                                                                                                            |  |                 |         |   |                 |   |         |  
|Cash and cash equivalents                                                                                                                                                  |  | $               | 90,135  |   |                 | $ | 16,391  |  
|Short-term investments                                                                                                                                                     |  |                 | 7,375   |   |                 |   | 36,890  |  
|Inventory                                                                                                                                                                  |  |                 | 79,923  |   |                 |   | 80,305  |  
|Prepaid expenses and other                                                                                                                                                 |  |                 | 13,897  |   |                 |   | 14,698  |  
|Deferred tax assets                                                                                                                                                        |  |                 | 6,365   |   |                 |   | 3,970   |  
|                                                                                                                                                                           |  |                 |         |   |                 |   |         |  
|Total current assets                                                                                                                                                       |  |                 | 197,695 |   |                 |   | 152,254 |  
|                                                                                                                                                                           |  |                
|Property and equipment, net                                                                                                                                                |  |                 | 155,290 |   |                 |   | 171,931 |  
|Deposits and other                                                                                                                                                         |  |                 | 1,607   |   |                 |   | 1,368   |  
|Long-term investments                                                                                                                                                      |  |                 | 8,402   |   |                 |   |        |  
|Deferred tax assets                                                                                                                                                        |  |                 | 7,577   |   |                 |   | 6,548   |  
|                                                                                                                                                                           |  |                 |         |   |                 |   |         |  
|Total assets                                                                                                                                                               |  | $               | 370,571 |   |                 | $ | 332,101 |  
|                                                                                                                                                                           |  |                 |         |   |                 |   |         |  
|Liabilities and shareholders equity                                                                                                                                       |  |                 |         |   |                 |   |         |  
|Current liabilities:                                                                                                                                                       |  |                 |         |   |                 |   |         |  
|Accounts payable                                                                                                                                                           |  | $               | 19,457  |   |                 | $ | 18,168  |  
|Accrued liabilities                                                                                                                                                        |  |                 | 45,055  |   |                 |   | 35,123  |  
|Income taxes payable                                                                                                                                                       |  |                 | 7,601   |   |                 |   | 1,167   |  
|                                                                                                                                                                           |  |                 |         |   |                 |   |         |  
|Total current liabilities                                                                                                                                                  |  |                 | 72,113  |   |                 |   | 54,458  |  
|                                                                                                                                                                           |  |                
|Deferred rent                                                                                                                                                              |  |                 | 36,909  |   |                 |   | 40,548  |  
|Income taxes payable                                                                                                                                                       |  |                 | 1,850   |   |                 |   | 837     |  
|Deferred compensation                                                                                                                                                      |  |                 | 1,273   |   |                 |   | 1,105   |  
|                                                                                                                                                                           |  |                
|Commitments and contingencies                                                                                                                                              |  |                 |         |   |                 |   |         |  
|                                                                                                                                                                           |  |                
|Shareholders equity:                                                                                                                                                      |  |                 |         |   |                 |   |         |  
|                                                                                                                                                                           |  |                
|Preferred shares, no par value; 10,000,000 shares authorized; no shares issued and outstanding                                                                             |  |                 |        |   |                 |   |        |  
|Common shares, no par value; 150,000,000 shares authorized; 43,949,726 and 43,698,670 shares issued and outstanding at January 31, 2009
and February 2, 2008, respectively |  |                 | 116,740 |   |                 |   | 111,873 |  
|Retained earnings                                                                                                                                                          |  |                 | 143,025 |   |                 |   | 123,283 |  
|Accumulated other comprehensive loss                                                                                                                                       |  |                 | (1,339  | ) |                 |   | (3      | )
|                                                                                                                                                                           |  |                 |         |   |                 |   |         |  
|Total shareholders equity                                                                                                                                                 |  |                 | 258,426 |   |                 |   | 235,153 |  
|                                                                                                                                                                           |  |                 |         |   |                 |   |         |  
|Total liabilities and shareholders equity                                                                                                                                 |  | $               | 370,571 |   |                 | $ | 332,101 |  
|                                                                                                                                                                           |  |                 |         |   |                 |   |         |  

See accompanying Notes to Consolidated Financial Statements.



F-2



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##### Table of Contents

Hot Topic, Inc. and Subsidiaries

Consolidated Statements of Income

(In
thousands, except per share amounts)



|                                                                       |  |                 |         |                 |   |                 |  |   |        
|---------------------------------------------------------------------- |  | --------------- | ------- | --------------- | - | --------------- |  | - | -------
|                                                                       |  | Years Ended    
|                                                                       |  | January 31,2009 |         | February 2,2008 |   | February 3,2007
|Net sales                                                              |  | $               | 761,074 |                 | $ | 728,121         |  | $ | 751,558
|Cost of goods sold, including buying, distribution and occupancy costs |  |                 | 487,769 |                 |   | 476,677         |  |   | 502,408
|                                                                       |  |                 |         |                 |   |                 |  |   |        
|Gross margin                                                           |  |                 | 273,305 |                 |   | 251,444         |  |   | 249,150
|Selling, general and administrative expenses                           |  |                 | 242,483 |                 |   | 227,147         |  |   | 227,580
|                                                                       |  |                 |         |                 |   |                 |  |   |        
|Income from operations                                                 |  |                 | 30,822  |                 |   | 24,297          |  |   | 21,570 
|Interest income, net                                                   |  |                 | 1,670   |                 |   | 1,934           |  |   | 1,450  
|                                                                       |  |                 |         |                 |   |                 |  |   |        
|Income before income taxes                                             |  |                 | 32,492  |                 |   | 26,231          |  |   | 23,020 
|Provision for income taxes                                             |  |                 | 12,750  |                 |   | 10,219          |  |   | 9,394  
|                                                                       |  |                 |         |                 |   |                 |  |   |        
|Net income                                                             |  | $               | 19,742  |                 | $ | 16,012          |  | $ | 13,626 
|                                                                       |  |                 |         |                 |   |                 |  |   |        
|Earnings per share:                                                    |  |                 |         |                 |   |                 |  |   |        
|Basic                                                                  |  | $               | 0.45    |                 | $ | 0.36            |  | $ | 0.31   
|                                                                       |  |                 |         |                 |   |                 |  |   |        
|Diluted                                                                |  | $               | 0.45    |                 | $ | 0.36            |  | $ | 0.30   
|                                                                       |  |                 |         |                 |   |                 |  |   |        
|Shares used in computing earnings per share:                           |  |                 |         |                 |   |                 |  |   |        
|Basic                                                                  |  |                 | 43,789  |                 |   | 44,005          |  |   | 44,167 
|Diluted                                                                |  |                 | 43,913  |                 |   | 44,132          |  |   | 44,752 

See accompanying Notes to Consolidated Financial Statements.



F-3



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##### Table of Contents

Hot Topic, Inc. and Subsidiaries

Consolidated Statements of Shareholders Equity

(In thousands)



|                                                         |  |               |   |  |        |         |   |                  |   |         |                                   |  |   |                          |   |  |   |         |  
|-------------------------------------------------------- |  | ------------- | - |  | ------ | ------- | - | ---------------- | - | ------- | --------------------------------- |  | - | ------------------------ | - |  | - | ------- | -
|                                                         |  |               |   |  |        |         |   | RetainedEarnings |   |         | AccumulatedOtherComprehensiveLoss |  |   | TotalShareholdersEquity |  
|                                                         |  | Common Shares |   |  |        |        
|                                                         |  | Shares        |   |  | Amount |         |   |                  |  
|Balance at January 28, 2006                              |  | 43,977        |   |  | $      | 100,328 |   |                  | $ | 100,746 |                                   |  | $ | (13                      | ) |  | $ | 201,061 |  
|Exercise of stock options                                |  | 195           |   |  |        | 1,865   |   |                  |   |        |                                   |  |   |                         |   |  |   | 1,865   |  
|Employee stock purchase plan                             |  | 50            |   |  |        | 493     |   |                  |   |        |                                   |  |   |                         |   |  |   | 493     |  
|Restricted stock awards                                  |  | 8             |   |  |        | 155     |   |                  |   |        |                                   |  |   |                         |   |  |   | 155     |  
|Tax benefit from exercise of stock options, net          |  |              |   |  |        | 147     |   |                  |   |        |                                   |  |   |                         |   |  |   | 147     |  
|Stock-based compensation expense                         |  |              |   |  |        | 4,100   |   |                  |   |        |                                   |  |   |                         |   |  |   | 4,100   |  
|Comprehensive income:                                    |  |               |   |  |        |         |   |                  |   |         |                                   |  |   |                          |   |  |   |         |  
|Net income                                               |  |              |   |  |        |        |   |                  |   | 13,626  |                                   |  |   |                         |   |  |   | 13,626  |  
|Unrealized gain on short-term investments, net           |  |              |   |  |        |        |   |                  |   |        |                                   |  |   | 10                       |   |  |   | 10      |  
|                                                         |  |               |   |  |        |         |   |                  |   |         |                                   |  |   |                          |   |  |   |         |  
|Total comprehensive income                               |  |               |   |  |        |         |   |                  |   |         |                                   |  |   |                          |   |  |   | 13,636  |  
|                                                         |  |               |   |  |        |         |   |                  |   |         |                                   |  |   |                          |   |  |   |         |  
|Balance at February 3, 2007                              |  | 44,230        |   |  |        | 107,088 |   |                  |   | 114,372 |                                   |  |   | (3                       | ) |  |   | 221,457 |  
|Cumulative effectFIN 48                                 |  |              |   |  |        |        |   |                  |   | (836    | )                                 |  |   |                         |   |  |   | (836    | )
|                                                         |  |               |   |  |        |         |   |                  |   |         |                                   |  |   |                          |   |  |   |         |  
|Balance at February 4, 2007                              |  | 44,230        |   |  |        | 107,088 |   |                  |   | 113,536 |                                   |  |   | (3                       | ) |  |   | 220,621 |  
|Exercise of stock options                                |  | 271           |   |  |        | 1,293   |   |                  |   |        |                                   |  |   |                         |   |  |   | 1,293   |  
|Employee stock purchase plan                             |  | 56            |   |  |        | 380     |   |                  |   |        |                                   |  |   |                         |   |  |   | 380     |  
|Restricted stock awards                                  |  | 12            |   |  |        | 155     |   |                  |   |        |                                   |  |   |                         |   |  |   | 155     |  
|Repurchase of common stock                               |  | (870          | ) |  |        | (897    | ) |                  |   | (6,265  | )                                 |  |   |                         |   |  |   | (7,162  | )
|Tax benefit from exercise of stock options, net          |  |              |   |  |        | 351     |   |                  |   |        |                                   |  |   |                         |   |  |   | 351     |  
|Stock-based compensation expense                         |  |              |   |  |        | 3,503   |   |                  |   |        |                                   |  |   |                         |   |  |   | 3,503   |  
|Comprehensive income:                                    |  |               |   |  |        |         |   |                  |   |         |                                   |  |   |                          |   |  |   |         |  
|Net income                                               |  |              |   |  |        |        |   |                  |   | 16,012  |                                   |  |   |                         |   |  |   | 16,012  |  
|                                                         |  |               |   |  |        |         |   |                  |   |         |                                   |  |   |                          |   |  |   |         |  
|Total comprehensive income                               |  |               |   |  |        |         |   |                  |   |         |                                   |  |   |                          |   |  |   | 16,012  |  
|                                                         |  |               |   |  |        |         |   |                  |   |         |                                   |  |   |                          |   |  |   |         |  
|Balance at February 2, 2008                              |  | 43,699        |   |  |        | 111,873 |   |                  |   | 123,283 |                                   |  |   | (3                       | ) |  |   | 235,153 |  
|Exercise of stock options                                |  | 166           |   |  |        | 440     |   |                  |   |        |                                   |  |   |                         |   |  |   | 440     |  
|Employee stock purchase plan                             |  | 71            |   |  |        | 329     |   |                  |   |        |                                   |  |   |                         |   |  |   | 329     |  
|Restricted stock awards                                  |  | 14            |   |  |        | 155     |   |                  |   |        |                                   |  |   |                         |   |  |   | 155     |  
|Tax deficiency from exercise of stock options, net       |  |              |   |  |        | (16     | ) |                  |   |        |                                   |  |   |                         |   |  |   | (16     | )
|Stock-based compensation expense                         |  |              |   |  |        | 3,959   |   |                  |   |        |                                   |  |   |                         |   |  |   | 3,959   |  
|Comprehensive income:                                    |  |               |   |  |        |         |   |                  |   |         |                                   |  |   |                          |   |  |   |         |  
|Net income                                               |  |              |   |  |        |        |   |                  |   | 19,742  |                                   |  |   |                         |   |  |   | 19,742  |  
|Unrealized loss on short- and long-term investments, net |  |              |   |  |        |        |   |                  |   |        |                                   |  |   | (1,336                   | ) |  |   | (1,336  | )
|                                                         |  |               |   |  |        |         |   |                  |   |         |                                   |  |   |                          |   |  |   |         |  
|Total comprehensive income                               |  |               |   |  |        |         |   |                  |   |         |                                   |  |   |                          |   |  |   | 18,406  |  
|                                                         |  |               |   |  |        |         |   |                  |   |         |                                   |  |   |                          |   |  |   |         |  
|Balance at January 31, 2009                              |  | 43,950        |   |  | $      | 116,740 |   |                  | $ | 143,025 |                                   |  | $ | (1,339                   | ) |  | $ | 258,426 |  
|                                                         |  |               |   |  |        |         |   |                  |   |         |                                   |  |   |                          |   |  |   |         |  

See accompanying Notes to Consolidated Financial Statements.



F-4



---

##### Table of Contents

Hot Topic, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)



|                                                                                  |  |                 |         |   |                 |   |          |                 |  |   |          |  
|--------------------------------------------------------------------------------- |  | --------------- | ------- | - | --------------- | - | -------- | --------------- |  | - | -------- | -
|                                                                                  |  | Years Ended     |        
|                                                                                  |  | January 31,2009 |         |   | February 2,2008 |   |          | February 3,2007 | 
|OPERATING ACTIVITIES                                                              |  |                 |         |   |                 |   |          |                 |  |   |          |  
|Net income                                                                        |  | $               | 19,742  |   |                 | $ | 16,012   |                 |  | $ | 13,626   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                 |         |   |                 |   |          |                 |  |   |          |  
|Depreciation and amortization                                                     |  |                 | 38,328  |   |                 |   | 41,583   |                 |  |   | 38,941   |  
|Stock-based compensation                                                          |  |                 | 4,114   |   |                 |   | 3,658    |                 |  |   | 4,255    |  
|Loss on disposal of fixed assets                                                  |  |                 | 572     |   |                 |   | 336      |                 |  |   | 720      |  
|Impairment of long-lived assets                                                   |  |                 | 1,198   |   |                 |   | 1,575    |                 |  |   | 3,395    |  
|Deferred taxes                                                                    |  |                 | (2,941  | ) |                 |   | (3,459   | )               |  |   | (5,838   | )
|Gift card breakage income                                                         |  |                 | (1,152  | ) |                 |   | (1,151   | )               |  |   | (1,198   | )
|Changes in operating assets and liabilities:                                      |  |                 |         |   |                 |   |          |                 |  |   |          |  
|Inventory                                                                         |  |                 | 382     |   |                 |   | (6,437   | )               |  |   | (2,708   | )
|Prepaid expenses and other current assets                                         |  |                 | 801     |   |                 |   | (196     | )               |  |   | 2,270    |  
|Deposits and other assets                                                         |  |                 | (239    | ) |                 |   | (780     | )               |  |   | (344     | )
|Accounts payable                                                                  |  |                 | 1,289   |   |                 |   | 2,306    |                 |  |   | (2,260   | )
|Accrued liabilities                                                               |  |                 | 11,103  |   |                 |   | 2,693    |                 |  |   | 2,579    |  
|Deferred rent                                                                     |  |                 | (3,640  | ) |                 |   | (126     | )               |  |   | 733      |  
|Income taxes payable                                                              |  |                 | 7,447   |   |                 |   | (4,423   | )               |  |   | (198     | )
|                                                                                  |  |                 |         |   |                 |   |          |                 |  |   |          |  
|Net cash provided by operating activities                                         |  |                 | 77,004  |   |                 |   | 51,591   |                 |  |   | 53,973   |  
|                                                                                  |  |                 |        
|INVESTING ACTIVITIES                                                              |  |                 |         |   |                 |   |          |                 |  |   |          |  
|Purchases of property and equipment                                               |  |                 | (23,257 | ) |                 |   | (48,766  | )               |  |   | (38,617  | )
|Proceeds from sale of short- and long-term investments                            |  |                 | 26,672  |   |                 |   | 156,164  |                 |  |   | 94,354   |  
|Purchases of short- and long-term investments                                     |  |                 | (7,743  | ) |                 |   | (141,474 | )               |  |   | (117,923 | )
|                                                                                  |  |                 |         |   |                 |   |          |                 |  |   |          |  
|Net cash used in investing activities                                             |  |                 | (4,328  | ) |                 |   | (34,076  | )               |  |   | (62,186  | )
|                                                                                  |  |                 |        
|FINANCING ACTIVITIES                                                              |  |                 |         |   |                 |   |          |                 |  |   |          |  
|Payments on capital lease obligations                                             |  |                 |        |   |                 |   |         |                 |  |   | (262     | )
|Excess tax benefit from stock-based compensation                                  |  |                 | 299     |   |                 |   | 455      |                 |  |   | 207      |  
|Proceeds from employee stock purchases and exercise of stock options              |  |                 | 769     |   |                 |   | 1,673    |                 |  |   | 2,505    |  
|Repurchase of common stock                                                        |  |                 |        |   |                 |   | (7,162   | )               |  |   |         |  
|                                                                                  |  |                 |         |   |                 |   |          |                 |  |   |          |  
|Net cash provided by (used in) financing activities                               |  |                 | 1,068   |   |                 |   | (5,034   | )               |  |   | 2,450    |  
|                                                                                  |  |                 |         |   |                 |   |          |                 |  |   |          |  
|Increase (decrease) in cash and cash equivalents                                  |  |                 | 73,744  |   |                 |   | 12,481   |                 |  |   | (5,763   | )
|Cash and cash equivalents at beginning of year                                    |  |                 | 16,391  |   |                 |   | 3,910    |                 |  |   | 9,673    |  
|                                                                                  |  |                 |         |   |                 |   |          |                 |  |   |          |  
|Cash and cash equivalents at end of year                                          |  | $               | 90,135  |   |                 | $ | 16,391   |                 |  | $ | 3,910    |  
|                                                                                  |  |                 |         |   |                 |   |          |                 |  |   |          |  
|SUPPLEMENTAL INFORMATION                                                          |  |                 |         |   |                 |   |          |                 |  |   |          |  
|Cash paid during the period for interest                                          |  | $               | 73      |   |                 | $ | 96       |                 |  | $ | 24       |  
|                                                                                  |  |                 |         |   |                 |   |          |                 |  |   |          |  
|Cash paid during the period for income taxes                                      |  | $               | 7,759   |   |                 | $ | 17,193   |                 |  | $ | 15,326   |  
|                                                                                  |  |                 |         |   |                 |   |          |                 |  |   |          |  

See accompanying Notes to Consolidated Financial Statements.



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HOT TOPIC, INC. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

January 31, 2009

NOTE 1. Organization and Summary of Significant Accounting Policies

Organization and Business Activities

We are a mall-
and web-based specialty retailer operating the Hot Topic and Torrid concepts, as well as the e-space music discovery concept, ShockHound. At Hot Topic, our business strategy is built on the foundation of pop culture and its relevance to our target
teen customer. We sell a selection of music/pop culture-licensed and music/pop culture-influenced apparel, accessories, music and gift items for young men and women principally between the ages of 12 and 22. At Torrid, we sell apparel, lingerie,
shoes and accessories designed for various lifestyles for plus-size females principally between the ages of 15 and 29. At ShockHound, our genre-spanning music website, people of all ages can purchase MP3s and music merchandise, share their music
interests, read the latest music news and enjoy exclusive editorial content about their favorite artists. We were incorporated in California in 1988. We opened our first Hot Topic store in 1989 and our first Torrid store in 2001. We launched
ShockHound during the third quarter of fiscal 2008. At the end of fiscal 2008 (the fiscal year ended January 31, 2009), we operated 681 Hot Topic stores throughout the United States and Puerto Rico, and 159 Torrid stores in 36 states. We sell
merchandise on our websites www.hottopic.com and www.torrid.com, which reflect the Hot Topic and Torrid store concepts and sell merchandise similar to that sold in the respective stores. We sell music merchandise and MP3s on our website
www.shockhound.com. We currently have one reportable segment given the similarities of the economic characteristics among the Hot Topic and Torrid concepts, and the very early stage of business operations of our ShockHound concept. Throughout this
report, the terms our, we and us refer to Hot Topic, Inc. and its subsidiaries.

Principles of Consolidation

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

Fiscal Year

Our fiscal year is on a 52- or 53-week
basis and ends on the Saturday nearest to January 31. The fiscal year ended 2008 and 2007 were 52-week fiscal years. The fiscal year ended 2006 was a 53-week year, and our fiscal year ending 2009 is a 52-week year ending on January 30,
2010.

Use of Estimates

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



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Cash and Cash Equivalents

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

Fair Value of Financial Instruments

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

Short- and Long-Term Investments

Our short-term investments consist of interest-bearing variable rate securities backed by government bonds, have maturities in excess of three months and are accounted for as available for sale. At January 31,
2009, short-term investments consisted of municipal bonds of $7.3 million and certificates of deposit of $0.1 million. At February 2, 2008, short-term investments consisted of municipal bonds of $21.2 million and government obligations of $15.7
million. Short-term investments are recorded at fair market value, based on quoted prices of identical assets that are trading in active markets as of the end of the period for which the values are determined. (Refer to NOTE 5Fair Value
Measurements for discussion on how we determined the fair value of our short-term investments).

Our long-term investments comprise of
AAA/Aaa/A3-rated auction rate securities. These auction rate securities are accounted for as available for sale and backed by pools of student loans guaranteed by the U.S. Department of Education. Our auction rate securities are debt instruments
with maturities that range from 25 to 32 years and with interest rates that are reset through an auction process, most commonly at intervals of 7, 28 and 35 days. This same auction process is designed to provide a means by which these securities can
be sold and historically has provided a liquid market for them. Negative market conditions continue to indicate uncertainty in the global credit and capital markets. This uncertainty has resulted in the failure of auctions representing the auction
rate securities we hold as the amount of securities submitted for sale in those auctions exceed the amount of bids. While we have continued to earn and receive interest on our auction rate securities through the date of this report, we concluded
that their estimated fair value no longer approximates par value as of the end of fiscal 2008. Due to the lack of availability of observable market quotes on our auction rate securities, the fair market value of these securities has been determined
based on a valuation model prepared by the broker-dealer that holds these securities on our behalf. In addition, we have continued to update the model using current assumptions throughout fiscal 2008. (Refer to NOTE 5Fair Value Measurements
for discussion on how we determined the fair value of our auction rate securities).

As of January 31, 2009 and February 2, 2008,
the fair value of our auction rate securities was $8.4 million and $21.2 million, respectively. The decrease represents a $10.8 million liquidation in the first quarter of fiscal 2008 and a decline in fair value of $2.0 million from February 2,
2008 through January 31, 2009. This $2.0 million decline is deemed temporary as we have the intent and ability to hold these investments until anticipated full or substantial recovery in fair value occurs. Accordingly, we have recorded an
unrealized loss of $2.0 million ($1.2 million net of tax) in accumulated other comprehensive income reflected in the shareholders equity section of the consolidated balance sheet. If uncertainties in the credit and capital markets continue, we
may incur additional losses, some of which may be other-than-temporary, which could negatively affect our financial condition or results of operations. In addition, in the event that we decide not to hold these investments until full or substantial
recovery, we may be required to recognize impairment charges against income. During the first quarter of fiscal 2008, we reclassified all of our auction rate securities from current assets to non-current assets on our consolidated balance sheet, as
we do not expect them to successfully auction and recover their full or par value within the next 12 months.



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Accumulated other comprehensive income is comprised of unrealized gains and losses from short- and
long-term investments, net of all related taxes, and are reflected in the Shareholders Equity section of the Consolidated Balance Sheets.

Inventory

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

Property and Equipment

Property and equipment are recorded at cost less accumulated depreciation, or in the case of capitalized leases, at the present value of future minimum
lease payments. Major renewals and improvements are capitalized, while routine maintenance and repairs are expensed as incurred. Costs associated with internally developed software are accounted for in accordance with Statement of Position, or SOP,
98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1 provides guidance for the treatment of costs associated with computer software development and defines those costs to be capitalized and
those to be expensed. These costs consist of salaries of employees and payments made to third parties and consultants working on such software development. Subsequent additions, modifications or upgrades to internal-use software are capitalized only
to the extent that they allow the software to perform a task it previously did not perform. Capitalized internal use software costs are amortized using the straight-line method over their estimated useful lives, generally three years. In fiscal
2008, 2007 and 2006, we amortized approximately $0.8 million, $0.4 million and $0.5 million, respectively. Additionally, as of January 31, 2009 and February 2, 2008, the net book value of capitalized internal use software totaled
approximately $2.9 million and $2.3 million, respectively.

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

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

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

Self-Insurance

We are self-insured for certain losses related to medical and workers compensation although we maintain stop loss coverage with third
party insurers to limit our total liability exposure. The estimate of our self-insurance liability involves uncertainty since we must use judgment to estimate the ultimate cost that will be incurred to settle reported claims and unreported claims
for incidents incurred but not reported as of the balance sheet date.



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When estimating our self-insurance liability, we consider a number of factors, which include historical claim experience and valuations provided by
independent third party actuaries. As claims develop, the actual ultimate losses may differ from actuarial estimates. Therefore, an analysis is performed quarterly to determine if modifications to the accrual are required.

Revenue Recognition

Revenue is recognized at our
retail store locations at the point at which the customer receives and pays for the merchandise at the register. For online sales, revenue is recognized at the time of shipment, which we refer to as the date of purchase by the customer. Sales are
recognized net of merchandise returns, which are reserved for based on historical experience. For the years ended January 31, 2009, February 2, 2008 and February 3, 2007, merchandise returns were $23.7 million, $22.6 million and
$27.9 million, respectively. Revenue from gift cards, gift certificates and store merchandise credits is recognized at the time of redemption. Shipping and handling revenues from our websites are included as a component of net sales.

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

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

Vendor Allowances

We
receive certain allowances from our vendors primarily related to damaged merchandise, markdowns and, for our Torrid division, new store openings. Allowances received from vendors related to damaged merchandise and new Torrid store openings are
reflected as a reduction of inventory in the period they are received and allocated to cost of sales during the period in which the items are sold. Markdown allowances received from vendors are reflected as reductions to cost of sales in the period
they are received as these allowances are generally received after goods have been sold or marked down. For the years ended January 31, 2009, February 2, 2008 and February 3, 2007, we received vendor allowances of $8.4 million,
$9.5 million and $6.9 million, respectively, of which $8.2 million, $9.3 million and $6.9 million, respectively, were accounted for as a reduction of cost of goods sold. Most of the vendor allowances that we receive are based on on-going agreements
and negotiations with vendors. We receive vendor allowances from substantially all of our vendors.

Selling, General and Administrative Expenses

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

Gift Cards

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

In fiscal 2008, 2007 and 2006, we recognized $1.2 million in each of the three years, as a component of sales in proportion to actual gift card
redemptions over the period that remaining gift card values are redeemed.



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Store Pre-Opening Costs

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

Shipping and Handling Costs

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

Leases

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

Advertising Costs

Advertising costs are expensed the first time the event occurs or as incurred. Advertising expenses were $7.6 million, $4.6 million and $3.8 million for
the years ended January 31, 2009, February 2, 2008 and February 3, 2007, respectively and advertising reimbursements from vendors for these years were immaterial. At January 31, 2009 and February 2, 2008, the amount of
advertising costs reported as prepaid advertising was immaterial.

Income Taxes

We account for income taxes using the liability method in accordance with Statement of Financial Accounting Standards, or SFAS, No. 109,
Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting bases and tax bases of assets and liabilities and are measured using the enacted tax
rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. Deferred tax assets are reduced by valuation allowances if we believe it is more likely than not that some
portion or the entire asset will not be realized.

In fiscal 2007, we adopted the provisions of Financial Accounting Standards Board, or
FASB, Interpretation No. 48, or FIN 48, Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement 109. FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The amount
recognized is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

We include interest and penalties related to uncertain tax positions in income tax expense.

Valuation of Long-Lived Assets

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



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negative industry or economic trend. When we determine that the carrying value of long-lived assets may not be recoverable based upon the existence of one or
more of the aforementioned factors, impairment is measured based on a projected discounted cash flow method using a discount rate determined by management.

In the event future store performance is lower than forecasted results, future cash flows may be lower than expected, which could result in future impairment charges. While we believe recently opened stores will
provide sufficient cash flow, material changes in results could result in future impairment charges. During the years ended January 31, 2009, February 2, 2008 and February 3, 2007, we recorded impairment charges of $1.2 million,
$1.6 million and $3.4 million, respectively, which is included in selling, general and administrative expenses in our consolidated statements of income.

Stock-Based Compensation

We estimate the fair value of stock options granted using the Black-Scholes option-pricing formula
and a single option award approach. This fair value is then amortized over the requisite service periods of the awards. This option-pricing model requires the input of highly subjective assumptions, including the options expected life, price
volatility of the underlying stock, risk free interest rate and expected dividend rate. As stock-based compensation expense is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS No. 123R Share
Based Payments, or SFAS 123R, requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical
experience.

Earnings Per Share

We
compute earnings or loss per share pursuant to SFAS No. 128 Earnings Per Share. Basic earnings or loss per share is computed by dividing net income or net loss, respectively, by the weighted average number of common shares
outstanding for the period. Diluted earnings per share is applicable only in periods of net income and is computed by dividing net income by the weighted average number of common shares outstanding for the period and potentially dilutive common
stock equivalents outstanding for the period. Periods of net loss require the diluted computation to be the same as the basic computation.

Comprehensive Income

Comprehensive income includes all changes in equity during a period except those that resulted from
investments by or distributions to shareholders. Other comprehensive income refers to revenues, expenses, gains and losses that, under generally accepted accounting principles, are included in comprehensive income, but excluded from net income as
these amounts are recorded directly as an adjustment to shareholders equity. We report comprehensive income in accordance with the provisions of SFAS 130, Reporting Comprehensive Income. Components of our comprehensive income
include net income (loss) and gains/losses associated with investments available for sale.

Comprehensive income for the years ended
January 31, 2009, February 2, 2008, and February 3, 2007 is as follows (in thousands):



|                                                                |  |                 |        |   |                 |   |                 |  |   |       
|--------------------------------------------------------------- |  | --------------- | ------ | - | --------------- | - | --------------- |  | - | ------
|                                                                |  | Years Ended    
|                                                                |  | January 31,2009 |        |   | February 2,2008 |   | February 3,2007
|Comprehensive Income                                            |  |                 |        |   |                 |   |                 |  |   |       
|Net income                                                      |  | $               | 19,742 |   |                 | $ | 16,012          |  | $ | 13,626
|Unrealized (loss) gain on short- and long-term investments, net |  |                 | (1,336 | ) |                 |   |                |  |   | 10    
|                                                                |  |                 |        |   |                 |   |                 |  |   |       
|Total comprehensive income                                      |  | $               | 18,406 |   |                 | $ | 16,012          |  | $ | 13,636
|                                                                |  |                 |        |   |                 |   |                 |  |   |       



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During fiscal 2008, we recognized a $0.8 million tax benefit for the $2.0 million unrealized loss on
auction rate securities. The resulting $1.2 million net loss is recorded in other comprehensive income. Unrealized loss on short-term marketable securities during fiscal 2008 was $127,000 and unrealized gain on short-term marketable securities
during fiscal 2006 was $10,000, and the related tax benefit on this activity was not material.

New Accounting Pronouncements

In June 2008, the FASB ratified Emerging Issues Task Force, or EITF, Issue No. 08-3 Accounting by Lessees for Nonrefundable Maintenance
Deposits Under Lease Arrangements, or EITF 08-3. EITF 08-3 provides guidance for accounting for nonrefundable maintenance deposits paid by a lessee to a lessor. It also provides revenue recognition accounting guidance for the
lessor. EITF 08-3 is effective for fiscal years beginning after December 15, 2008 and is not applicable to us.

In May 2008, the
FASB issued SFAS No. 162 The Hierarchy of Generally Accepted Accounting Principles, or SFAS 162. SFAS 162 is intended to improve financial reporting by identifying a consistent hierarchy for selecting accounting principles to
be used in preparing financial statements that are prepared in conformity with generally accepted accounting principles. Unlike Statement on Auditing Standards No. 69 The Meaning of Present Fairly in Conformity With GAAP, SFAS
162 is directed to the entity rather than the auditor. The statement is effective November 15, 2008 and we do not expect its adoption to impact our results of operations, financial position or cash flows.

In February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial Assets and Financial Liabilities: Including an Amendment of
FASB Statement No. 115, or SFAS 159. SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value and requires entities to display the fair value of those assets and liabilities for which
the company has chosen to use fair value on the face of the balance sheet. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and is not applicable to us as we have not elected to use
fair value measurements on any assets or liabilities under this statement.

We adopted SFAS No. 157 Fair Value
Measurements, or SFAS 157, on February 3, 2008 (Refer to NOTE 5  Fair Value Measurements). During 2008, the FASB issued the following amendments to SFAS 157:



| |  |  | FASB Staff Position, or FSP, No. 157-1 Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 amends SFAS 157 to remove certain leasing transactions from its scope. FSP No. 157-1 did not have any impact on our financial
condition or results of operations.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | FSP No. 157-2 Effective Date of FASB Statement No. 157 delays the effective date of SFAS 157 from 2008 to 2009 for nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We are currently evaluating the impact the adoption of SFAS 157 for nonfinancial assets
and nonfinancial liabilities measured at fair value on a nonrecurring basis may have on our financial condition or results of operations.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | FSP No. 157-3 Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, or FSP No. 157-3, clarifies the
application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP No. 157-3 is
effective October 2008, including prior periods for which financial statements have not been issued. FSP No. 157-3 did not have any impact on our financial condition or results of operations.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTE 2. Stock-Based Compensation

Stock Plan Activity

Under our 1996 Equity Incentive Plan, or the 1996 Plan, we granted stock
options, stock bonuses and other awards to our employees, directors and consultants as deemed appropriate by the Board of Directors, or the Board. On June 14, 2006, the 1996 Plan expired and was replaced with the 2006 Equity Incentive Plan, or
the 2006 Plan. The 2006 Plan was approved by the Board on March 17, 2006 and by our shareholders on June 13, 2006. Upon expiration of the 1996 Plan, no shares had been granted to consultants and 732,456 shares out of an aggregate of
18,300,000 shares of common stock were authorized and available for grant.

The 2006 Plan provides for the grant of incentive stock
options, non-statutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance stock awards and other forms of equity compensation to our employees, consultants and directors as deemed appropriate
by the Board. Both incentive and non-statutory stock options granted by us under the 2006 Plan must carry an exercise price of at least 100% of the fair market value of our common stock on the date of grant or 110% of the fair market value of our
common stock on the date of grant for persons possessing 10% or more of the total combined voting power of all classes of stock. Options granted may be subject to different vesting terms as determined by the Board and the maximum term of options
granted is 10 years. In addition, the maximum number of shares of common stock available for future issuance may not exceed the sum of (a) the number of unallocated shares of common stock remaining available for issuance under the 1996 Plan as
of June 13, 2006, (b) an additional 2,350,000 shares and (c) the number of shares subject to stock awards as of June 13, 2006 under the 1996 Plan pursuant to the terms of the 1996 Plan. As of January 31, 2009, 1,484,580
shares were available for future grants. These available shares include 585,000 shares that were set aside for the issuance of up to 390,000 restricted stock unit awards previously granted to certain of our executive officers in March 2007 which, on
December 18, 2008, were voluntarily cancelled in exchange for a nominal payment to them of $1.00 in the aggregate. This cancellation effectively lowered the requirement to set aside 786,000 shares (for the issuance of 524,000 restricted stock
unit awards) to 201,000 shares (for the issuance of 134,000 restricted stock unit awards). All awards to date under the 2006 Plan have been granted to our employees and none have been granted to consultants.

In March 2007, we granted restricted stock unit awards under the 2006 Plan and in March 2006, we granted restricted stock unit awards under the 1996 Plan
to certain members of our management. None of these awards have vested, and no shares have been issued pursuant to the grants. These 2007 and 2006 awards provide for the issuance of up to 134,000 and 398,000 shares of our common stock, respectively,
net of forfeitures (including the forfeiture of the 390,000 awards mentioned above), with vesting and issuance contingent upon achieving performance goals for fiscal 2009 and 2008, respectively, based upon our operating income for those fiscal
years; and prior to vesting (or termination without vesting), the awards constitute an agreement by us to issue shares to the extent these performance goals are ultimately met. The market values of our common stock as of the 2007 and 2006 grant
dates of these restricted stock unit awards were $11.31 and $13.90, respectively. Compensation expense for these awards is required to be recorded over the three-year terms of the awards, based on the market values as of the grant dates, with actual
amounts expensed dependent upon the likelihood from period to period of vesting of these awards at the end of fiscal 2009 and 2008. As of January 31, 2009, it is our best estimate that none of the awards granted in March 2007 will be earned at
the end of the three-year term. In addition, none of the awards granted in March 2006 were earned as the performance goal for fiscal 2008 was not achieved. Thus, we have not recognized any compensation expense for the twelve months ended
January 31, 2009 for these restricted stock unit awards.

In March 2008, we granted restricted stock unit awards under the 2006 Plan
to certain members of our management. These grants were substantially similar to the restricted stock unit awards granted in March 2006 and March 2007. None of these awards have vested and no shares have been issued pursuant to the grants. These
awards provide for the issuance of up to 390,000 shares of our common stock, net of forfeitures, with vesting and issuance contingent upon achieving performance goals for fiscal 2010 based upon our operating income for that fiscal year; and prior to
vesting (or termination without vesting), the awards constitute an agreement by us to issue shares to the extent these performance goals are ultimately met. The market value of our common stock as



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of the grant date of these restricted stock unit awards was $4.75. Compensation expense for these awards is required to be recorded over the three-year term
of the awards, based on the market value as of the grant date, with actual amounts expensed dependent upon the likelihood from period to period of vesting of these awards at the end of fiscal 2010. As of January 31, 2009, it is our best
estimate that 37.5% of these awards, or 146,250 out of a possible 390,000, will be earned and will vest at the end of the three-year term. We have accounted for the change in estimate by applying the change retroactively and recognizing the
cumulative effect, a $106,000 charge to compensation expense, in the fourth quarter of fiscal 2008. In aggregate, we have recognized $203,000 as compensation expense during the twelve months ended January 31, 2009 for these restricted stock
unit awards.

In June 2008, the Board reinstated our 1996 Non-Employee Directors Stock Option Plan, or the 1996 NEDSOP, as a
sufficient number of shares had been added back to its share reserve due to termination of unexercised awards in accordance with the provisions of the 1996 NEDSOP. Under the 1996 NEDSOP, we may grant and have granted stock options to non-employee
directors. The exercise price of options granted under the 1996 NEDSOP shall be determined by the Board at the date of grant and shall be 100% of the fair market value of our common stock on the date of grant. Unless the Board determines
otherwise, options vest over four years and generally expire ten years from the date of grant. The total share reserve under the 1996 NEDSOP is 720,000 shares, of which as of January 31, 2009, 123,332 shares were available for future grants. No
options under the 1996 NEDSOP have been granted to consultants.

In June 2008 and June 2007, we granted non-employee directors 25,748 and
13,826 shares of restricted common stock, respectively, under the 2006 Plan, and in June 2006, we granted them 11,842 shares of restricted common stock under the 1996 Plan. Restricted shares generally vest in the year subsequent to the grant year.
All awarded common shares remain restricted (i.e., not transferable by the holders) until such time as the recipient is no longer a member of our Board. The value of these grants is expensed over the vesting period. During fiscal 2008, $155,000, of
which $52,000 relates to the fiscal 2007 grant, was expensed. During fiscal 2007, non-employee directors were granted 13,826 shares of restricted stock and $155,000, of which $52,000 related to the fiscal 2006 grant, was expensed.

The following table summarizes stock options outstanding under all of our plans as of January 31, 2009:



|                                 |  |           |   |  |                               |      
|-------------------------------- |  | --------- | - |  | ----------------------------- | -----
|                                 |  | Options   |   |  | Weighted-AverageExercisePrice
|Outstanding at beginning of year |  | 5,741,507 |   |  | $                             | 14.09
|Granted                          |  | 1,513,749 |   |  | $                             | 4.99 
|Exercised                        |  | (166,262  | ) |  | $                             | 2.64 
|Forfeited or expired             |  | (827,531  | ) |  | $                             | 10.31
|                                 |  |           |   |  |                               |      
|Outstanding at end of year       |  | 6,261,463 |   |  | $                             | 12.54
|                                 |  |           |   |  |                               |      
|Exercisable at end of year       |  | 4,248,337 |   |  | $                             | 14.91
|                                 |  |           |   |  |                               |      



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##### Table of Contents

The following table summarizes information about stock options outstanding and exercisable as of
January 31, 2009:



|                         |  |                     |  |                               |       |                                         |      |         |           |                               |   |                                         |  |     
|------------------------ |  | ------------------- |  | ----------------------------- | ----- | --------------------------------------- | ---- | ------- | --------- | ----------------------------- | - | --------------------------------------- |  | ----
|                         |  | Options Outstanding |  | Options Exercisable          
|Range of Exercise Prices |  | Options             |  | Weighted-AverageExercisePrice |       | Weighted-AverageContractualLife (Years) |      | Options |           | Weighted-AverageExercisePrice |   | Weighted-AverageContractualLife (Years)
|$1.51    $5.19          |  | 1,172,081           |  | $                             | 4.61  |                                         | 7.78 |         | 213,581   |                               | $ | 3.72                                    |  |     
|$5.59    $11.31         |  | 1,876,203           |  | $                             | 9.94  |                                         | 6.11 |         | 1,087,668 |                               | $ | 10.00                                   |  |     
|$11.38  $15.33          |  | 1,437,947           |  | $                             | 14.31 |                                         | 5.37 |         | 1,174,669 |                               | $ | 14.48                                   |  |     
|$15.61  $21.24          |  | 1,490,682           |  | $                             | 18.56 |                                         | 5.15 |         | 1,487,869 |                               | $ | 18.56                                   |  |     
|$21.30  $25.51          |  | 284,550             |  | $                             | 24.69 |                                         | 4.94 |         | 284,550   |                               | $ | 24.69                                   |  |     
|                         |  |                     |  |                               |       |                                         |      |         |           |                               |   |                                         |  |     
|$1.51    $25.51         |  | 6,261,463           |  | $                             | 12.54 |                                         | 6.00 |         | 4,248,337 |                               | $ | 14.91                                   |  | 4.71
|                         |  |                     |  |                               |       |                                         |      |         |           |                               |   |                                         |  |     

The aggregate intrinsic values of stock options outstanding and exercisable as of January 31,
2009 were $6.0 million and $1.5 million, respectively. The aggregate intrinsic values of stock options outstanding and exercisable as of February 2, 2008 were each $0.9 million.

Cash proceeds, tax benefits and intrinsic value related to total stock options exercised during the years ended January 31,
2009, February 2, 2008 and February 3, 2007 are provided in the following table (in thousands):



|                                               |  |                 |     |                 |   |                 |  |   |      
|---------------------------------------------- |  | --------------- | --- | --------------- | - | --------------- |  | - | -----
|                                               |  | Years Ended    
|                                               |  | January 31,2009 |     | February 2,2008 |   | February 3,2007
|Proceeds from stock options exercised          |  | $               | 440 |                 | $ | 1,293           |  | $ | 1,865
|Tax benefit related to stock options exercised |  | $               | 299 |                 | $ | 455             |  | $ | 207  
|Intrinsic value of stock options exercised     |  | $               | 753 |                 | $ | 806             |  | $ | 530  

In June 1996, the Board adopted the Employee Stock Purchase Plan, or the Stock Purchase Plan. The
Stock Purchase Plan provides for the issuance of up to 1,350,000 shares of common stock to our employees. All eligible employees are granted identical rights to purchase common stock for each Board authorized offering under the Stock Purchase Plan.
Rights granted pursuant to any offering under the Stock Purchase Plan terminate immediately upon cessation of an employees employment for any reason. In general, an employee may reduce contribution or withdraw from participation in an offering
at any time during the purchase period for such offering. Employees receive a 15% discount on shares purchased under the Stock Purchase Plan. 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 have occurred every six months commencing January 1, 1997. At
January 31, 2009, 959,869 shares could still be sold to employees under the plan. Compensation expense for the year ended January 31, 2009 and February 2, 2008 was $117,000 and $101,000, respectively, related to the fair value of the
rights granted to participants under the plan at the beginning of the then-current offering.



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##### Table of Contents

Accounting for Stock-Based Compensation Expense

We compute stock-based compensation pursuant to SFAS 123R.

The effect of recording stock-based compensation for the years ended January 31, 2009, February 2, 2008 and February 3, 2007 was as follows (in thousands, except per share amounts):



|                                               |  |                 |        |   |                 |   |        |                 |  |   |        |  
|---------------------------------------------- |  | --------------- | ------ | - | --------------- | - | ------ | --------------- |  | - | ------ | -
|                                               |  | Years Ended     |       
|Stock-based compensation by type of award:     |  | January 31,2009 |        |   | February 2,2008 |   |        | February 3,2007 | 
|Employee stock options and awards              |  | $               | 3,794  |   |                 | $ | 3,557  |                 |  | $ | 4,036  |  
|Restricted stock units, net of adjustments     |  |                 | 203    |   |                 |   |       |                 |  |   |       |  
|Employee stock purchase plan                   |  |                 | 117    |   |                 |   | 101    |                 |  |   | 219    |  
|                                               |  |                 |        |   |                 |   |        |                 |  |   |        |  
|Total stock-based compensation expense         |  | $               | 4,114  |   |                 | $ | 3,658  |                 |  | $ | 4,255  |  
|Tax effect on stock-based compensation expense |  |                 | (1,514 | ) |                 |   | (1,209 | )               |  |   | (1,180 | )
|                                               |  |                 |        |   |                 |   |        |                 |  |   |        |  
|Net effect on net income                       |  | $               | 2,600  |   |                 | $ | 2,449  |                 |  | $ | 3,075  |  
|                                               |  |                 |        |   |                 |   |        |                 |  |   |        |  
|Effect on earnings per share:                  |  |                 |        |   |                 |   |        |                 |  |   |        |  
|Basic and diluted                              |  | $               | 0.06   |   |                 | $ | 0.06   |                 |  | $ | 0.07   |  
|                                               |  |                 |        |   |                 |   |        |                 |  |   |        |  

For the years ended January 31, 2009, February 2, 2008 and February 3, 2007,
$620,000, $752,000 and $668,000, respectively, of stock and equity awards compensation expense was recorded as a component of cost of goods sold and the remainder, $3,494,000, $2,906,000 and $3,587,000, respectively, was charged to selling, general
and administrative expense.

As of January 31, 2009, we had $6.6 million of unrecognized expense related to non-vested stock option
grants, which is expected to be recognized over a weighted average period of 2.66 years.

As of January 31, 2009, we had $0.1 million
of unrecognized expense related to restricted stock grants, which is expected to be recognized over a weighted average period of 0.36 years.

Calculation of Fair Value of Options

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

The following weighted average assumptions were used for stock options granted:



|                                          |  |                 |  |                 |  |                
|----------------------------------------- |  | --------------- |  | --------------- |  | ---------------
|                                          |  | Years Ended    
|                                          |  | January 31,2009 |  | February 2,2008 |  | February 3,2007
|Risk free interest rate                   |  | 3%              |  | 4%              |  | 5%             
|Expected life                             |  | 5 years         |  | 5 years         |  | 5 years        
|Expected volatility                       |  | 47%             |  | 44%             |  | 48%            
|Expected dividend yield                   |  | 0%              |  | 0%              |  | 0%             
|                                          |  |                 | 
|Weighted average fair value at grant date |  | $    2.16       |  | $    5.34       |  | $    6.07      



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##### Table of Contents

NOTE 3. Property and Equipment

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



|                                                |  |                 |          |   |                 |   |          |  
|----------------------------------------------- |  | --------------- | -------- | - | --------------- | - | -------- | -
|                                                |  | January 31,2009 |          |   | February 2,2008 |  
|Leasehold improvements                          |  | $               | 167,625  |   |                 | $ | 165,049  |  
|Furniture, fixtures and equipment               |  |                 | 110,419  |   |                 |   | 107,229  |  
|Software and licenses                           |  |                 | 46,587   |   |                 |   | 37,978   |  
|Building and land                               |  |                 | 14,270   |   |                 |   | 14,270   |  
|                                                |  |                 |          |   |                 |   |          |  
|                                                |  |                 | 338,901  |   |                 |   | 324,526  |  
|Less: Accumulated depreciation and amortization |  |                 | (183,611 | ) |                 |   | (152,595 | )
|                                                |  |                 |          |   |                 |   |          |  
|Property and equipment, net                     |  | $               | 155,290  |   |                 | $ | 171,931  |  
|                                                |  |                 |          |   |                 |   |          |  

We recorded depreciation expense in the amounts of $38.3 million, $41.6 million and
$38.9 million for the years ended January 31, 2009, February 2, 2008 and February 3, 2007, respectively.

NOTE 4. Accrued
Liabilities

Accrued liabilities consist of the following (in thousands):



|                                                            |  |                 |        |                 |   |       
|----------------------------------------------------------- |  | --------------- | ------ | --------------- | - | ------
|                                                            |  | January 31,2009 |        | February 2,2008
|Accrued payroll and related expenses                        |  | $               | 17,593 |                 | $ | 9,933 
|Gift cards, gift certificates and store merchandise credits |  |                 | 7,344  |                 |   | 7,899 
|Accrued self insurance liabilities                          |  |                 | 3,620  |                 |   | 3,091 
|Accrued sales tax                                           |  |                 | 2,328  |                 |   | 2,015 
|Accrued percentage rents                                    |  |                 | 744    |                 |   | 1,088 
|Accrued cost of fixed assets and software                   |  |                 | 1,695  |                 |   | 1,150 
|Other                                                       |  |                 | 11,731 |                 |   | 9,947 
|                                                            |  |                 |        |                 |   |       
|Accrued liabilities                                         |  | $               | 45,055 |                 | $ | 35,123
|                                                            |  |                 |        |                 |   |       

NOTE 5. Fair Value Measurements

In September 2006, the FASB issued SFAS 157. We adopted SFAS 157 on February 3, 2008 for all financial assets and liabilities and any other
assets and liabilities that are recognized or disclosed at fair value on a recurring basis.

The adoption of SFAS 157 requires us to
provide additional disclosures within our consolidated financial statements. SFAS 157 establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. It also defines fair value as the price that
would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on
assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as
follows:

Level 1: Observable inputs such as quoted prices in active markets (the fair value hierarchy gives the highest priority to Level 1
inputs);

Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: Unobservable inputs in which there is little or no market data and require the reporting entity to develop its own assumptions
(the fair value hierarchy gives the lowest priority to Level 3 inputs).



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##### Table of Contents

Financial assets and liabilities measured at fair value on a recurring basis as of January 31, 2009
consisted of the following (in thousands):



|                                           |  |                           |        |                                                          |   |                                           |  |                                        |   |  |   |      
|------------------------------------------ |  | ------------------------- | ------ | -------------------------------------------------------- | - | ----------------------------------------- |  | -------------------------------------- | - |  | - | -----
|                                           |  | Balance atJanuary 31,2009 |        | Quoted Pricesin ActiveMarkets forIdenticalItems(Level 1) |   | SignificantOtherObservableInputs(Level 2) |  | SignificantUnobservableInputs(Level 3)
|Assets:                                    |  |                           |        |                                                          |   |                                           |  |                                        |   |  |   |      
|Marketable securities (available for sale) |  | $                         | 7,375  |                                                          | $ | 7,375                                     |  | $                                      |  |  | $ |     
|Auction rate securities (non-current)      |  |                           | 8,402  |                                                          |   |                                          |  |                                        |  |  |   | 8,402
|                                           |  |                           |        |                                                          |   |                                           |  |                                        |   |  |   |      
|Total assets                               |  | $                         | 15,777 |                                                          | $ | 7,375                                     |  | $                                      |  |  | $ | 8,402
|                                           |  |                           |        |                                                          |   |                                           |  |                                        |   |  |   |      
|Liabilities:                               |  |                           |        |                                                          |   |                                           |  |                                        |   |  |   |      
|Deferred compensation plan (non-current)   |  | $                         | 1,273  |                                                          | $ | 1,273                                     |  | $                                      |  |  | $ |     
|                                           |  |                           |        |                                                          |   |                                           |  |                                        |   |  |   |      

The fair value of our short-term marketable securities and deferred compensation plan liability is
determined based on quoted prices of identical assets that are trading in active markets. The deferred compensation plan liability represents the amount that would be earned by participants if the funds were invested in securities traded in active
markets. Due to the lack of availability of observable market quotes on our auction rate securities, the fair market value of these securities was initially determined in the first quarter of fiscal 2008 based on a valuation model prepared by the
broker-dealer that holds these securities on our behalf. We reviewed and found reasonable the valuation model and methodologies used by the broker-dealer. In addition, we have continued to update the model using current assumptions throughout fiscal
2008. The model values the securities by estimating the present value of future principal and interest payments discounted at rates considered to reflect current market conditions. Assumptions used in the valuation include those made about the
liquidity horizon, or period of time expected, before the securities are successfully auctioned; coupon rates; weighted average cost of capital; and holding spreads and yields. Other factors that impact our valuation include changes to credit
ratings of our auction rate securities as well as to the underlying assets supporting these securities and the ongoing strength and quality of the credit markets. Our valuation is subject to uncertainties that are difficult to predict and could
change significantly based on future market conditions.

The activity of our auction rate securities through the end of fiscal 2008, whose
fair value was measured using Level 3 inputs, is summarized below (in thousands):



|                                           |  |         |         |   |             |   |        |  
|------------------------------------------ |  | ------- | ------- | - | ----------- | - | ------ | -
|                                           |  | Current |         |   | Non-current |  
|Carrying value as of February 2, 2008      |  | $       | 21,190  |   |             | $ |       |  
|Settlements*                               |  |         | (10,790 | ) |             |   |       |  
|Total losses                               |  |         |         |   |             |   |        |  
|Included in earnings                       |  |         |        |   |             |   |       |  
|Included in other comprehensive income**   |  |         |        |   |             |   | (1,998 | )
|Transfers between current and non-current* |  |         | (10,400 | ) |             |   | 10,400 |  
|                                           |  |         |         |   |             |   |        |  
|Carrying value as of January 31, 2009      |  | $       |        |   |             | $ | 8,402  |  
|                                           |  |         |         |   |             |   |        |  



|* | Settlements and transfers occurred during the first quarter of fiscal 2008.
|- | ---------------------------------------------------------------------------



|** | Temporary losses of $72,000, $82,000, $701,000 and $1,143,000 occurred during the first, second, third and fourth quarters of fiscal 2008, respectively.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

NOTE 6. Bank Credit Agreement

We maintain an unsecured bank credit agreement of $5.0 million that will expire on September 1, 2009. Letters of credit, which are primarily used for inventory purchases, are issued under the credit agreement.
There were letters of credit for $446,000 and $133,000 outstanding at January 31, 2009 and February 2, 2008, respectively.

NOTE 7.
Commitments and Contingencies

Leases

We have entered into lease agreements for retail, distribution and office space, vehicles and equipment under primarily non-cancelable leases with terms ranging from approximately two to ten years. The retail space leases provide for rents
based upon the greater of the minimum annual rental amounts or 5% to 8% of annual sales volume. Certain leases provide for increasing minimum annual rental amounts. Rent expense is recorded on a straight-line basis over the term of the lease based
on us taking possession of premises. Accordingly, deferred rent, as reflected in the accompanying balance sheets, represents the difference between rent expense accrued and amounts paid under the terms of the lease agreements. Total rent expense for
the years ended January 31, 2009, February 2, 2008 and February 3, 2007 was $54.8 million, $54.7 million and $52.3 million, respectively, including contingent rentals of $0.9 million, $1.1 million and $1.7 million, respectively.

Annual future minimum lease payments under operating leases as of January 31, 2009 are as follows (in thousands):



|                                       |  |   |        
|-------------------------------------- |  | - | -------
|Fiscal Year                            |  |  
|2009                                   |  | $ | 55,601 
|2010                                   |  |   | 52,634 
|2011                                   |  |   | 49,436 
|2012                                   |  |   | 44,098 
|2013                                   |  |   | 37,307 
|Thereafter                             |  |   | 78,281 
|                                       |  |   |        
|Total minimum operating lease payments |  | $ | 317,357
|                                       |  |   |        

Litigation

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

Indemnities, Commitments and Guarantees

During the ordinary course of business, we have made certain indemnities, commitments and guarantees under which we may be required to make payments in relation to certain transactions. These indemnities include those
given to various lessors in connection with facility leases for certain claims arising from such facility or lease and indemnities to our directors and officers to the maximum extent permitted under the laws of the State of California. From time to
time, we have issued guarantees in the form of letters of credit as security for some merchandise shipments from overseas. At January 31, 2009, there were letters of credit for $446,000 outstanding. The durations of these indemnities,
commitments and guarantees vary. Some of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments we could be obligated to make. We have not recorded any liability for these
indemnities, commitments and guarantees in the accompanying consolidated financial statements.



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##### Table of Contents

NOTE 8. Income Taxes

Provision for Income Taxes

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



|                         |  |                 |        |   |                 |   |        |                 |  |   |        |  
|------------------------ |  | --------------- | ------ | - | --------------- | - | ------ | --------------- |  | - | ------ | -
|                         |  | January 31,2009 |        |   | February 2,2008 |   |        | February 3,2007 | 
|Current:                 |  |                 |        |   |                 |   |        |                 |  |   |        |  
|Federal                  |  | $               | 12,887 |   |                 | $ | 10,971 |                 |  | $ | 13,359 |  
|State                    |  |                 | 2,514  |   |                 |   | 2,686  |                 |  |   | 1,666  |  
|                         |  |                 |        |   |                 |   |        |                 |  |   |        |  
|                         |  |                 | 15,401 |   |                 |   | 13,657 |                 |  |   | 15,025 |  
|                         |  |                 |        |   |                 |   |        |                 |  |   |        |  
|Deferred:                |  |                 |        |   |                 |   |        |                 |  |   |        |  
|Federal                  |  |                 | (2,052 | ) |                 |   | (2,860 | )               |  |   | (5,126 | )
|State                    |  |                 | (599   | ) |                 |   | (578   | )               |  |   | (505   | )
|                         |  |                 |        |   |                 |   |        |                 |  |   |        |  
|                         |  |                 | (2,651 | ) |                 |   | (3,438 | )               |  |   | (5,631 | )
|                         |  |                 |        |   |                 |   |        |                 |  |   |        |  
|Total income tax expense |  | $               | 12,750 |   |                 | $ | 10,219 |                 |  | $ | 9,394  |  
|                         |  |                 |        |   |                 |   |        |                 |  |   |        |  

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



|                                              |  |                 |        |   |                 |   |        |  
|--------------------------------------------- |  | --------------- | ------ | - | --------------- | - | ------ | -
|                                              |  | January 31,2009 |        |   | February 2,2008 |  
|Current deferred tax assets (liabilities):    |  |                 |        |   |                 |   |        |  
|Inventory                                     |  | $               | 758    |   |                 | $ | 1,075  |  
|Accrued expense and other                     |  |                 | 5,375  |   |                 |   | 3,353  |  
|State taxes                                   |  |                 | (257   | ) |                 |   | (543   | )
|Other assets, net                             |  |                 | 489    |   |                 |   | 85     |  
|                                              |  |                 |        |   |                 |   |        |  
|Net current deferred tax assets               |  |                 | 6,365  |   |                 |   | 3,970  |  
|                                              |  |                 |        |   |                 |   |        |  
|Noncurrent deferred tax assets (liabilities): |  |                 |        |   |                 |   |        |  
|Depreciation                                  |  |                 | (1,904 | ) |                 |   | (1,846 | )
|Deferred rent                                 |  |                 | 4,969  |   |                 |   | 5,301  |  
|Stock-based compensation expense              |  |                 | 3,498  |   |                 |   | 2,455  |  
|Other assets, net                             |  |                 | 1,014  |   |                 |   | 638    |  
|                                              |  |                 |        |   |                 |   |        |  
|Total noncurrent deferred tax assets          |  |                 | 7,577  |   |                 |   | 6,548  |  
|                                              |  |                 |        |   |                 |   |        |  
|Net deferred tax assets                       |  | $               | 13,942 |   |                 | $ | 10,518 |  
|                                              |  |                 |        |   |                 |   |        |  

A reconciliation of the provision for income taxes to the statutory tax rate is as follows:



|                                                        |  |                 |   |  |                 |   |  |                 |  
|------------------------------------------------------- |  | --------------- | - |  | --------------- | - |  | --------------- | -
|                                                        |  | January 31,2009 |   |  | February 2,2008 |   |  | February 3,2007 |  
|Statutory federal rate                                  |  | 35.0            | % |  | 35.0            | % |  | 35.0            | %
|State and local taxes, net of federal benefit and other |  | 3.9             |   |  | 5.5             |   |  | 3.2             |  
|Stock-based compensation expense                        |  | 0.2             |   |  | 0.3             |   |  | 1.8             |  
|Other permanent differences                             |  | 0.1             |   |  | (1.8            | ) |  | 0.8             |  
|                                                        |  |                 |   |  |                 |   |  |                 |  
|Effective income tax rate                               |  | 39.2            | % |  | 39.0            | % |  | 40.8            | %
|                                                        |  |                 |   |  |                 |   |  |                 |  

We operate in numerous tax jurisdictions and are subject to routine tax examinations. Future tax
examinations could involve difficult issues and multiple years. Although we cannot predict the outcome of future examinations, amounts that could be owed in excess of amounts accrued would impact future tax expense but would not be expected to have
a material impact on our financial condition.



F-20



---

##### Table of Contents

Our effective tax rate was 39.2%, 39.0% and 40.8% for fiscal 2008, 2007 and 2006, respectively. The
increase in fiscal 2008 compared to fiscal 2007 was primarily due to a decrease in non-taxable income arising from lower interest rate yields, an increase in non-deductible expense arising from deferred compensation investment losses and an increase
in the liability associated with unrecognized tax benefits. The increase was partially offset by the benefit obtained from federal and state tax research and development credits.

Uncertain Tax Positions

On February 4, 2007, we adopted FIN 48. FIN 48 clarifies the accounting
for the uncertainty in recognizing income taxes in an organization in accordance with FASB Statement No. 109 by providing detailed guidance for financial statement recognition, measurement and disclosure involving uncertain tax positions.

As of January 31, 2009, the total liability for income tax associated with unrecognized tax benefits was $2.9 million ($2.2 million
net of federal benefit), of which $0.3 million ($0.2 million net of federal benefit) related to interest and $0.4 million related to penalties. Our effective tax rate will be affected by any portion of this liability we may recognize. As of
February 2, 2008, the total liability for income tax associated with unrecognized tax benefits was $2.3 million ($1.8 million net of federal benefit), of which $0.4 million ($0.3 million net of federal benefit) related to interest and $0.1
million related to penalties.

We believe that it is reasonably possible that $1.0 million ($0.8 million net of federal benefit) of our
liability for unrecognized tax benefits of which $0.2 million ($0.1 million net of federal benefit) of associated interest and $0.1 million related to penalties may be recognized in the next 12 months due to the settlement of audits and the
expiration of statutes of limitations. As such, we have classified this amount as a current liability.

The following table reconciles the
amount recorded for the liability for income tax associated with unrecognized tax benefits for the years ended January 31, 2009 and February 2, 2008 (in thousands):



|                                            |  |                 |       |   |                 |   |       |  
|------------------------------------------- |  | --------------- | ----- | - | --------------- | - | ----- | -
|                                            |  | January 31,2009 |       |   | February 2,2008 |  
|Unrecognized tax benefitsbeginning of year |  | $               | 1,845 |   |                 | $ | 1,965 |  
|Additions:                                  |  |                 |       |   |                 |   |       |  
|Tax positions related to prior period       |  |                 | 424   |   |                 |   | 1,176 |  
|Tax positions related to current period     |  |                 | 1,203 |   |                 |   | 407   |  
|Reductions:                                 |  |                 |       |   |                 |   |       |  
|Tax positions related to prior period       |  |                 | (677  | ) |                 |   | (611  | )
|Settlements                                 |  |                 | (345  | ) |                 |   | (951  | )
|Lapse of statute of limitations             |  |                 | (277  | ) |                 |   | (141  | )
|                                            |  |                 |       |   |                 |   |       |  
|Unrecognized tax benefitsend of year       |  | $               | 2,173 |   |                 | $ | 1,845 |  
|                                            |  |                 |       |   |                 |   |       |  

Our continuing practice is to recognize interest and penalties related to unrecognized tax
benefits in tax expense. Tax expense for fiscal 2008 related to interest and penalties was $0.3 million and at January 31, 2009, we had accrued $0.7 million of interest and penalties related to uncertain tax positions.

We operate stores throughout the United States and Puerto Rico, and as a result, we file income tax returns in the U.S. federal jurisdiction and various
state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities. With few exceptions, we are no longer subject to U.S. federal, state and local or non-U.S. income tax examinations for years
before fiscal 2002. While it is often difficult to predict the final outcome or the timing or resolution of any particular uncertain tax position, we believe our reserves for income taxes represent the most probable outcome. We adjust these
reserves, as well as the related interest and penalties, in light of changing facts and circumstances.



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##### Table of Contents

NOTE 9. Earnings Per Share

We compute earnings per share pursuant to SFAS No. 128 Earnings Per Share. Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for
the period. Diluted earnings per share is applicable only in periods of net income and is computed by dividing net income by the weighted average number of common shares outstanding for the period and potentially dilutive common stock equivalents
outstanding for the period. Periods of net loss require the diluted computation to be the same as the basic computation. At January 31, 2009, February 2, 2008 and February 3, 2007, options to purchase 6,062,339, 5,122,684 and
4,613,223 shares, respectively, of potentially anti-dilutive common stock equivalents were outstanding. The calculation of dilutive shares also excludes the restricted stock unit awards covering 390,000, 134,000 and 398,000 shares, net of
forfeitures, granted to certain members of our management in March 2008, March 2007 and March 2006, respectively, as the issuance of the underlying shares is contingent upon achieving certain performance goals in fiscal 2010, 2009 and 2008,
respectively.

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



|                                                    |  |                 |        |                 |   |                 |  |   |       
|--------------------------------------------------- |  | --------------- | ------ | --------------- | - | --------------- |  | - | ------
|                                                    |  | January 31,2009 |        | February 2,2008 |   | February 3,2007
|Basic Earnings Per Share Computation:               |  |                 |        |                 |   |                 |  |   |       
|Numerator                                           |  | $               | 19,742 |                 | $ | 16,012          |  | $ | 13,626
|Denominator:                                        |  |                 |        |                 |   |                 |  |   |       
|Weighted average common shares outstanding          |  |                 | 43,789 |                 |   | 44,005          |  |   | 44,167
|                                                    |  |                 |        |                 |   |                 |  |   |       
|Basic earnings per share                            |  | $               | 0.45   |                 | $ | 0.36            |  | $ | 0.31  
|                                                    |  |                 |        |                 |   |                 |  |   |       
|Diluted Earnings Per Share Computation:             |  |                 |        |                 |   |                 |  |   |       
|Numerator                                           |  | $               | 19,742 |                 | $ | 16,012          |  | $ | 13,626
|Denominator:                                        |  |                 |        |                 |   |                 |  |   |       
|Weighted average common shares outstanding          |  |                 | 43,789 |                 |   | 44,005          |  |   | 44,167
|Incremental shares from assumed exercise of options |  |                 | 124    |                 |   | 127             |  |   | 584   
|                                                    |  |                 |        |                 |   |                 |  |   |       
|Total shares                                        |  |                 | 43,913 |                 |   | 44,132          |  |   | 44,752
|                                                    |  |                 |        |                 |   |                 |  |   |       
|Diluted earnings per share                          |  | $               | 0.45   |                 | $ | 0.36            |  | $ | 0.30  
|                                                    |  |                 |        |                 |   |                 |  |   |       

NOTE 10. Stock Repurchases

On August 13, 2007, we announced that our Board approved the repurchase of up to an aggregate of $40.0 million of our outstanding common stock during the period ended February 2, 2008. During fiscal 2007, we
repurchased 870,470 shares of our common stock for approximately $7.2 million, which represents an average price of $8.23 per share. This share repurchase program expired at the end of fiscal 2007.

We did not repurchase any shares of our common stock during fiscal 2008 or fiscal 2006.

NOTE 11. Employee Benefit Plan

Effective January 1, 1995, we adopted the Hot Topic 401(k) Plan,
or the 401(k) Plan. All employees who have been employed by us for at least one year, maintained a minimum of 1,000 hours worked during the year and are at least 21 years of age, are eligible to participate. Employees may contribute up to 25% of
their eligible compensation to the 401(k) Plan, subject to a statutorily prescribed annual limit. We may at our discretion contribute certain amounts to eligible employees accounts. In January 2009, we began to contribute 50% of the first 4%
of participants eligible contributions into their 401(k) Plan accounts.



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NOTE 12. Deferred Compensation Plan

In August 2006, we adopted the Hot Topic Inc. Management Deferred Compensation Plan, or the Deferred Compensation Plan, for the purpose of providing highly compensated employees and members of our Board a program to
meet their financial planning needs. The Deferred Compensation Plan provides participants with the opportunity to defer up to 80% of their base salary and up to 100% of their annual earned bonus, or, in the case of members of our Board, 100% of
their earned cash fees, all of which, together with the associated investment returns, are 100% vested from the outset. The Deferred Compensation Plan, which is designed to be exempt from most provisions of the Employee Retirement Security Act of
1974, is informally funded by us in order to preserve the tax-deferred savings advantages of a non-qualified plan. As such, all deferrals and associated earnings are general unsecured obligations of Hot Topic, Inc. held within a rabbi
trust on our consolidated balance sheet. We may at our discretion contribute certain amounts to eligible employees accounts. In January 2009, we began to contribute 50% of the first 4% of participants eligible contributions into
their Deferred Compensation Plan accounts. As of January 31, 2009, assets and associated liabilities of the Deferred Compensation Plan were $1.4 million and $1.3 million, respectively, and are included in other non-current assets and
non-current liabilities, respectively, in our consolidated balance sheets. As of February 2, 2008, assets and associated liabilities of the Deferred Compensation Plan were $1.1 million.



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