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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

FOR ANNUAL AND TRANSITION REPORTS


PURSUANT TO SECTIONS 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934




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

For the fiscal year ended February 2,
2002




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

For the transition period
from                          to


Commission File No. 1-31228



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GameStop Corp.

(Exact name of registrant as specified in its
Charter)


|                                                                |  |                                      
|--------------------------------------------------------------- |  | -------------------------------------
|Delaware                                                        |  | 75-2951347                           
|(State or other jurisdiction of
	incorporation or organization) |  | (I.R.S. Employer
	Identification No.)
|                                                               
|2250 William D. Tate Avenue, Grapevine,
	Texas                  |  | 76051                                
|(Address of principal executive
	offices)                       |  | (Zip Code)                           

Registrants telephone number, including
area code: (817) 424-2000


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

|                                                 |  |                                       
|------------------------------------------------ |  | --------------------------------------
|(Title of Class)                                 |  | (Name of Exchange on which registered)
|                                                 |  |                                       
|Class A Common Stock, $.001 par value per
	share |  | New York Stock Exchange               

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

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 þ     o

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.     o

The aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately
$384,886,728 based upon the closing market price of $18.50 per
share of Class A Common Stock on the New York Stock
Exchange as of April 11, 2002.

Number of shares of $.001 par value Class A
Common Stock outstanding as of April 11, 2002: 20,804,688

Number of shares of $.001 par value Class B
Common Stock outstanding as of April 11, 2002: 36,009,000



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TABLE OF CONTENTS

|                     |  |                                                                                        |     |      |    | 
|-------------------- |  | -------------------------------------------------------------------------------------- | --- | ---- | -- | 
|                     |  |                                                                                        |     | Page
|                     |  |                                                                                        |     |     
|PART I              
|Item 1.              |  | Business                                                                               |     |      | 1  | 
|Item 2.              |  | Properties                                                                             |     |      | 15 | 
|Item 3.              |  | Legal Proceedings                                                                      |     |      | 15 | 
|Item 4.              |  | Submission of Matters to a Vote of Security
	Holders                                   |     |      | 15 | 
|PART II             
|Item 5.              |  | Market for Registrants Common Stock and
	Related Stockholder Matters                  |     |      | 16 | 
|Item 6.              |  | Selected Consolidated Financial Data                                                   |     |      | 16 | 
|Item 7.              |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |     |      | 19 | 
|Item 7A.             |  | Quantitative and Qualitative Disclosures About
	Market Risk                            |     |      | 27 | 
|Item 8.              |  | Consolidated Financial Statements and
	Supplementary Data                              |     |      | 27 | 
|Item 9.              |  | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosure  |     |      | 27 | 
|PART III            
|Item 10.             |  | Directors and Executive Officers of the Registrant                                     |     |      | 27 | 
|Item 11.             |  | Executive Compensation                                                                 |     |      | 30 | 
|Item 12.             |  | Security Ownership of Certain Beneficial Owners
	and Management                        |     |      | 34 | 
|Item 13.             |  | Certain Relationships and Related Transactions                                         |     |      | 35 | 
|PART IV             
|Item 14.             |  | Exhibits, Financial Statement Schedules and
	Reports on Form 8-K                       |     |      | 39 | 
|SIGNATURES           |  |                                                                                        | 41  |     
|FINANCIAL STATEMENTS |  |                                                                                        | F-1 |     
|EXHIBITS             |  |                                                                                        | E-1 |     



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PART I

Item
1.     Business

General

GameStop Corp. (GameStop or the Company) is the
largest video game and PC entertainment software specialty
retailer in the United States, based on the number of stores we
operate and our total revenues. We carry one of the largest
assortments of new and used video game hardware, video game
software and accessories, PC entertainment software, and related
products, including action figures, trading cards and strategy
guides. We operate 1,038 stores in the United States,
Puerto Rico and Guam. We currently operate our stores under the
GameStop, Babbages, Software Etc. and FuncoLand names and
are in the process of rebranding most of our stores under the
GameStop name. We carry a constantly changing selection of more
than 2,800 stock keeping units (SKUs) of electronic game
merchandise in most stores. In addition, we operate a web site
at gamestop.com and publish Game Informer, one of the
industrys largest circulation multi-platform video game
magazines, with over 500,000 subscribers.

Of our 1,038 stores, 542 stores are located in
shopping malls and other locations and 496 stores are located in
strip centers. Our mall stores, which average approximately
1,200 square feet, carry primarily new video game hardware,
video game software and accessories, which we refer to as video
game products, and PC entertainment software, as well as a
limited selection of used video game products. Our strip center
stores, which average approximately 1,500 square feet,
carry a balanced mix of new and used video game products and, in
selected stores, PC entertainment software. Our used video game
products provide a unique value proposition to our customers,
and our purchasing of video game products provides our customers
with an opportunity to trade in their used video game products
for store credits and apply those credits towards other
merchandise, which, in turn, drives more sales.

Prior to February 12, 2002, we were a
wholly-owned subsidiary of Barnes & Noble, Inc
(Barnes & Noble). On February 12, 2002, we
completed an initial public offering of shares of our
Class A common stock at a price of $18.00 per share,
raising net proceeds of approximately $348.0 million. A
portion of those proceeds was used to repay $250.0 million
of our indebtedness to Barnes & Noble, with
Barnes & Noble contributing the remaining
$150.0 million of indebtedness to the Company as additional
paid-in-capital. The balance of the proceeds (approximately
$98.0 million) is being used for working capital and
general corporate purposes. Currently, Barnes & Noble owns
approximately 63.4% of the outstanding shares of our capital
stock through its ownership of 100% of our Class B common
stock, which represents 94.5% of the combined voting power of
all classes of our voting stock.

Risk Factors

Risks Related To Our Business

We depend
upon the timely delivery of products.

We depend on major hardware manufacturers to
deliver new and existing video game platforms on a timely basis
and in anticipated quantities. In addition, we depend on
software publishers to introduce new and updated software
titles. Any material delay in the introduction or delivery of
hardware platforms or software titles could result in reduced
sales in one or more fiscal quarters.

We depend
upon third parties to develop products and
software.

Our business depends upon the continued
development of new and enhanced video game platforms, PC
hardware and video game and PC entertainment software. Our
business could suffer due to the failure of manufacturers to
develop new or enhanced video game platforms, a decline in the
continued technological development and use of multimedia PCs,
or the failure of software publishers to develop popular game
and entertainment titles for current or future generation video
game systems or PC hardware.

1



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| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | Our ability to obtain favorable terms from
	our suppliers may impact our financial results.

Our financial results depend significantly upon
the business terms we can obtain from our suppliers, including
competitive prices, unsold product return policies, advertising
and market development allowances, freight charges and payment
terms. We purchase substantially all of our products directly
from manufacturers, software publishers and approximately five
distributors. Our largest vendors are Sony Computer
Entertainment of America, Inc., Microsoft Corporation and
Electronic Arts, Inc., which accounted for 25%, 11%, and 11%,
respectively, of our purchases in fiscal 2001 (the 52-week
period ended February 2, 2002). If our suppliers do not
provide us with favorable business terms, we may not be able to
offer products to our customers at competitive prices.



| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | The video game system and software product
	industries are cyclical, which could cause significant
	fluctuation in our earnings.

The electronic game industry has been cyclical in
nature in response to the introduction and maturation of new
technology. Following the introduction of new video game
platforms, sales of these platforms and related software and
accessories generally increase due to initial demand, while
sales of older platforms and related products generally decrease
as customers migrate towards the new platforms. New video game
platforms have historically been introduced approximately every
five years. If video game platform manufacturers fail to develop
new hardware platforms, our sales of video game products could
decline.



| |                                                                                                  
| | -------------------------------------------------------------------------------------------------
| | An adverse trend in sales during the
	holiday selling season could impact our financial
	results.

Our business, like that of many specialty
retailers, is seasonal, with the major portion of our sales and
operating profit realized during the fourth fiscal quarter,
which includes the holiday selling season. During fiscal 2001,
we generated approximately 46% of our sales and substantially
all of our operating earnings during the fourth quarter. In
addition, we have historically experienced net losses in each of
our first three fiscal quarters. Any adverse trend in sales
during the holiday selling season could lower our results of
operations for the fourth quarter and the entire year.



| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | Our results of operations may fluctuate
	from quarter to quarter, which could result in a lower price for
	our Class A common stock.

Our results of operations may fluctuate from
quarter to quarter depending upon several factors, most of which
are beyond our control. These factors include:



| |   |                                            
| | - | -------------------------------------------
| |  | the timing of new product releases;        
|
| |  | the timing of new store openings; and      
|
| |  | shifts in the timing of certain promotions.

These and other factors could affect our
business, financial condition and results of operations, and
this makes the prediction of our financial results on a
quarterly basis difficult. Also, it is possible that our
quarterly financial results may be below the expectations of
public market analysts and investors.



| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | Our failure to effectively manage new store
	openings could lower our sales and profitability.

Our growth strategy is largely dependent upon
opening new stores and operating them profitably. We opened 74
stores in fiscal 2001 and expect to open approximately 150
to 200 new stores in fiscal 2002 (the 52-week period ending
February 1, 2003). Our ability to open new stores and
operate them profitably depends upon a number of factors, some
of which may be beyond our control. These factors include:



| |   |                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------
| |  | the ability to identify new store locations,
	negotiate suitable leases and build out the stores in a timely
	and cost efficient manner;
|
| |  | the ability to hire and train skilled associates;
	and                                                                                  
|
| |  | the ability to integrate new stores into our
	existing operations.                                                                      

2



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Our growth will also depend on our ability to
process increased merchandise volume resulting from new store
openings through our inventory management systems and
distribution facility in a timely manner. If we fail to manage
new store openings in a timely and cost efficient manner, our
growth may decrease.



| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | Pressure from our competitors may force us
	to reduce our prices or increase spending, which could decrease
	our profitability.

The electronic game industry is intensely
competitive and subject to rapid changes in consumer preferences
and frequent new product introductions. We compete with mass
merchants and regional chains, including Wal-Mart Stores, Inc.,
Target Corporation and Kmart Corporation; other video game and
PC software specialty stores located in malls and other
locations, including Electronics Boutique Holdings Corp.; toy
retail chains, including Toys R Us, Inc. and KB
Holdings, L.L.C.; mail-order businesses; catalogs; direct sales
by software publishers; online retailers; and computer product
and consumer electronics superstores, including Best Buy Co.,
Inc. and Circuit City Stores, Inc. Best Buy has acquired
Musicland, Inc., a music retail chain with over 1,300 stores
primarily located in shopping malls. Our sales may decline to
the extent Best Buy substantially increases the availability of
video game products in these music stores. In addition, video
games are available for rental from many video stores, who, we
anticipate, may increase the availability of video game products
for sale. Video game products may also be distributed through
other methods which may emerge in the future. We also compete
with sellers of used video game products. Some of our
competitors in the electronic game industry have longer
operating histories and may have greater financial resources
than we do. Additionally, we compete with other forms of
entertainment activities, including movies, television, theater,
sporting events and family entertainment centers. If we lose
customers to our competitors or if we reduce our prices or
increase our spending to maintain our customers, we may be less
profitable.



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | International events could delay or prevent
	the delivery of products to our suppliers.

Our suppliers rely on foreign sources, primarily
in Asia, to manufacture a significant portion of the products we
purchase from them. As a result, any event causing a disruption
of imports, including the imposition of import restrictions or
trade restrictions in the form of tariffs or quotas, could
increase the cost and reduce the supply of products available to
us, which could lower our sales and profitability.



| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | If we are unable to renew or enter into new
	leases on favorable terms, our revenue growth may
	decline.

All of our retail stores are located in leased
premises. If the cost of leasing existing stores increases, we
cannot assure you that we will be able to maintain our existing
store locations as leases expire. In addition, we may not be
able to enter into new leases on favorable terms or at all, or
we may not be able to locate suitable alternative sites or
additional sites for new store expansion in a timely manner. Our
revenues and earnings may decline if we fail to maintain
existing store locations, enter into new leases, locate
alternative sites or find additional sites for new store
expansion.



| |                                                                                                  
| | -------------------------------------------------------------------------------------------------
| | The ability to download video games and
	play video games on the Internet could lower our
	sales.

While it is currently not possible to download
video game software onto existing video game platforms over the
Internet, at some point in the future this technology may become
available. A limited selection of PC entertainment software may
currently be purchased for download over the Internet, and as
technology advances, a broader selection of PC entertainment
software may become available for purchase and download. If
advances in technology continue to expand our customers
ability to access software through these and other sources, our
customers may no longer choose to purchase video games or PC
entertainment software in our stores. As a result, our sales and
earnings could decline.



| |                                                                              
| | -----------------------------------------------------------------------------
| | The terms of our credit facility could
	restrict our operational flexibility.

We are subject to operational and financial
covenants and other restrictions under our revolving credit
facility. The covenants place restrictions on our ability to,
among other things, incur more debt or create liens on our
assets, merge or consolidate with others, make acquisitions and
investments, dispose of assets, pay

3



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dividends, and enter into transactions with
affiliates. These covenants could limit our operational
flexibility and restrict our ability to borrow additional funds,
if necessary, to finance operations. In addition, our credit
facility includes a number of covenants relating to financial
ratios.


Failure to comply with these operational and
financial covenants could result in an event of default under
the terms of the credit facility which, if not cured or waived,
could result in the borrowed amounts becoming due and payable.
In addition, our obligations under the credit facility are
secured by all assets owned by us and our subsidiaries. An event
of default under the credit facility would permit the lenders to
proceed directly against those assets.

We depend
upon our key personnel and they would be difficult to
replace.

Our success depends upon our ability to attract,
motivate and retain key management for our stores and skilled
merchandising, marketing and administrative personnel at our
headquarters. We depend upon the continued services of our
executive officers, R. Richard Fontaine, our Chairman of the
Board and Chief Executive Officer, Daniel A. DeMatteo, our
President and Chief Operating Officer, David W. Carlson, our
Executive Vice President and Chief Financial Officer, and John
W. Woodson, President of Strip Center Stores. We do not have
employment contracts with any of our key personnel. The loss of
services of any of our key personnel could have a negative
impact on our business.

Risks Related to our Relationship with
Barnes & Noble



| |                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Barnes & Nobles control of our
	company could increase the difficulty of our acquisition by
	another company, even if such acquisition would be
	beneficial.

Barnes & Noble owns 100% of our outstanding
Class B common stock, which represents 94.5% of the
combined voting power of all classes of our voting stock. In
addition, some of the members of our board of directors
(currently a majority) also serve as directors of Barnes &
Noble. As a result, Barnes & Noble has control over us, the
election of our board of directors and our management and
policies. Barnes & Noble also has control over all matters
requiring stockholder approval, including the amendment of
certain provisions of our certificate of incorporation and
by-laws and the approval of fundamental corporate transactions,
including mergers. In light of this control, other companies
could be discouraged from initiating a potential merger,
takeover or any other transaction resulting in a change of
control. Such a transaction potentially could be beneficial to
our business or to our stockholders. This may in turn reduce the
price that investors are willing to pay in the future for shares
of our Class A common stock.

Any conflict
of interest between us and Barnes & Noble could hurt our
business or prospects.

There is a possibility that conflicts of interest
will arise between Barnes & Noble and us in various areas
pertaining to our past and ongoing relationships. Potential
factors that may create a conflict of interest between Barnes
& Noble and us are:



| |   |                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | some of the members of our board of directors
	(currently a majority) also sit on Barnes & Nobles
	board of directors, which could result in Barnes &
	Nobles interests being prioritized over our interests; and
|
| |  | our directors currently have, or may have in the
	future, an equity interest in Barnes & Noble, which could
	affect their decisions in resolving potential conflicts between
	us and Barnes & Noble.               

In addition, Leonard Riggio, one of our
directors, is the Chairman of the Board, Chief Executive Officer
and a principal stockholder of Barnes & Noble. As of
March 31, 2002, Mr. Riggio beneficially owned
approximately 21.4% of the outstanding common stock of Barnes
& Noble. Mr. Riggio also currently has options to
acquire approximately 7.3% of our outstanding common stock. As a
result, Mr. Riggio may have substantial control over the
management and affairs of our company.

4



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Barnes & Noble is under no obligation to
resolve any potential conflicts between it and us in a manner
that is favorable to us, and we cannot guarantee that the
resolution of such conflicts would not adversely impact our
business or prospects.



| |                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If Barnes & Noble distributes our
	shares of Class B common stock in a tax-free distribution,
	the Class A common stock may trade at a lower price than
	the Class B common stock.

If Barnes & Noble distributes our
Class B common stock to its stockholders in a tax-free
distribution, we will have two separate classes of publicly
traded common stock. Following a tax-free distribution of the
Class B common stock, the Class B common stockholders
will continue to exercise voting control over us. This could
result in less liquidity for either class of our common stock
than if there were only one class of common stock and could
result in the market price of our Class A common stock
being lower than the market price of our Class B common
stock.



| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | The limited voting rights of our
	Class A common stock could impact its attractiveness to
	investors and its liquidity and as a result, its market
	value.

The holders of our Class A and Class B
common stock generally have identical rights, except that
holders of our Class A common stock are entitled to one
vote per share and holders of our Class B common stock are
entitled to ten votes per share on all matters to be voted on by
stockholders. The difference in the voting rights of the
Class A and Class B common stock could diminish the
value of the Class A common stock to the extent that
investors or any potential future purchasers of our Class A
common stock ascribe value to the superior voting rights of the
Class B common stock.



| |                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our ability to issue common stock may be
	hampered because of our relationship with Barnes & Noble,
	which may interfere with our ability to grow our
	business.

Barnes & Noble may wish to maintain until
October 2004 or thereafter its current ownership of our
Class B common stock in order to qualify for a tax-free
distribution of such stock to its stockholders. Barnes &
Noble owns 100% of the outstanding Class B common stock,
which represents 94.5% of the combined voting power of all
classes of our voting stock. It may be difficult for us to issue
common stock in the future because of Barnes & Nobles
control of us. In addition, we have entered into a separation
agreement with Barnes & Noble that restricts our ability to
issue equity securities or securities convertible into equity
securities if the effect of the issuance would be to preclude a
tax-free distribution by Barnes & Noble to its stockholders
or our consolidation with Barnes & Noble for its financial
reporting purposes. If we are unable to issue common stock, we
may be unable to raise additional capital, which we may need to
fund our business.



| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | Certain affiliate agreements we have with
	Barnes & Noble could prevent us from or increase our cost in
	taking certain actions.

We have entered into various agreements with
Barnes & Noble, including a separation agreement, an
insurance agreement, an operating agreement, a tax
disaffiliation agreement and a registration rights agreement.
Because of our current status as a majority-owned subsidiary of
Barnes & Noble, these agreements, or some of our future
intercompany agreements with Barnes & Noble, may not be the
result of arms length negotiations. For example, these
agreements may contain terms and conditions that are less
favorable to us than we could have obtained from independent
third parties, and may prevent change of control attempts that
are beneficial to our stockholders and restrict our ability to
take certain business actions, such as selling our assets or
business or issuing additional shares of our common stock.

A change of
control may result if Barnes & Noble defaults on its credit
facility.

Barnes & Noble has pledged to its lenders its
ownership interest in the entity that owns our shares of common
stock as collateral for its credit facility. If Barnes &
Noble defaults on its credit facility, our common stock owned by
Barnes & Noble could be transferred to its lenders or sold
to third parties. There can be no assurance that any new owner
will have the qualifications or ability to successfully operate
our business.

5



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Industry Background

According to NPD Group, Inc., a market research
firm, the electronic game industry was approximately an
$11.0 billion market in the United States in 2001. Of this
$11.0 billion market, approximately $9.4 billion was
attributable to video game products, excluding sales of used
video game products, and approximately $1.6 billion was
attributable to PC entertainment software.

New Video Game Products.Industry experts believe that the
electronic game industry is at the beginning stage of a new
expansion cycle. International Data Corporation, or IDC, an
industry forecaster, forecasts that domestic sales of new video
game products will increase at a compound annual growth rate of
approximately 47.5% over the next three years. In addition,
Interactive Digital Software Association, or IDSA, estimates
that 60% of all Americans, or approximately 145 million
people, play video or computer games on a regular basis. We
expect the following trends to result in increased sales of
video game products:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Hardware Platform Technology Evolution.Video game hardware has evolved
	significantly from the early products launched in the
	1980s. The processing speed of video game hardware has
	increased from 8-bit speeds in the 1980s to 128-bit speeds
	in next-generation systems such as Sony PlayStation 2,
	launched in 2000, and Nintendo GameCube and Microsoft Xbox,
	which both launched in November 2001. In addition, portable
	handheld video game devices have evolved from the 8-bit Nintendo
	Game Boy to the 32-bit Game Boy Advance, which was introduced in
	June 2001. Technological developments in both chip processing
	speed and data storage have provided significant improvements in
	advanced graphics and audio quality, which allow software
	developers to create more advanced games, encourage existing
	players to upgrade their hardware platforms and attract new
	video game players to purchase an initial system. As general
	computer technology advances, we expect video game technology to
	make similar advances.
|
| |  | Next-generation Systems Provide Multiple
	Capabilities Beyond Gaming.Many
	next-generation hardware platforms, including Sony PlayStation 2
	and Microsoft Xbox, utilize a DVD software format and have the
	potential to serve as multi-purpose entertainment centers by
	doubling as a player for DVD movies and compact discs. In
	addition, Sony PlayStation 2 and Microsoft Xbox are expected to
	provide Internet connectivity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Backward Compatibility.Sony PlayStation 2 and Nintendo Game
	Boy Advance are both backward compatible, meaning that titles
	produced for the earlier version of the hardware platform may be
	used on the new hardware platform. We believe that backward
	compatibility may result in more stable industry growth because
	the decrease in consumer demand for products associated with
	existing hardware platforms that typically precedes the release
	of next-generation hardware platforms may be diminished.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Introduction of Next-generation Hardware
	Platforms Drives Software Demand.
	Sales of video game software generally increase as
	next-generation platforms mature and gain wider acceptance.
	Historically, when a new platform is released, a limited number
	of compatible game titles are immediately available, but the
	selection grows rapidly as manufacturers and third-party
	publishers develop and release game titles for that new
	platform. For example, when Sony PlayStation 2 was released in
	October 2000, approximately 30 game titles were available
	for sale. By January 2002, approximately 220 game titles for the
	Sony PlayStation 2 platform were available for sale.                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Broadening Demographic Appeal.While the typical electronic game
	enthusiast is male between the ages of 14 and 34, the electronic
	game industry is broadening its appeal. More females are playing
	electronic video games, in part due to the development of video
	game products that appeal to them. According to IDSA,
	approximately 43% of all electronic game players currently are
	female. More adults are also playing video games as a portion of
	the population that played video games in their childhood
	continue to play and advance to the next-generation video game
	products. In addition, the availability of used video game
	products for sale has enabled a lower-economic demographic, that
	may not have been able to afford the considerably more expensive
	new video game products, to participate in the video game
	industry.                                                                                                                                                                                          

6



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PC Entertainment Software.IDC forecasts that domestic sales of
PC entertainment software will increase at a compound annual
growth rate of 7.9% over the next three years. PC entertainment
software is generally sold in the form of CD-ROMs and played on
multimedia PCs featuring fast processors, expanded memories, and
enhanced graphics and audio capabilities.

Used Video Game Market.As the installed base of video game
hardware platforms has increased and new hardware platforms are
introduced, a growing used video game market has evolved in the
United States. Based on reports published by NPD, management
believes that, as of November 2001, the installed base of video
game hardware systems in the United States, based on original
sales, totaled over 109.4 million units, including
approximately 25.7 million Sony PlayStation units,
4.1 million Sega Dreamcast units, 17.8 million
Nintendo 64 units, 20.9 million Nintendo Game Boy and Game
Boy Color units, and approximately 40.9 million total units
of Sega Genesis and Super Nintendo systems, which are no longer
being manufactured. Hardware manufacturers and third-party
software publishers produce a wide variety of software titles
for each of these hardware platforms. Based on internal company
estimates, management believes that the installed base of video
game software units in the United States totals over
500 million units.

Business Strategy

Our goal is to enhance our position as the
nations largest specialty retailer of new and used video
game products and PC entertainment software by focusing on the
following strategies:

Targeting a Broad Audience of Game Players.We have created a store environment
targeting a broad audience including the electronic game
enthusiast, the casual gamer and the seasonal gift giver. Our
mall stores primarily focus on the electronic game enthusiast
who demands the latest merchandise featuring the
hottest technology immediately on the day of
release. Our strip center stores also serve the electronic game
enthusiast, but focus on serving the value-oriented customer by
offering a wide selection of value-priced used video game
products and the opportunity to trade in used video game
products in exchange for store credits applicable to future
purchases, which, in turn, drives more sales.

Enhancing our Image as a Destination Location.Our stores serve as destination
locations for game players due to our broad selection of
products, knowledgeable sales associates, game oriented
environment and unique pricing proposition. We offer all major
video game platforms, provide a broad assortment of video game
products and offer a larger and more current selection of
merchandise than other retailers. We provide a high level of
customer service by hiring game enthusiasts and providing them
with ongoing sales training, as well as training in the latest
technical and functional elements of our products and services.
Our stores are equipped with several video game sampling areas,
which provide our customers the opportunity to play games before
purchase, as well as equipment to play video game clips.

Providing a First-to-Market Distribution
Network.We employ a variety of
rapid-response distribution methods in our efforts to be the
first to market for new video game products and PC entertainment
software. We strive to deliver popular new releases to selected
stores within hours of release and to all of our stores within
24 hours of release. This highly efficient distribution network
is essential as a significant portion of a new titles
sales will be generated in the first few days and weeks
following its release. As the largest specialty retailer of
video game products and PC entertainment software, with a proven
capability to distribute new releases to our customers quickly,
our management believes that we regularly receive a
disproportionately large allocation of popular new video game
products and PC entertainment software. On a daily basis, we
actively monitor sales trends, customer reservations and store
manager feedback to ensure a high in-stock position for each
store. To assure our customers immediate access to new releases,
we offer our customers the opportunity to pre-order products in
our stores or through our web site prior to their release.

Offering the Largest Selection of Used Video
Game Products.We are the
nations leading provider and carry the broadest selection
of used video game products for both current and previous
generation platforms. We are one of the only retailers that
provide video game software for previous generation platforms,
giving us a unique advantage in the video game retail industry.
The opportunity to trade in and purchase used video game
products offers our customers a unique value proposition
unavailable at mass merchants, toy stores and consumer
electronic retailers. We obtain most of our used video game
products from trade-ins made in our

7



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stores by our customers. Used video game products
generate significantly higher gross margins than new video game
products.


Rebranding our Stores with the GameStop Name.We currently operate stores under the
GameStop, Babbages, Software Etc. and FuncoLand names. We
have initiated a rebranding strategy under which all new stores
opened since December 2000 operate under the GameStop name and
existing stores in targeted markets are being rebranded under
the GameStop name. We have completed rebranding our stores in
Dallas, Houston, San Antonio, Seattle, and Philadelphia. At the
end of fiscal 2001, we operated approximately 250 stores under
the GameStop name and we intend to continue to rebrand most of
our stores. Rebranding to a single GameStop name enables us to
leverage brand awareness and to capture advertising and
marketing efficiencies. Our rebranding strategy is further
supported by the GameStop loyalty card and our web site. The
GameStop loyalty card, which is obtained as a bonus with a paid
subscription to our Game Informermagazine, offers
customers discounts on selected merchandise in our stores. Our
web site allows our customers to buy games on-line and to learn
about the latest video game products and PC entertainment
software and their availability in our stores.

Investing in our Information Systems and
Distribution Capabilities.We employ
sophisticated and fully-integrated inventory management,
store-level point of sale and financial systems and a
centralized state-of-the-art distribution facility. These
systems enable us to maximize the efficiency of the flow of over
2,800 SKUs, improve store efficiency, optimize store
in-stock positions, and carry a broad selection of inventory.
Our proprietary inventory management system enables us to
maximize sales of new release titles and avoid markdowns as
titles mature and utilizes electronic point-of-sale equipment
that provides corporate headquarters with daily information
regarding store-level sales and available inventory levels to
automatically generate replenishment shipments to each store at
least twice a week. In addition, our highly customized inventory
management system allows us to actively manage the pricing and
product availability of our used video game products across our
store base and to reallocate our inventory as necessary. Our
systems enable each store to carry a merchandise assortment
uniquely tailored to its own sales mix and customer needs. Our
ability to react quickly to consumer purchasing trends has
resulted in a target mix of inventory, reduced shipping and
handling costs for overstocks and reduced our need to discount
products.

Growth Strategy

New Store Expansion.We intend to continue to open new
strip center stores in our targeted markets and new mall stores
in selected mall locations. We opened 62 new stores in
fiscal 2000 (the 53-week period ended February 3, 2001) and
74 new stores in fiscal 2001. We plan on opening
approximately 150 to 200 new stores in fiscal 2002. Our
primary growth vehicle will be the expansion of our strip center
store base, which we believe could grow to over 2,000 stores in
the United States. Our strategy is to open clusters of strip
center stores in targeted major metropolitan markets under the
GameStop brand name. For example, we opened 14 new stores
in the Houston metropolitan area in the last ten months and now
operate a total of 31 stores in Houston. We analyze each
market relative to target population and other demographic
indices, real estate availability, competitive factors and past
operating history, if available.

Increase Comparable Store Sales.We plan to increase our comparable
store sales by capitalizing on the growth in the video game
industry, expanding our sales of used video game products and
increasing awareness of the GameStop name.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Capitalize on Industry Growth.In fiscal 2001, our comparable store
	sales increased 32.0%, driven in large measure by the success of
	Sony PlayStation 2, which was launched in October 2000,
	Nintendo Game Boy Advance, which was launched in June 2001 and
	Microsoft Xbox and Nintendo GameCube, both of which were
	launched in November 2001. Over the next few years, we expect to
	continue to capitalize on the increasing installed base for
	these platforms. We expect the launch of these four platforms
	and the related increase in the installed hardware base to drive
	significant growth in video game software and accessories sales
	over the next few years.
|
| |  | Increase Sales of Used Video Game Products.We will continue to expand the
	selection and availability of used video game products in both
	our mall and strip center stores. Our strategy consists                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

8



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | of increasing consumer awareness of the benefits
	of trading in and buying used video game products at our stores
	through increased marketing activities. We expect the launch of
	new platform technology to drive trade-ins of previous
	generation products, including Nintendo Game Boy Color and
	Nintendo 64, Sega Dreamcast and Sony PlayStation, thereby
	expanding the supply of used video game products.                                       
|
| |  | Increase GameStop Brand Awareness.We intend to increase customer
	awareness of the benefits of shopping in our stores. In
	connection with our rebranding efforts, we plan to enhance
	GameStop brand awareness by increasing the amount of media
	advertising in targeted markets, expanding our GameStop loyalty
	card program, aggressively promoting trade-ins of used video
	game products in our stores and leveraging our web site at
	gamestop.com.

Merchandise

Our product offerings consist of video game
products, PC entertainment software, and related products, such
as action figures, trading cards and strategy guides. We also
market selected PC productivity and educational software titles.
Our in-store inventory generally consists of a constantly
changing selection of over 2,800 SKUs. We have a central
buying group that negotiates terms, discounts and cooperative
advertising allowances for all of our stores. We use customer
requests and feedback, industry magazines and product reviews to
determine which new releases are expected to be hits. Call lists
and advance orders are tracked at individual stores to
distribute titles and capture demand effectively. This
merchandise management is essential because a significant
portion of a games sales are usually generated in the
first days and weeks following its release. We also carefully
manage product pricing utilizing a tiered pricing strategy that
enables us to tailor pricing at our stores based on each
stores competitive environment.

Video Game Hardware.We offer the video game platforms of
all major manufacturers, including Sony PlayStation 2 and
PlayStation, Nintendo GameCube, Game Boy Advance, Game Boy Color
and Nintendo 64, Microsoft Xbox and Sega Dreamcast. We also
offer extended service agreements on video game hardware. In
support of our strategy to be the destination location for
electronic game players, we aggressively promote the sale of
video game platforms. Video game hardware sales are generally
driven by the introduction of new platform technology and the
reduction in price points as platforms mature. Due to our strong
relationships with the manufacturers of these platforms, we
often receive disproportionately large allocations of new
release hardware products, which is an important component of
our strategy to be the destination of choice for electronic game
players. We believe that selling video game hardware increases
store traffic and promotes customer loyalty, leading to
increased sales of video game software, which have higher gross
margins than video game hardware.

Video Game Software.We purchase video game software
directly from the leading manufacturers, including Sony,
Microsoft, Nintendo of America, Inc. and Sega Corporation, as
well as over 44 third-party game publishers, such as
Electronic Arts, THQ Inc. and Activision, Inc. We are one of the
largest customers in the United States of video game titles sold
by these publishers. We carry over 1,000 SKUs at any given
time across a variety of genres, including Sports, Action,
Strategy, Adventure/Role Playing and Simulation.

Used Video Game Products.We are the largest retailer of used
video games in the United States. We provide our customers with
an opportunity to trade in their used video game products in our
stores in exchange for store credits which can be applied
towards the purchase of other products, including new
merchandise. We have the largest selection (approximately
1,000 SKUs) of used video game titles which have an average
price of $16 as compared to $37 for new video game titles and
which generate significantly higher gross margins than new video
game products. Our trade-in program provides our customers with
a unique value proposition which is unavailable at mass
merchants, toy stores and consumer electronics retailers. This
program provides us with an inventory of used video game
products which we resell to our more value-oriented customers.
In addition, our highly-customized inventory management system
allows us to actively manage the pricing and product
availability of our used video game products across our store
base and to reallocate our inventory as necessary. Our trade-in
program also allows us to be one of the only suppliers of
previous generation platforms and related video games. We also
operate a refurbishment center where defective video game
products can be tested, cleaned, relabeled, repackaged, priced
and redistributed back to our stores.

9



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PC Entertainment and Other Software.We purchase PC entertainment software
from over 42 publishers, including Electronic Arts,
Microsoft and Vivendi Universal. We offer PC entertainment
software across a variety of genres, including Action,
Simulation, Sports, Strategy and Adventure/Role Playing. We also
carry a limited assortment of educational, productivity and
reference titles.

Accessories and Other Products.Video game accessories consist
primarily of controllers, memory cards and other add-ons. PC
entertainment accessories consist primarily of video cards,
joysticks and modems. We also carry strategy guides and
magazines, as well as character-related merchandise, including
action figures and trading cards. We carry over 400 SKUs of
accessories and other products. In general, this category has
higher margins than new video game and PC entertainment products.

The following table sets forth sales mix,
expressed as a percentage of net sales for the periods indicated:

|                                  |                        |                  |    |                  |   |  |    |    |  
|--------------------------------- | ---------------------- | ---------------- | -- | ---------------- | - |  | -- | -- | -
|                                  |                        | 53 Weeks Ended   |    | 52 Weeks Ended  
|                                  |                        | February 3, 2001 |    | February 2, 2002
|                                  |                        |                  |    |                 
|Video Games:*                     |                        |                  |    |                  |   |  |    |   
|                                  | Video Game Hardware    |                  |    | 15               | % |  |    | 25 | %
|                                  | Video Game Software    |                  |    | 49               | % |  |    | 48 | %
|                                  | Video Game Accessories |                  |    | 11               | % |  |    | 12 | %
|PC Software                       |                        |                  | 17 | %                |   |  | 10 | % 
|PC Accessories and Other Products |                        |                  | 8  | %                |   |  | 5  | % 



---



|  |                                   
|- | ----------------------------------
|* | Includes new and used merchandise.

Store Operations

We currently operate 1,038 stores, primarily
under the GameStop, Babbages, Software Etc., and FuncoLand
names. Each of our stores typically carries over
2,800 SKUs. We design our stores to provide an electronic
gaming atmosphere with an engaging and visually captivating
layout. Our stores are equipped with several video game sampling
areas, which provide our customers the opportunity to play games
before purchase, as well as equipment to play video game clips.
We use store configuration, in-store signage and product
demonstrations to produce marketing opportunities both for us
and for our vendors.

Store
Formats.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Mall-Based Stores.Our mall-based stores, which average
	approximately 1,200 square feet, carry primarily new video
	game products and PC entertainment software, as well as a
	limited selection of used video game products. We currently
	operate 542 mall stores in high traffic shopping malls in
	targeted locations throughout the United States, Puerto Rico and
	Guam.                                                                                                                                                                                                                                                                                               
|
| |  | Strip Center Stores.Our strip center stores, which average
	approximately 1,500 square feet, carry a balanced mix of
	new and used video game products and, in selected stores, PC
	entertainment software. We currently operate 496 strip
	center stores in the United States. Our strip center stores are
	located in both high traffic power strip centers and
	local neighborhood strip centers, primarily in major
	metropolitan areas. These locations provide visibility, easy
	access and high frequency of visits. We target strip centers
	that are conveniently located, have a mass merchant or
	supermarket anchor tenant and have a high volume of customers.

Store Economics.Average annual sales per mall store
were approximately $1.3 million in fiscal 2001, and the
average cost to open a new mall store is approximately $185,000,
including $60,000 of inventory net of vendor financing. Average
annual sales per strip center store were approximately $875,000
in fiscal 2001, and the average cost to open a new strip center
store is approximately $125,000, including $50,000 of inventory
net of vendor financing. We expect these costs to remain
relatively constant throughout fiscal 2002. All of our new
stores, lease renewals, relocations and major remodels are
evaluated on the basis of their return on investment, strategic
positioning and conditions of the market. We generally achieve
profitability in each of our new stores within the first holiday
season of opening.

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Site Selection and Locations

Site Selection.We
have a dedicated staff of real estate personnel experienced in
selecting store locations. Site selections for new stores are
made after an extensive review of demographic data and other
information relating to market potential, competitor access and
visibility, compatible nearby tenants, accessible parking,
location visibility, lease terms and the location of our other
stores. Most of our stores are located in highly visible
locations within malls and strip centers.

Locations.The table
below sets forth the number of our stores located in each state,
Puerto Rico and Guam as of February 2, 2002:

|               |  |           |     | 
|-------------- |  | --------- | --- | 
|               |  | Number   
|State          |  | of Stores
|               |  |          
|Alabama        |  |           | 9   | 
|Alaska         |  |           | 3   | 
|Arizona        |  |           | 19  | 
|Arkansas       |  |           | 4   | 
|California     |  |           | 114 | 
|Colorado       |  |           | 14  | 
|Connecticut    |  |           | 17  | 
|Delaware       |  |           | 3   | 
|Florida        |  |           | 33  | 
|Georgia        |  |           | 21  | 
|Guam           |  |           | 1   | 
|Hawaii         |  |           | 9   | 
|Idaho          |  |           | 2   | 
|Illinois       |  |           | 51  | 
|Indiana        |  |           | 18  | 
|Iowa           |  |           | 9   | 
|Kansas         |  |           | 5   | 
|Kentucky       |  |           | 15  | 
|Louisiana      |  |           | 11  | 
|Maine          |  |           | 1   | 
|Maryland       |  |           | 30  | 
|Massachusetts  |  |           | 27  | 
|Michigan       |  |           | 49  | 
|Minnesota      |  |           | 22  | 
|Mississippi    |  |           | 4   | 
|Missouri       |  |           | 21  | 
|Montana        |  |           | 4   | 
|Nebraska       |  |           | 3   | 
|Nevada         |  |           | 6   | 
|New Hampshire  |  |           | 5   | 
|New Jersey     |  |           | 54  | 
|New Mexico     |  |           | 4   | 
|New York       |  |           | 55  | 
|North Carolina |  |           | 21  | 
|North Dakota   |  |           | 4   | 

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|               |  |           |    | 
|-------------- |  | --------- | -- | 
|               |  | Number   
|State          |  | of Stores
|               |  |          
|Ohio           |  |           | 54 | 
|Oklahoma       |  |           | 9  | 
|Oregon         |  |           | 6  | 
|Pennsylvania   |  |           | 61 | 
|Puerto Rico    |  |           | 9  | 
|Rhode Island   |  |           | 1  | 
|South Carolina |  |           | 11 | 
|South Dakota   |  |           | 2  | 
|Tennessee      |  |           | 19 | 
|Texas          |  |           | 98 | 
|Utah           |  |           | 9  | 
|Vermont        |  |           | 1  | 
|Virginia       |  |           | 35 | 
|Washington     |  |           | 27 | 
|West Virginia  |  |           | 8  | 
|Wisconsin      |  |           | 20 | 

Game Informer

We publish Game Informer, a monthly video
game magazine featuring reviews of new title releases, tips and
secrets about existing games and news regarding current
developments in the electronic game industry. The magazine is
sold through subscription and through displays in our stores.
For its February 2002 issue, the magazine had more than 500,000
paid subscriptions. Game Informer revenues are also
generated through the sale of advertising space. In addition, we
have recently begun offering the GameStop loyalty card as a
bonus with each paid subscription, providing our subscribers
with a discount on selected merchandise.

E-Commerce

We operate an electronic commerce web site at
www.gamestop.com that allows our customers to buy video game
products and other merchandise on-line. The site also offers
customers information and content about available games, release
dates for upcoming games, and access to store information, such
as location and product availability. In addition, the site
offers the ability to register on a call list in any store,
enabling us to notify customers when a game arrives at a nearby
store.

Information Management

Our operating strategy involves providing a broad
merchandise selection to our customers as quickly and as
cost-effectively as possible. We use our inventory management
systems to maximize the efficiency of the flow of products to
our stores, enhance store efficiency and optimize store in-stock
and overall investment in inventory.

Distribution.We
operate a 210,000 square foot state-of-the-art distribution
center in Grapevine, Texas. By operating with a centralized
distribution facility, we effectively control and minimize
inventory levels. A technologically-advanced conveyor system and
flow-through racks control costs and improve speed of
fulfillment. The technology used in the distribution center
allows for high-volume receiving, distributions to stores and
returns to vendors. Inventory is shipped to each store at least
twice a week, or daily, if necessary, in order to keep stores in
supply of products. In order to support our first-to-market
distribution network, we utilize the services of 15 off-site,
third-party operated distribution centers that pick up products
from our suppliers, repackage the products for each of our
stores and ship those products to our stores by package
carriers. Our ability to rapidly process incoming shipments of
new release titles and distribute them to all of

12



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our stores, either that day or by the next
morning, enables us to meet peak demand and replenish stores at
least twice a week.


Management Information Systems.Our proprietary inventory management
system and point of sale technology show daily sales and
in-store stock by title by store. Systems in place use these
data to automatically generate replenishment shipments to each
store from our distribution center in Grapevine, Texas, enabling
each store to carry a merchandise assortment uniquely tailored
to its own sales mix and rate of sale. Our call lists and
reservation system also provide our centralized buying staff
with information to determine order size and inventory
management for store-by-store inventory allocation. We
constantly review and edit our merchandise categories with the
objective of ensuring that inventory is up-to-date and meets
customer needs. We use a centralized PC network-based
information system based in our corporate offices, in order to
minimize initial outlay of capital while allowing for
flexibility and growth as operations expand.

Our in-store point-of-sale system enables us to
efficiently manage in-store transactions. This proprietary
point-of-sale system has been enhanced to facilitate trade-in
transactions, including automatic look-up of trade-in prices and
printing of machine readable bar codes to facilitate in-store
restocking of used video games. In addition, our central
database of all used video game products allows us to actively
manage the pricing and product availability of our used video
game products across our store base and re-allocate our used
video game products as necessary.

Advertising

Our stores are primarily located in high traffic,
high visibility areas of regional shopping malls and strip
centers. Given the high foot traffic drawn past the stores
themselves, we use in-store marketing efforts such as window
displays and coming soon signs to attract customers,
as well as to promote used video game products and subscriptions
to our Game Informermagazine. Inside the stores, we
feature selected products through the use of vendor displays,
coming soon or preview videos, signs, catalogs,
point of purchase materials and end-cap displays. These
advertising efforts are designed to increase the initial sales
of new titles upon their release. We receive cooperative
advertising and market development funds from manufacturers,
distributors, software publishers and accessory suppliers to
promote their respective products. Generally, a vendor agrees to
purchase advertising space in one of our advertising vehicles.
Once we run the advertising, the vendor pays to us an agreed
amount. As part of our rebranding and targeted growth strategy,
we also intend to expand our advertising to other media,
including print and radio.

Field Management and Staff

Our store operations are managed regionally by
nine store operations directors. The regions are divided into 84
districts, each with a district manager covering an average of
13 stores. Each store employs, on average, one manager, one
assistant manager and between two and ten sales associates, many
of whom are part-time employees. We have cultivated a work
environment that attracts employees who are actively interested
in electronic games. We seek to hire and retain employees who
know and enjoy working with our products so that they are better
able to assist customers. To encourage them to sell the full
range of our products, we provide our employees with targeted
incentive programs to drive sales. We also provide our employees
with the opportunity to take home and try new video games, which
enables them to better discuss those games with our customers.
In addition, employees are casually dressed to encourage
customer access and increase the game-oriented focus
of the stores. We also employ nine regional loss prevention
managers who assist the field in implementing security to
prevent theft of our products.

Stores communicate with our corporate offices via
daily e-mail. This e-mail allows for better tracking of trends
in upcoming titles, competitor strategies and in-stock inventory
positions. In addition, this communication allows title
selection in each store to be continuously updated and tailored
to reflect the tastes and buying patterns of the stores
local market. These communications also give field management
access to relevant inventory levels and loss prevention
information. We also sponsor an annual store managers
conference to which we invite all video game software publishers
to attend and operate an intense educational training

13



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program for our employees to provide our
employees with information about the video game products that
will be released by those publishers in the holiday season.


Customer Service

Our store personnel provide value-added services
to each customer, such as maintaining lists of regular
customers, notifying each customer by phone when new titles are
available, and reserving new releases for customers with a down
payment to ensure product availability. In addition, our store
personnel readily provide product reviews to ensure customers
are making informed purchasing decisions and offering help-line
numbers to increase a customers enjoyment of the product
upon purchase.

Vendors

We purchase substantially all of our new products
from approximately 85 manufacturers and software publishers and
approximately five distributors. Purchases from the top five
vendors accounted for approximately 59% of our new product
purchases in fiscal 2001. Only Sony, Microsoft and Electronic
Arts (which accounted for 25%, 11% and 11%, respectively)
accounted for more than 10% of our new product purchases during
fiscal 2001. We have established price protections and return
privileges with our primary vendors in order to reduce the risk
of inventory obsolescence. In addition, we have no purchase
contracts with trade vendors and conduct business on an
order-by-order basis, a practice that is typical throughout the
industry. We believe that maintaining and strengthening our
long-term relationships with our vendors is essential to our
operations and continued expansion. We believe that we have very
good relations with our vendors.

Competition

The electronic game industry is intensely
competitive and subject to rapid changes in consumer preferences
and frequent new product introductions. We compete with mass
merchants and regional chains, including Wal-Mart, Target and
Kmart; other video game and PC software specialty stores located
in malls and other locations, including Electronics Boutique;
toy retail chains, including Toys R Us and KB Toys;
mail-order businesses; catalogs; direct sales by software
publishers; online retailers; and computer product and consumer
electronics superstores, including Best Buy and Circuit City.
Best Buy has acquired Musicland, a music retail chain with over
1,300 stores primarily located in shopping malls. Our business
may be adversely affected to the extent Best Buy substantially
increases the availability of video game products in these music
stores. In addition, video games are available for rental from
many video stores, who, we anticipate, may increase the
availability of video game products for sale. Video game
products may also be distributed through other methods which may
emerge in the future. We also compete with sellers of used video
game products. Additionally, we compete with other forms of
entertainment activities, including movies, television, theater,
sporting events and family entertainment centers.

Seasonality

Our business, like that of many specialty
retailers, is seasonal, with the major portion of our sales and
operating profit realized during the fourth fiscal quarter,
which includes the holiday selling season. During fiscal 2001,
we generated approximately 46% of our sales and substantially
all of our operating earnings during the fourth quarter. In
addition, we have historically experienced net losses in each of
our first three fiscal quarters. Any adverse trend in sales
during the holiday selling season could lower our results of
operations for the fourth quarter and the entire year.

Trademarks

We have a number of trademarks and servicemarks,
including GameStop, Game Informer,
Babbages and FuncoLand, all of
which have been registered by us with the United States Patent
and Trademark Office. We maintain a policy of pursuing
registration of our principal marks and opposing any
infringement of our marks.

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Employees

We have approximately 1,400 full-time salaried,
1,300 full-time hourly and between 5,000 and 12,000 part-time
hourly employees depending on the time of year. Fluctuation in
the number of part-time hourly employees is due to the
seasonality of the electronic game industry. We believe that our
relationship with our employees is excellent, and none of our
employees is represented by a labor union or is a member of a
collective bargaining unit.

Item
2.     Properties

All of our stores are leased. Store leases
typically provide for an initial lease term of three to ten
years, plus renewal options. This arrangement gives us the
flexibility to pursue extension or relocation opportunities that
arise from changing market conditions. We believe that, as
current leases expire, we will be able to obtain either renewals
at present locations or leases for equivalent locations in the
same area.

The terms of the store leases for the 1,038
leased stores open as of February 2, 2002 expire as follows:

|                                          |  |           |     | 
|----------------------------------------- |  | --------- | --- | 
|                                          |  | Number   
|Lease Terms to Expire During              |  | of Stores
|                                          |  |          
|(12 Months Ending on or About January 31) |  |           |     | 
|Expired and in negotiations               |  |           | 87  | 
|2003                                      |  |           | 180 | 
|2004                                      |  |           | 226 | 
|2005                                      |  |           | 173 | 
|2006                                      |  |           | 103 | 
|2007 and later                            |  |           | 269 | 

In addition to our stores, we lease a 250,000
square foot headquarters and distribution center in Grapevine,
Texas. This lease expires on January 31, 2006. We have the
right to renew the lease for an additional five years.
Management believes that this facility will support our growth
for at least the next few years.

We also lease a 5,700 square foot office facility
in Minneapolis, Minnesota which houses the operations of Game
Informermagazine. This lease expires in February 2007.

Item 3.     Legal
Proceedings

In the ordinary course of our business, we are
from time to time subject to various legal proceedings. We do
not believe that any current legal proceedings, individually or
in the aggregate, will have a material adverse effect on our
operations or financial condition.

Item
4.     Submission of Matters to a
Vote of Security Holders

There were no matters submitted to a vote of
security holders during the 13 weeks ended February 2,
2002.

15



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##### 



PART II

Item 5.     Market
For Registrants Common Equity and Related Stockholder
Matters

Price Range of Common Stock

The Companys Class A common stock
began trading on the New York Stock Exchange (NYSE)
under the symbol GME on February 13, 2002. As
such, there was no public trading market for the Companys
Class A common stock prior to that time. The Companys
Class B common stock is not publicly traded and is held
entirely by Barnes & Noble, Inc.

Use of Proceeds of Initial Public
Offering

Pursuant to a registration statement on
Form S-1 (the Registration Statement) filed
with the SEC (File No. 333-68294), we registered and sold
an aggregate of 20,763,888 shares of our Class A common
stock at a price of $18.00 per share. The aggregate price of the
offering amount registered and sold was approximately
$373.7 million. Salomon Smith Barney acted as the managing
underwriter for the offering.

Our net proceeds from our initial public
offering, after deduction of underwriting discounts and
commissions of $24.3 million and expenses of
$1.4 million, were $348.0 million. All of the expenses
were paid directly to persons other than our directors, officers
or affiliates, their associates or persons owning 10% or more of
any class of our equity securities. A portion of the proceeds
was used to repay $250.0 million of our indebtedness to
Barnes & Noble, with Barnes & Noble contributing the
remaining $150.0 million of indebtedness to the Company as
additional paid-in-capital. The balance of the proceeds
(approximately $98.0 million) is being used for working
capital and general corporate purposes. Other than the repayment
of indebtedness to Barnes & Noble and as otherwise
described in the Registration Statement, none of the proceeds
has been paid directly or indirectly to any of our directors,
officers or affiliates, their associates or persons owning 10%
or more of any class of our equity securities.

Approximate Number of Holders of Common
Equity

As of April 11, 2002, there were
approximately 3,849 holders of the Companys $.001 par
value Class A common stock.

Dividends

The Company has never declared or paid any
dividends on its common stock. We do not expect to pay dividends
on any of our common stock for the foreseeable future. Instead,
we anticipate that all of our earnings in the foreseeable future
will be used for working capital and other general corporate
purposes. Our payment of dividends is and will continue to be
restricted by or subject to, among other limitations, the terms
of the revolving credit facility we entered into on
February 13, 2002, applicable provisions of federal and
state laws, our earnings and various business considerations
including our financial condition, results of operations, cash
flow, the level of our capital expenditures, our future business
prospects, our status as a holding company and such other
matters that our board of directors deems relevant.

Item
6.     Selected Consolidated
Financial Data

We completed our initial public offering on
February 12, 2002. Before that date, we were a wholly-owned
subsidiary of Barnes & Noble.

The following table sets forth our selected
consolidated financial and operating data for the periods and at
the dates indicated. Our fiscal year is composed of 52 or
53 weeks ending on the Saturday closest to January 31.
The fiscal years ended January 31, 1998, January 30,
1999, January 29, 2000 and February 2, 2002 consisted
of 52 weeks and the fiscal year ended February 3, 2001
consisted of 53 weeks. The Statement of Operations
Data for the 39 weeks ended October 30, 1999,
for the 13 weeks ended January 29, 2000 and for the
fiscal years 2000 and 2001 and the Balance Sheet
Data as of February 3, 2001 and February 2, 2002
are derived from, and are qualified by reference to, our audited
financial statements which are included elsewhere

16



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##### 



in this Form 10-K. The Statement of
Operations Data for the fiscal years ended
January 31, 1998 and January 30, 1999 and the
Balance Sheet Data as of January 31, 1998,
January 30, 1999 and January 29, 2000 are derived from
our audited financial statements which are not included
elsewhere in this Form 10-K.


Our wholly-owned subsidiary, Babbages Etc.
LLC, began operations in November 1996. In October 1999,
Babbages Etc. LLC was acquired by, and became a
wholly-owned subsidiary of, Barnes & Noble. Because our
financial statements subsequent to the acquisition by Barnes
& Noble are not directly comparable to those prior to the
acquisition, our financial statements make a distinction between
the predecessor company and the successor
company. In June 2000, Barnes & Noble acquired
Funco, Inc. and thereafter, Babbages Etc. LLC became a
wholly-owned subsidiary of Funco, Inc. The acquisition of Funco,
Inc. has been accounted for under the purchase method of
accounting. In December 2000, Funco, Inc. changed its name to
GameStop, Inc.

17



---



##### 



Our selected financial data set forth below
should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and
notes thereto included elsewhere in this Form 10-K.

|                                                                                                    |  |                                                     |         |             |  |             |         |             |  |             |         |             |  |   |         |   |  |   |         |    |  |   |           |  
|--------------------------------------------------------------------------------------------------- |  | --------------------------------------------------- | ------- | ----------- |  | ----------- | ------- | ----------- |  | ----------- | ------- | ----------- |  | - | ------- | - |  | - | ------- | -- |  | - | --------- | -
|                                                                                                    |  |                                                     |         |             |  |             |         |            
|                                                                                                    |  | Predecessor                                         |         |             |  |             |         |            
|                                                                                                    |  |                                                     |         |             |  |             |         |            
|                                                                                                    |  | Fiscal Year                                         |         | Fiscal Year |  | 39 Weeks    |         | 13 Weeks    |  | Fiscal Year |         | Fiscal Year
|                                                                                                    |  | Ended                                               |         | Ended       |  | Ended       |         | Ended       |  | Ended       |         | Ended      
|                                                                                                    |  | January 31,                                         |         | January 30, |  | October 30, |         | January 29, |  | February 3, |         | February 2,
|                                                                                                    |  | 1998                                                |         | 1999        |  | 1999        |         | 2000        |  | 2001        |         | 2002       
|                                                                                                    |  |                                                     |         |             |  |             |         |             |  |             |         |            
|                                                                                                    |  |                                                    
|                                                                                                    |  | (In thousands, except per share and operating data)
|Statement of Operations Data:                                                                       |  |                                                     |         |             |  |             |         |             |  |             |         |             |  |   |         |   |  |   |         |    |  |   |           |  
|Sales                                                                                               |  | $                                                   | 383,359 |             |  | $           | 465,166 |             |  | $           | 329,392 |             |  | $ | 223,748 |   |  | $ | 756,697 |    |  | $ | 1,121,138 |  
|Cost of sales                                                                                       |  |                                                     | 291,767 |             |  |             | 350,475 |             |  |             | 246,865 |             |  |   | 174,808 |   |  |   | 570,995 |    |  |   | 854,035   |  
|                                                                                                    |  |                                                     |         |             |  |             |         |             |  |             |         |             |  |   |         |   |  |   |         |    |  |   |           |  
|Gross profit                                                                                        |  |                                                     | 91,592  |             |  |             | 114,691 |             |  |             | 82,527  |             |  |   | 48,940  |   |  |   | 185,702 |    |  |   | 267,103   |  
|Selling, general and administrative expenses                                                        |  |                                                     | 76,309  |             |  |             | 84,644  |             |  |             | 68,112  |             |  |   | 30,019  |   |  |   | 157,891 |    |  |   | 202,719   |  
|Acquisition incentive bonuses                                                                       |  |                                                     |        |             |  |             |        |             |  |             | 26,789  |             |  |   |        |   |  |   |        |    |  |   |          |  
|Depreciation and amortization                                                                       |  |                                                     | 5,405   |             |  |             | 4,805   |             |  |             | 4,475   |             |  |   | 1,926   |   |  |   | 12,974  |    |  |   | 19,172    |  
|Amortization of goodwill                                                                            |  |                                                     |        |             |  |             |        |             |  |             |        |             |  |   | 1,687   |   |  |   | 9,223   |    |  |   | 11,125    |  
|                                                                                                    |  |                                                     |         |             |  |             |         |             |  |             |         |             |  |   |         |   |  |   |         |    |  |   |           |  
|Operating earnings (loss)                                                                           |  |                                                     | 9,878   |             |  |             | 25,242  |             |  |             | (16,849 | )           |  |   | 15,308  |   |  |   | 5,614   |    |  |   | 34,087    |  
|Interest expense, net                                                                               |  |                                                     | 5,620   |             |  |             | 3,544   |             |  |             | 972     |             |  |   | 3,123   |   |  |   | 23,411  |    |  |   | 19,452    |  
|                                                                                                    |  |                                                     |         |             |  |             |         |             |  |             |         |             |  |   |         |   |  |   |         |    |  |   |           |  
|Earnings (loss) before income taxes                                                                 |  |                                                     | 4,258   |             |  |             | 21,698  |             |  |             | (17,821 | )           |  |   | 12,185  |   |  |   | (17,797 | )  |  |   | 14,635    |  
|Income tax expense (benefit)(1)                                                                     |  |                                                     |        |             |  |             |        |             |  |             |        |             |  |   | 4,968   |   |  |   | (5,836  | )  |  |   | 7,675     |  
|Pro forma income tax expense (benefit)(2)                                                           |  |                                                     | 1,724   |             |  |             | 8,738   |             |  |             | (7,142  | )           |  |   |        |   |  |   |        |    |  |   |          |  
|                                                                                                    |  |                                                     |         |             |  |             |         |             |  |             |         |             |  |   |         |   |  |   |         |    |  |   |           |  
|Net earnings (loss)(3)                                                                              |  | $                                                   | 2,534   |             |  | $           | 12,960  |             |  | $           | (10,679 | )           |  | $ | 7,217   |   |  | $ | (11,961 | )  |  | $ | 6,960     |  
|                                                                                                    |  |                                                     |         |             |  |             |         |             |  |             |         |             |  |   |         |   |  |   |         |    |  |   |           |  
|Net earnings (loss) per share 
	basic(3)                                                           |  |                                                     |         |             |  |             |         |             |  |             |         |             |  | $ | 0.20    |   |  | $ | (0.33   | )  |  | $ | 0.19      |  
|                                                                                                    |  |                                                     |         |             |  |             |         |             |  |             |         |             |  |   |         |   |  |   |         |    |  |   |           |  
|Weighted average shares outstanding 
	basic                                                        |  |                                                     |         |             |  |             |         |             |  |             |         |             |  |   | 36,009  |   |  |   | 36,009  |    |  |   | 36,009    |  
|                                                                                                    |  |                                                     |         |             |  |             |         |             |  |             |         |             |  |   |         |   |  |   |         |    |  |   |           |  
|Net earnings (loss) per share 
	diluted(3)                                                         |  |                                                     |         |             |  |             |         |             |  |             |         |             |  | $ | 0.20    |   |  | $ | (0.33   | )  |  | $ | 0.18      |  
|                                                                                                    |  |                                                     |         |             |  |             |         |             |  |             |         |             |  |   |         |   |  |   |         |    |  |   |           |  
|Weighted average shares outstanding 
	diluted                                                      |  |                                                     |         |             |  |             |         |             |  |             |         |             |  |   | 36,009  |   |  |   | 36,009  |    |  |   | 39,397    |  
|                                                                                                    |  |                                                     |         |             |  |             |         |             |  |             |         |             |  |   |         |   |  |   |         |    |  |   |           |  
|Other Financial Data:                                                                               |  |                                                     |         |             |  |             |         |             |  |             |         |             |  |   |         |   |  |   |         |    |  |   |           |  
|Net earnings (loss) excluding the after-tax
	effect of goodwill amortization(4)                     |  | $                                                   | 2,534   |             |  | $           | 12,960  |             |  | $           | (10,679 | )           |  | $ | 8,295   |   |  | $ | (5,212  | )  |  | $ | 13,613    |  
|Net earnings (loss) per share excluding the
	after-tax effect of goodwill amortization  diluted(4) |  |                                                     |         |             |  |             |         |             |  |             |         |             |  | $ | 0.23    |   |  | $ | (0.14   | )  |  | $ | 0.35      |  
|Store Operating Data:                                                                               |  |                                                     |         |             |  |             |         |             |  |             |         |             |  |   |         |   |  |   |         |    |  |   |           |  
|Stores open at the end of period                                                                    |  |                                                     | 458     |             |  |             | 473     |             |  |             |         |             |  |   | 526     |   |  |   | 978     |    |  |   | 1,038     |  
|Comparable store sales increase (decrease)(5)                                                       |  |                                                     | N/A     |             |  |             | 22.4    | %           |  |             |         |             |  |   |         |   |  |   | (6.7    | )% |  |   | 32.0      | %
|Inventory turnover                                                                                  |  |                                                     | 4.2     |             |  |             | 4.7     |             |  |             |         |             |  |   |         |   |  |   | 4.6     |    |  |   | 5.2       |  
|Balance Sheet Data:                                                                                 |  |                                                     |         |             |  |             |         |             |  |             |         |             |  |   |         |   |  |   |         |    |  |   |           |  
|Working capital (deficit)                                                                           |  | $                                                   | 27,716  |             |  | $           | 23,635  |             |  | $           | (40,409 | )           |  | $ | (28,849 | ) |  | $ | (1,726  | )  |  | $ | 31,107    |  
|Total assets                                                                                        |  |                                                     | 91,570  |             |  |             | 121,023 |             |  |             | 124,413 |             |  |   | 307,922 |   |  |   | 509,757 |    |  |   | 606,843   |  
|Total debt                                                                                          |  |                                                     | 35,000  |             |  |             | 10,000  |             |  |             |        |             |  |   | 203,613 |   |  |   | 385,148 |    |  |   | 399,623   |  
|Total liabilities                                                                                   |  |                                                     | 82,881  |             |  |             | 91,218  |             |  |             | 140,279 |             |  |   | 316,571 |   |  |   | 530,367 |    |  |   | 610,828   |  
|Stockholders equity (deficit)                                                                      |  |                                                     | 8,689   |             |  |             | 29,805  |             |  |             | (15,866 | )           |  |   | (8,649  | ) |  |   | (20,610 | )  |  |   | (3,985    | )

18



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---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Prior to October 30, 1999, when
	Babbages Etc. LLC was acquired by Barnes & Noble,
	Babbages Etc. LLC was not subject to federal and most
	state income taxes, and its earnings were taxed directly to its
	members. For the fiscal year ended January 31, 1998, there
	was no provision for taxes. For the fiscal year ended
	January 30, 1999 and the 39 weeks ended
	October 30, 1999, the financial statements include only a
	provision for state income taxes for those states in which
	Babbages Etc. LLC was taxed as a C
	corporation. For ease of comparison, provisions for state income
	taxes are included in the pro forma income tax expense
	(benefit), which is described in footnote (2). For periods
	after October 30, 1999, the financial statements reflect
	income tax expense (benefit) as if we were taxed as a
	C corporation on a stand-alone basis.
|   
|(2) | For periods prior to October 30, 1999, the
	pro forma income tax expense (benefit) reflects taxes as if
	we had been a C corporation in all jurisdictions and
	includes certain state income taxes in the amount of $582 and
	$100 for the year ended January 30, 1999 and the
	39 weeks ended October 30, 1999, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(3) | Net earnings (loss) for the periods prior to
	October 30, 1999 reflect pro forma taxes as described in
	footnote (2) above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(4) | Net earnings (loss) excluding the after-tax
	effect of goodwill amortization is presented here to provide
	additional information about our operations. These items should
	be considered in addition to, but not as a substitute for or
	superior to, operating earnings, net earnings, cash flow and
	other measures of financial performance prepared in accordance
	with generally accepted accounting principles.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(5) | Stores are included in our comparable store sales
	base beginning in the 13th month of operation. Comparable store
	sales for the fiscal year ended February 3, 2001 were
	computed using the first 52 weeks of the 53 week
	fiscal year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

Item
7.Managements Discussion
and Analysis of Financial Condition and Results of
Operations

The following discussion should be read in
conjunction with the information contained in our consolidated
financial statements, including the notes thereto. Statements
regarding future economic performance, managements plans
and objectives, and any statements concerning assumptions
related to the foregoing contained in Managements
Discussion and Analysis of Financial Condition and Results of
Operations constitute forward-looking statements. Certain
factors, which may cause actual results to vary materially from
these forward-looking statements, accompany such statements or
appear elsewhere in this Form 10-K, including the factors
disclosed under Business  Risk
Factors.

General

We are the largest specialty retailer of video
game products and PC entertainment software in the United
States. We sell new and used video game hardware, video game
software and accessories, as well as PC entertainment software
and related accessories and other merchandise. As of
February 2, 2002, we operated 1,038 stores, in 49 states,
Puerto Rico and Guam, under the names GameStop, Babbages,
Software Etc. and FuncoLand. We also operate an electronic
commerce web site under the name gamestop.com and publish
Game Informer, one of the industrys largest
circulation multi-platform video game magazines in the United
States.

Our fiscal year is composed of 52 or
53 weeks ending on the Saturday closest to January 31.
The fiscal years ended January 29, 2000, or fiscal
1999, and February 2, 2002, or fiscal
2001, consisted of 52 weeks and the fiscal year ended
February 3, 2001, or fiscal 2000, consisted of
53 weeks.

Our wholly-owned subsidiary, Babbages Etc.,
began operations in November 1996. In October 1999,
Babbages Etc. was acquired by, and became a wholly-owned
subsidiary of, Barnes & Noble. Because our financial
statements subsequent to the acquisition by Barnes & Noble
are not directly comparable to those prior to the acquisition,
the financial statements included elsewhere in this
Form 10-K make a distinction between the predecessor
company and the successor company. The
statement of operations data presented below for fiscal 1999 and
any references to fiscal 1999 consist of the results of
operations for the

19



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##### 



predecessor company for the 39 weeks ended
October 30, 1999 and the results of operations for the
successor company for the 13 weeks ended January 29,
2000. However, for purposes of managements discussion and
analysis of results of operations, the year ended
January 29, 2000 for the predecessor and successor company
combined is being compared to fiscal year 2000. In June 2000,
Barnes & Noble acquired Funco, Inc. and thereafter,
Babbages Etc. became a wholly-owned subsidiary of Funco.
In December 2000, Funco changed its name to GameStop, Inc.


Growth in the video game industry is driven by
the introduction of new technology. Within the past
18 months, four new video game platforms have been
introduced. In October 2000, Sony introduced PlayStation 2
and in June 2001 Nintendo introduced Game Boy Advance. Microsoft
introduced Xbox and Nintendo introduced GameCube in November
2001. As is typical following the introduction of new video game
platforms, we expect that the sales of these four platforms and
related software and accessories will increase in the future. In
contrast, we expect the sales of PlayStation, Nintendo 64 and
Dreamcast products to continue to decline as is typically the
trend with older video game platforms when new platforms are
anticipated or introduced. Sales of new video game hardware
generally increase as a percentage of sales in the first full
year following the introduction of next generation platforms. As
video game platforms mature, the sales mix attributable to
complementary video game software and accessories, which
generate higher gross margins, generally increases in the second
and third years. The net effect is generally a decline in gross
margins in the first full year following new platform releases
and an increase in gross margins in the second and third years.

Based upon the terms of the acquisition of
Babbages Etc. by Barnes & Noble, in March 2002, Barnes
& Noble made an additional payment of approximately
$9.7 million to the former Babbages Etc. members
because certain financial targets were met by us in the fiscal
year ended February 2, 2002 and, under push-down accounting
rules, as of February 2, 2002, we recognized additional
goodwill of approximately $9.7 million with a corresponding
increase in additional paid-in-capital.

Prior to its acquisition by Barnes &
Noble in October 1999, Babbages Etc., as a limited
liability company, was not subject to federal and most state
income taxes and its earnings were taxed directly to its
members. Effective in the fourth quarter of fiscal 1999 and for
all periods subsequent to that time, we recorded taxes as a
C corporation on a stand-alone basis.

Critical Accounting Policies

The Company believes that the following are its
most significant accounting polices which are important in
determining the reporting of transactions and events.

Use of Estimates.The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. In preparing these
financial statements, management has made its best estimates and
judgments of certain amounts included in the financial
statements, giving due consideration to materiality. Changes in
the estimates and assumptions used by management could have
significant impact on the Companys financial results.
Actual results could differ from those estimates.

Revenue Recognition.Revenue from the sales of the
Companys products is recognized at the time of sale. The
sales of used video game products are recorded at the retail
price charged to the customer. Sales returns (which are not
significant) are recognized at the time returns are made.
Subscription and advertising revenues are recorded upon release
of magazines for sale to consumers and are stated net of sales
discounts. Magazine subscription revenue is recognized on a
straight-line basis over the subscription period.

Merchandise
Inventories.Our merchandise
inventories are carried at the lower of cost or market using the
average cost method. Used video game products traded in by
customers are recorded as inventory at the amount of the store
credit given to the customer. In valuing inventory, management
is required to make

20



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##### 



assumptions regarding the necessity of reserves
required to value potentially obsolete or over-valued items at
the lower of cost or market. Management considers quantities on
hand, recent sales, potential price protections and returns to
vendors, among other factors, when making these assumptions.


Impairment of Long Lived Assets.The Companys long-lived assets
include property and equipment and goodwill. At February 2,
2002, the Company had $51.6 million of property and equipment,
net of accumulated depreciation and $318.0 million of goodwill,
net of amortization, accounting for approximately 60.9% of the
Companys total assets. The goodwill was recorded in the
acquisition of Funco, Inc. and through the application of
push-down accounting in accordance with SAB 54 in
connection with the acquisition of Babbages Etc. LLC by a
subsidiary of Barnes & Noble. Goodwill represents the
excess purchase price over tangible net assets acquired and is
being amortized on a straight-line basis over a 30-year period.
The amortization of goodwill associated with the acquisition of
Babbages Etc. is deductible for tax purposes, whereas the
amortization of goodwill associated with the Funco acquisition
is not deductible for tax purposes. This non-deductible goodwill
amortization affects our effective tax rate as a stand-alone
corporation. The Company periodically reviews its long-lived
assets for impairment whenever events or changes in
circumstances indicate that their carrying amounts may not be
recoverable or their depreciation or amortization periods should
be accelerated. The Company assesses recoverability based on
several factors, including managements intention with
respect to its stores and those stores projected
undiscounted cash flows. An impairment loss would be recognized
for the amount by which the carrying amount of the assets
exceeds the present value of their projected cash flows. No
write-downs have been necessary through February 2, 2002.
For a further discussion, see Recent Accounting Pronouncements.

Results of Operations

The following table sets forth certain income
statement items as a percentage of sales for the periods
indicated:

|                                             |  |             |       |             |  |             |       |    |  |  |       |  
|-------------------------------------------- |  | ----------- | ----- | ----------- |  | ----------- | ----- | -- |  |  | ----- | -
|                                             |  | Fiscal Year |       | Fiscal Year |  | Fiscal Year
|                                             |  | Ended       |       | Ended       |  | Ended      
|                                             |  | January 29, |       | February 3, |  | February 2,
|                                             |  | 2000        |       | 2001        |  | 2002       
|                                             |  |             |       |             |  |            
|Statement of Operations Data:                |  |             |       |             |  |             |       |    |  |  |       |  
|Sales                                        |  |             | 100.0 | %           |  |             | 100.0 | %  |  |  | 100.0 | %
|Cost of sales                                |  |             | 76.2  |             |  |             | 75.5  |    |  |  | 76.2  |  
|                                             |  |             |       |             |  |             |       |    |  |  |       |  
|Gross profit                                 |  |             | 23.8  |             |  |             | 24.5  |    |  |  | 23.8  |  
|Selling, general and administrative expenses |  |             | 17.7  |             |  |             | 20.9  |    |  |  | 18.1  |  
|Acquisition incentive bonuses                |  |             | 4.9   |             |  |             |      |    |  |  |      |  
|Depreciation and amortization                |  |             | 1.2   |             |  |             | 1.7   |    |  |  | 1.7   |  
|Amortization of goodwill                     |  |             | 0.3   |             |  |             | 1.2   |    |  |  | 1.0   |  
|                                             |  |             |       |             |  |             |       |    |  |  |       |  
|Operating earnings (loss)                    |  |             | (0.3  | )           |  |             | 0.7   |    |  |  | 3.0   |  
|Interest expense, net                        |  |             | 0.7   |             |  |             | 3.1   |    |  |  | 1.7   |  
|                                             |  |             |       |             |  |             |       |    |  |  |       |  
|Earnings (loss) before income taxes          |  |             | (1.0  | )           |  |             | (2.4  | )  |  |  | 1.3   |  
|Income tax expense (benefit)                 |  |             | (0.4  | )           |  |             | (0.8  | )  |  |  | 0.7   |  
|                                             |  |             |       |             |  |             |       |    |  |  |       |  
|Net earnings (loss)                          |  |             | (0.6  | )%          |  |             | (1.6  | )% |  |  | 0.6   | %
|                                             |  |             |       |             |  |             |       |    |  |  |       |  

21



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The results of the predecessor company for the
39 weeks ended October 30, 1999 have been combined
with the results for the successor company for the 13 weeks
ended January 29, 2000 to facilitate comparison to results
for the fiscal year ended February 3, 2001. The combination
of such results are set forth below:

|                                             |  |                |         |             |  |             |         |  |  |   |         |  
|-------------------------------------------- |  | -------------- | ------- | ----------- |  | ----------- | ------- |  |  | - | ------- | -
|                                             |  | Predecessor    |         | Successor   |  | Combined   
|                                             |  |                |         |             |  |            
|                                             |  | 39 Weeks       |         | 13 Weeks    |  | Fiscal Year
|                                             |  | Ended          |         | Ended       |  | Ended      
|                                             |  | October 30,    |         | January 29, |  | January 29,
|                                             |  | 1999           |         | 2000        |  | 2000       
|                                             |  |                |         |             |  |            
|                                             |  |               
|                                             |  | (In thousands)
|Sales                                        |  | $              | 329,392 |             |  | $           | 223,748 |  |  | $ | 553,140 |  
|Cost of sales                                |  |                | 246,865 |             |  |             | 174,808 |  |  |   | 421,673 |  
|                                             |  |                |         |             |  |             |         |  |  |   |         |  
|Gross profit                                 |  |                | 82,527  |             |  |             | 48,940  |  |  |   | 131,467 |  
|Selling, general and administrative expenses |  |                | 68,112  |             |  |             | 30,019  |  |  |   | 98,131  |  
|Acquisition incentive bonuses                |  |                | 26,789  |             |  |             |        |  |  |   | 26,789  |  
|Depreciation and amortization                |  |                | 4,475   |             |  |             | 1,926   |  |  |   | 6,401   |  
|Amortization of goodwill                     |  |                |        |             |  |             | 1,687   |  |  |   | 1,687   |  
|                                             |  |                |         |             |  |             |         |  |  |   |         |  
|Operating earnings (loss)                    |  |                | (16,849 | )           |  |             | 15,308  |  |  |   | (1,541  | )
|Interest expense, net                        |  |                | 972     |             |  |             | 3,123   |  |  |   | 4,095   |  
|                                             |  |                |         |             |  |             |         |  |  |   |         |  
|Earnings (loss) before income taxes          |  |                | (17,821 | )           |  |             | 12,185  |  |  |   | (5,636  | )
|Income tax expense (benefit)                 |  |                | (7,142  | )           |  |             | 4,968   |  |  |   | (2,174  | )
|                                             |  |                |         |             |  |             |         |  |  |   |         |  
|Net earnings (loss)                          |  | $              | (10,679 | )           |  | $           | 7,217   |  |  | $ | (3,462  | )
|                                             |  |                |         |             |  |             |         |  |  |   |         |  

Fiscal 2001
Compared to Fiscal 2000

Sales increased by $364.4 million, or 48.2%,
from $756.7 million in fiscal 2000 to $1,121.1 million
in fiscal 2001. The increase in sales was primarily attributable
to the acquisition of Funco in June 2000 and the related sales
for the full year in fiscal 2001, compared to Funco sales for
only 33 weeks included in fiscal 2000. Sales from the
acquired FuncoLand stores and related magazine and e-commerce
operations accounted for $189.3 million of the
$364.4 million increase in sales. Sales also increased due
to a $137.3 million increase in comparable store sales in
the stores operated by the Company at the time of the Funco
acquisition and opened by the Company in fiscal 2000 subsequent
to the acquisition of Funco, and the additional sales resulting
from 60 net new stores opened since February 3, 2001.
Stores are included in our comparable store sales base beginning
in the thirteenth month of operation. The comparable store sales
increase of 32.0% was primarily due to sales of
PlayStation 2, Game Boy Advance, Xbox and GameCube
hardware, software and accessories, following the launch of
these new video game platforms in October 2000, June 2001, and
November 2001, respectively. The sales of these new hardware
platforms and related products were partially offset by sales
declines in PlayStation, Nintendo 64, Dreamcast and PC
entertainment software from the corresponding period a year ago.

Cost of sales increased by $283.0 million,
or 49.6%, from $571.0 million in fiscal 2000 to
$854.0 million in fiscal 2001. Cost of sales as a
percentage of net sales increased from 75.5% in fiscal 2000 to
76.2% in fiscal 2001. The margin gains achieved from the sales
of higher margin used video game products, which resulted from
the acquisition of Funco, were offset by margin declines
associated with the increased sales of lower margin video game
hardware.

Selling, general and administrative expenses
increased by $44.8 million, or 28.4%, from
$157.9 million in fiscal 2000 to $202.7 million in
fiscal 2001. The increase was primarily attributable to the
increase in the number of stores in operation following the
Funco acquisition in June 2000 and the related increases in
store, distribution, and corporate office operating expenses.
Selling, general and administrative expenses as a percentage of
sales decreased from 20.9% in fiscal 2000 to 18.1% in fiscal
2001. The decrease in selling, general and administrative
expenses as a percentage of sales was due to the economies
achieved in distribution

22



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and corporate operating expenses after the
integration of the Funco acquisition and the store operating
efficiencies gained as a result of the increase in comparable
store sales.


Depreciation and amortization expense increased
from $13.0 million for fiscal 2000 to $19.2 million in
fiscal 2001. This increase of $6.2 million was due to the
acquisition of Funco and capital expenditures for new stores,
management information systems and distribution center
enhancements.

Amortization of goodwill increased from
$9.2 million in fiscal 2000 to $11.1 million in fiscal
2001 due to the Funco acquisition. The related goodwill was
amortized for the full year in fiscal 2001 compared to
33 weeks in 2000.

Interest expense, net of interest income,
decreased by $3.9 million, or 16.7%, from
$23.4 million in fiscal 2000 to $19.5 million in
fiscal 2001. The decrease was attributable to decreases in
average borrowing rates.

Income tax benefit of $5.8 million was
recorded during fiscal 2000 compared to income tax expense of
$7.7 million in fiscal 2001.

Fiscal 2000
Compared to Fiscal 1999

Sales increased by $203.6 million, or 36.8%,
from $553.1 million in fiscal 1999 to $756.7 million
in fiscal 2000. The increase in sales was primarily attributable
to the additional sales volume from the acquisition of Funco in
June 2000. Sales from the 406 acquired FuncoLand stores and
related magazine and e-commerce operations accounted for
$167.8 million of the $203.6 million increase in
sales. Sales also increased due to the 46 net new stores opened
during fiscal 2000 and because fiscal 2000 included
53 weeks of sales compared to 52 weeks in fiscal 1999.
Offsetting these increases in sales was a decrease in comparable
stores sales of 6.7% for the year. Comparable store sales
decreased due to declines in sales of PlayStation and
Nintendo 64 hardware and software, action figures and
trading cards, and PC education and productivity software, which
were partially offset by increases in PlayStation 2 video
game hardware and software, Dreamcast and Game Boy video game
software and PC entertainment software. PlayStation 2
product availability shortages prior to the holiday selling
season resulted in less than expected sales during the fourth
quarter of fiscal 2000.

Cost of sales increased by 35.4%, or
$149.3 million, from $421.7 million in fiscal 1999 to
$571.0 million in fiscal 2000. As a percentage of sales,
cost of sales decreased from 76.2% in fiscal 1999 to 75.5% in
fiscal 2000. The decrease in cost of sales as a percentage of
sales was primarily attributable to the acquisition of Funco and
the related increase in sales of higher margin used video game
products. These margin gains were offset, to some extent, by
increased sales of low margin PlayStation 2 hardware and
decreased sales of high margin action figures and trading cards.

Selling, general and administrative expenses
increased $59.8 million, or 61.0%, from $98.1 million
in fiscal 1999 to $157.9 million in fiscal 2000. The
increase was due primarily to the Funco acquisition and the
related costs to integrate corporate and distribution functions.
As a percentage of sales, selling, general and administrative
expenses increased from 17.7% in fiscal 1999 to 20.9% in fiscal
2000. The increase in selling, general and administrative
expenses as a percentage of sales was primarily attributable to
additional distribution, corporate and store operating expenses
during the integration of the Funco acquisition as well as a
decrease in comparable store sales.

In October 1999, the predecessor company
authorized a $26.8 million bonus to employees upon the sale
of the company to Barnes & Noble.

Depreciation and amortization expense increased
from $6.4 million in fiscal 1999 to $13.0 million in
fiscal 2000. The $6.6 million increase was primarily
attributable to the Funco acquisition, capital expenditures for
new store openings, remodeling of existing stores and management
information systems and distribution center enhancements.

Amortization of goodwill increased from
$1.7 million to $9.2 million due to the goodwill
associated with the acquisition of Babbages Etc. by
Barnes & Noble in October 1999 and due to the Funco
acquisition in June 2000. The goodwill generated from the
acquisition of Babbages Etc. was amortized for only three

23



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months in fiscal 1999 compared to the full year
in fiscal 2000. In addition, during fiscal 2000, the goodwill
related to the Funco acquisition was amortized from the date of
acquisition through February 3, 2001.


Interest expense, net of interest income,
increased by $19.3 million from $4.1 million in fiscal
1999 to $23.4 million in fiscal 2000. The increase was due
to the $202.4 million of intercompany debt associated with
the acquisition of Babbages Etc. by Barnes & Noble in
October 1999 and the additional $159.1 million of
intercompany debt incurred as a result of the acquisition of
Funco in June 2000. The debt incurred as a result of the
acquisition of Babbages Etc. accrued interest for only
three months in fiscal 1999 compared to the full year in fiscal
2000. In addition, the fiscal 2000 results reflect interest on
the debt related to the Funco acquisition from June 15,
2000 through February 3, 2001.

Income tax benefit, which reflects income taxes
as if we were taxed as a C corporation on a
stand-alone basis, increased from $2.2 million in fiscal
1999 on a pro forma basis to $5.8 million in fiscal 2000.

Liquidity and Capital Resources

The following table sets forth our contractual
obligations:

|                 |  |                        |       |           |  |           |      |           |  |         |      |  |  |   |      |  |  |   |      | 
|---------------- |  | ---------------------- | ----- | --------- |  | --------- | ---- | --------- |  | ------- | ---- |  |  | - | ---- |  |  | - | ---- | 
|                 |  |                       
|                 |  | Payments Due by Period
|                 |  |                       
|                 |  |                        |       | Less than |  |           |      | After    
|                 |  | Total                  |       | 1 Year    |  | 1-3 Years |      | 4-5 Years |  | 5 Years
|                 |  |                        |       |           |  |           |      |           |  |        
|Operating Leases |  | $                      | 176.0 |           |  | $         | 39.0 |           |  | $       | 56.0 |  |  | $ | 37.0 |  |  | $ | 44.0 | 

We have no other commercial commitments such as
lines of credit, standby letters of credit, guarantees, or
standby repurchase obligations outstanding.

We have historically financed our operations
through a combination of cash flow generated from operations and
external borrowings. Subsequent to our acquisition by Barnes
& Noble in October 1999, our operations were funded by cash
flows from operations and advances from Barnes & Noble.
Those advances were treated as an intercompany loan owed to
Barnes & Noble by us. As of February 2, 2002, we were
indebted to Barnes & Noble in the amount of
$399.6 million. Upon closing the common stock offering in
February 2002, Barnes & Noble contributed the
difference between the aggregate amount of the intercompany
loans and $250.0 million as additional paid-in-capital. The
amount of the capital contribution was $150.0 million.

During fiscal 2001, cash provided by operations
was $78.1 million, compared to cash used in operations of
$0.5 million in fiscal 2000. In fiscal 2001, cash provided
by operations was primarily due to increases in accounts
payable, offset partially by increases in merchandise
inventories. Cash used in operations in fiscal 2000 was
primarily the result of net purchases of merchandise inventories.

Cash used in investing activities was
$180.7 million and $20.5 million during fiscal 2000
and fiscal 2001, respectively. In fiscal 2000, we used
$156.8 million to purchase Funco. During fiscal 2000 and
2001, we had capital expenditures of $25.1 million and
$20.5 million, respectively, to open new stores, remodel
existing stores, and invest in information systems. Our future
capital requirements will depend on the number of new stores we
open and the timing of those openings within a given fiscal
year. We opened 74 stores in fiscal 2001 and expect to open
between 150 and 200 stores in fiscal 2002. Projected capital
expenditures for fiscal 2002 are $35 million, to be used
primarily to fund new store openings.

On February 13, 2002, we entered into a
senior secured revolving credit facility with a syndicate of
banks, with Fleet National Bank as administrative agent. The
credit facility is a three-year revolving facility in an

24



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aggregate principal amount of $75.0 million.
Drawings under the credit facility will be subject to
satisfaction of customary conditions precedent, including
absence of a default and continued accuracy of representations
and warranties.


Loans incurred under the credit facility will be
maintained from time to time, at our option, as (1) base
rate loans which bear interest at the base rate (defined in the
credit facility as the higher of (a) the administrative
agents announced base rate or (b)  1/2 of 1% in
excess of the federal funds effective rate, each as in effect
from time to time) and (2) LIBOR loans bearing interest at
the LIBOR rate for the applicable interest period, in each case
plus an applicable interest margin. The applicable interest
margin will initially be 0.25% for base rate loans and 1.75% for
LIBOR rate loans, and in each case will thereafter vary
depending on our fixed charge coverage ratio.

We are required to reduce the outstanding amounts
under the credit facility to zero for 30 consecutive days each
year during the three-month period of December through February.

We are subject to certain affirmative and
negative covenants contained in the credit facility, including,
but not limited to, covenants that restrict, subject to
specified exceptions: the incurrence of additional indebtedness
and other obligations and the granting of additional liens,
mergers, acquisitions, investments and disposition of assets,
dividends, engaging in certain transactions with affiliates,
capital expenditures, and the use of proceeds of the credit
facility. There are also covenants relating to compliance with
certain laws, payment of taxes and rights and maintenance of
insurance and financial reporting. In addition, the credit
facility requires us to maintain compliance with certain
specified financial ratios, including covenants relating to
minimum fixed charge coverage and maximum leverage.

Events of default under the credit facility
include (subject to grace periods and notice provisions in
certain circumstances) non-payment of principal, interest or
fees, violation of covenants, inaccuracy of any representation
or warranty in any material respect, default under or
acceleration of certain other indebtedness, bankruptcy and
insolvency events, certain judgments and other liabilities,
certain environmental claims and a change of control. If an
event of default occurs, the lenders under the credit facility
will be entitled to take various actions, including the
acceleration of amounts due under the credit facility and
requiring that all such amounts be immediately paid in full.

Our obligations under the credit facility will be
secured by all assets owned by us and our subsidiaries. Based on
our current operating plans, we believe that cash generated from
our operating activities, available borrowings under our credit
facility and the cash proceeds from the initial public offering
will be sufficient to fund our operations, store expansion and
remodeling activities and corporate capital expenditure programs
for at least the next 12 months. There have been no
borrowings under the credit facility.

Impact of Inflation

We do not believe that inflation has had a
material effect on our net sales or results of operations.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards
Board finalized FASB Statements No. 141, Business
Combinations(SFAS 141), No. 142,
Goodwill and Other Intangible Assets(SFAS 142), No. 143, Accounting for
Asset Retirement Obligations(SFAS 143) and
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets(SFAS 144).

SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS 141
also requires that we recognize acquired intangible assets apart
from goodwill if the acquired intangible assets meet certain
criteria. SFAS 141 applies to all business combinations
initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that we reclassify the
carrying amounts of certain intangible assets and goodwill based
on the criteria in SFAS 141.

25



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SFAS 142 requires, among other things, that
companies no longer amortize goodwill, but instead test goodwill
for impairment at least annually. In addition, SFAS 142
requires that we identify reporting units for the purposes of
assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and
cease amortization of intangible assets with an indefinite
useful life. An intangible asset with an indefinite useful life
should be tested for impairment in accordance with the guidance
in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all
goodwill and other intangible assets recognized at that date,
regardless of when those assets were initially recognized.
SFAS 142 requires us to complete a transitional goodwill
impairment test six months from the date of adoption. We are
also required to reassess the useful lives of other intangible
assets within the first interim quarter after adoption of
SFAS 142. We intend to complete the transitional goodwill
impairment test within six months from the date of adoption.
Currently, we are assessing but have not yet determined how the
adoption of SFAS 141 and SFAS 142 will impact our
financial position and results of operations.

SFAS 143 requires that the fair value for an
asset retirement obligation be recognized in the period in which
it is incurred if a reasonable estimate of fair value can be
made, and that the carrying amount of the asset, including
capitalized asset retirement costs, be tested for impairment.
SFAS 143 is effective for fiscal years beginning after
June 15, 2002. Management does not believe this statement
will have a material effect on the Companys financial
position or results of operations.

SFAS 144 prescribes financial accounting and
reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of, and specifies when to test
a long-lived asset for recoverability. SFAS 144 is
effective for fiscal years beginning after December 15,
2001. Management does not believe this statement will have a
material effect on the Companys financial position or
results of operations.

Seasonality

Our business, like that of many retailers, is
seasonal, with the major portion of sales and operating profit
realized during the fourth quarter which includes the holiday
selling season. Results for any quarter are not necessarily
indicative of the results that may be achieved for a full fiscal
year. Quarterly results may fluctuate materially depending upon,
among other factors, the timing of new product introductions and
new store openings, sales contributed by new stores, increases
or decreases in comparable store sales, adverse weather
conditions, shifts in the timing of certain holidays or
promotions and changes in our merchandise mix.

Disclosure Regarding Forward-looking
Statements

This report on Form 10-K and other oral and
written statements made by the Company to the public contain
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the
Securities Act), and Section 21E of the
Securities Exchange Act of 1934. The forward-looking statements
involve a number of risks and uncertainties. A number of factors
could cause our actual results, performance, achievements or
industry results to be materially different from any future
results, performance or achievements expressed or implied by
these forward-looking statements. These factors include, but are
not limited to:



| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | our reliance on suppliers and vendors for new
	product releases;                                                   
|
| |  | economic conditions affecting the electronic game
	industry;                                                       
|
| |  | the competitive environment in the electronic
	game industry;                                                      
|
| |  | our ability to open and operate new stores;                                                                        
|
| |  | our ability to attract and retain qualified
	personnel; and                                                        
|
| |  | other factors described in this Form 10-K,
	including those set forth under the caption
	Business  Risk Factors.

In some cases, forward-looking statements can be
identified by the use of terms such as anticipates,
believes, continues, could,
estimates, expects, intends,
may, plans, potential,
predicts,

26



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##### 



will, should,
seeks, pro forma or similar expressions.
These statements are only predictions and involve known and
unknown risks, uncertainties and other factors that may cause
our or our industrys actual results, levels of activity,
performance or achievements to be materially different from any
future results, levels of activity, performance or achievements
expressed or implied by such forward-looking statements. You
should not place undue reliance on these forward-looking
statements.


Although we believe that the expectations
reflected in our forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance
or achievements. We undertake no obligation to publicly update
or revise any forward-looking statements, whether as a result of
new information, future events or otherwise after the date of
this Form 10-K. In light of these risks and uncertainties,
the forward-looking events and circumstances contained in this
Form 10-K may not occur, causing actual results to differ
materially from those anticipated or implied by our
forward-looking statements.

Item
7A.Quantitative and Qualitative
Disclosures About Market Risk

We do not use derivative financial instruments to
hedge interest rate exposure. We limit our interest rate risks
by investing our excess cash balances in short-term,
highly-liquid instruments with an original maturity of three
months or less. We do not expect any material losses from our
invested cash balances and we believe that our interest rate
exposure is modest.

We do not have any foreign currency exposure as
all of our business is transacted in United States currency.

Item
8.Consolidated Financial
Statements and Supplementary Data

See Item 14(a)(1) and (2) of this
Form 10-K.

Item
9.Changes in and Disagreements
with Accountants on Accounting and Financial
Disclosure

None.

PART III

Item 10.     Directors
and Executive Officers of the Registrant

Executive Officers and Directors

The following table sets forth the names and ages
of our directors and executive officers and the positions they
hold:

|                    |  |     |    |          |  |                                                                           
|------------------- |  | --- | -- | -------- |  | --------------------------------------------------------------------------
|Name                |  | Age |    | Position
|                    |  |     |    |         
|R. Richard Fontaine |  |     | 60 |          |  | Chairman of the Board, Chief Executive Officer
	and Director              
|Daniel A. DeMatteo  |  |     | 54 |          |  | President and Chief Operating Officer                                     
|David W. Carlson    |  |     | 39 |          |  | Executive Vice President, Chief Financial Officer
	and Assistant Secretary
|John W. Woodson     |  |     | 39 |          |  | President of Strip Center Stores                                          
|Leonard Riggio      |  |     | 61 |          |  | Director                                                                  
|Michael N. Rosen    |  |     | 61 |          |  | Secretary and Director                                                    

R. Richard Fontaineis our Chairman of the Board, Chief
Executive Officer and a director. Mr. Fontaine has served
as the Chief Executive Officer of GameStop, Inc. since its
acquisition by Barnes & Noble in June 2000.
Mr. Fontaine has also been Chief Executive Officer of
Babbages Etc. since its formation in November 1996. Prior
to November 1996, Mr. Fontaine held positions at B. Dalton
Bookseller, Inc. (B. Dalton), Software Etc.
Stores, Inc. (Software Etc.), Michaels Stores Inc.
and Ingram Distribution.

27



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##### 



Daniel A. DeMatteois our President and Chief Operating
Officer. Mr. DeMatteo has served in the same capacities for
GameStop, Inc. since its acquisition by Barnes & Noble in
June 2000. Mr. DeMatteo has been President and Chief
Operating Officer of Babbages Etc. since its formation in
November 1996. Mr. DeMatteo has also served in various
positions with Software Etc. and B. Dalton. Prior to
joining B. Dalton, Mr. DeMatteo was the Vice President
of MIS for Super Valu Inc.

David W. Carlsonis
our Executive Vice President, Chief Financial Officer and
Assistant Secretary. Mr. Carlson has served in the same
capacities for GameStop, Inc. since its acquisition by
Barnes & Noble in June 2000. Mr. Carlson has been
Vice President and Chief Financial Officer of Babbages
Etc. since its formation in November 1996. Mr. Carlson has
held various positions within Barnes & Noble since
1989, including Director of Finance, Director of Accounting and
Manager of Financial Reporting. Prior to 1989, Mr. Carlson
held various positions with the public accounting firm of KPMG
Peat Marwick.

John W. Woodsonhas
been our President of Strip Center Stores since June 2000. From
August 1999 to June 2000, Mr. Woodson was Vice President of
CompUSA.com, and from July 1997 to August 1999, he served as the
Senior Vice President of Retail Marketing at Associates First
Capital. Prior to that, Mr. Woodson was Vice President of
Technology for Key Corp.

Leonard Riggiois a
director. Mr. Riggio was the Chairman of the Board of
GameStop, Inc. since its acquisition by Barnes & Noble
in June 2000 and of Babbages Etc. since he formed it in
November 1996 until the completion of our common stock offering
in February 2002. Mr. Riggio has been Chairman of the Board
and a principal stockholder of Barnes & Noble since its
inception in 1986 and served as Chief Executive Officer from its
inception in 1986 until February 2002. In addition,
Mr. Riggio has been Chairman of the Board of
barnesandnoble.com inc. (Barnes &
Noble.com) since its inception in February 1997. Since
1965, Mr. Riggio has been Chairman of the Board, Chief
Executive Officer and the principal stockholder of
Barnes & Noble College Bookstores, Inc., one of the
largest operators of college bookstores in the country. Since
1985, Mr. Riggio has been Chairman of the Board and a
principal beneficial owner of MBS Textbook Exchange, Inc., one
of the nations largest wholesalers of college textbooks.

Michael N. Rosenis
our Secretary and a director. Mr. Rosen has served in the
same capacities for GameStop, Inc. since its acquisition by
Barnes & Noble in June 2000. Mr. Rosen has also
been Secretary of Babbages Etc. since its acquisition by
Barnes & Noble in October 1999. Mr. Rosen has been
Chairman of Robinson Silverman Pearce Aronsohn & Berman LLP,
counsel to our company, for more than the past five years.
Mr. Rosen is also a director of Barnes & Noble and
Barnes & Noble.com.

Board of Directors

Our board of directors currently consists of
three directors. We expect to appoint additional directors,
including at least three independent directors.

Our certificate of incorporation divides our
board of directors into three classes: Class I, whose terms
will expire at the annual meeting of stockholders to be held in
2003, Class II, whose terms will expire at the annual
meeting of stockholders to be held in 2004, and Class III,
whose terms will expire at the annual meeting of stockholders to
be held in 2005. Michael N. Rosen is in Class I; R. Richard
Fontaine is in Class II; and Leonard Riggio is in
Class III. At each annual meeting of stockholders beginning
in 2003, the successors to directors whose terms will then
expire will be elected to serve from the time of election and
qualification until the third annual meeting following election.

In addition, our certificate of incorporation
provides that the authorized number of directors may be changed
only by resolution of the board of directors. Any additional
directorships resulting from an increase in the number of
directors will be distributed among the three classes so that,
as nearly as possible, each class will consist of one-third of
the total number of directors.

Executive Officers

Our executive officers are elected by our board
of directors on an annual basis and serve until the next annual
meeting of our board of directors or until their successors have
been duly elected and qualified.

28



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##### 



Board Committees

Our board will establish an audit committee and a
compensation committee. The audit committee will select, subject
to stockholders approval, the independent public
accountants to audit our annual financial statements and will
establish the scope of, and oversee, the annual audit. The
compensation committee will make recommendations to our board
regarding the approval of employment agreements, management and
consultant hiring and executive compensation.

The audit committee and the compensation
committee will each consist of three directors who meet all
requirements imposed by Securities and Exchange Commission rules
and regulations and the rules and regulations of the New York
Stock Exchange. The audit committee will be composed of three
independent directors, each of whom will be able to read and
understand fundamental financial statements, including a
companys balance sheet, income statement and statement of
cash flows. In addition, at least one member of the audit
committee will have accounting or related financial management
expertise. In keeping with New York Stock Exchange listing
requirements, our board of directors will adopt a charter for
our audit committee. We will file this charter at least once
every three years as an appendix to the annual proxy statement
that we will file with the Securities and Exchange Commission.

Our board may establish other committees from
time to time to facilitate the management of the business and
affairs of our company.

Compensation of Directors

Directors who are not employees or officers of
our company or Barnes & Noble will receive compensation in
amounts to be determined. In addition, we will reimburse our
directors for expenses in connection with attendance at board
and committee meetings. Other than with respect to reimbursement
of expenses, directors who are our employees or officers will
not receive additional compensation for their services as
directors.

Compensation Committee Interlocks and Insider
Participation

Our board will establish a compensation
committee. None of our executive officers serves as a member of
the board of directors or compensation committee of any entity
that has one or more executive officers serving as a member of
our board of directors or compensation committee, except that
Leonard Riggio, one of our directors, is also the Chairman of
the Board of Barnes & Noble and Michael Rosen, our Secretary
and a director, is also the Secretary and a director of Barnes
& Noble.

29



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##### 



Item 11.Executive
Compensation

The following table sets forth the compensation
earned during the years indicated by our chief executive officer
and our other four most highly compensated executive officers.
All information set forth in this table reflects compensation
earned by the named individuals for services with Barnes &
Noble and its subsidiaries.

|                    |                           |        |      |                 |     |            |         |                     |  |            |         |                 |  |  |           |         |     |  |         |       |  |   |       |           |          
|------------------- | ------------------------- | ------ | ---- | --------------- | --- | ---------- | ------- | ------------------- |  | ---------- | ------- | --------------- |  |  | --------- | ------- | --- |  | ------- | ----- |  | - | ----- | --------- | ---------
|                    |                           |        |      |                 |     |            |         |                     |  |           
|                    |                           |        |      |                 |     |            |         | Long-Term           |  |           
|                    |                           |        |      |                 |     |            |         | Compensation Awards |  |           
|                    |                           |        |      |                 |     |            |         |                     |  |           
|                    |                           |        |      |                 |     |            |         |                     |  | Securities |         |                
|                    |                           |        |      |                 |     | Securities |         | Underlying          |  |           
|                    |                           |        |      | Annual          |     | Underlying |         | Barnes &            |  |           
|                    |                           |        |      | Compensation(1) |     | GameStop   |         | Noble               |  |           
|Name and            |                           | Fiscal |      |                 |     | Options    |         | Options             |  | All Other 
|Principal Position  |                           | Year   |      | Salary($)       |     | Bonus($)   |         | (Shs.)              |  | (Shs.)     |         | Compensation($)
|                    |                           |        |      |                 |     |            |         |                     |  |            |         |                
|R. Richard Fontaine |                           |        | 2001 |                 |     | $          | 339,552 |                     |  | $          | 681,400 |                 |  |  | 600,000   | (7)     |     |  |        |       |  | $ | 8,945 | (2)      
|                    | Chief Executive Officer   |        |      | 2000            |     |            |         | 328,933             |  |            |         |                |  |  |           | 562,500 | (8) |  |         |      |  |   |       |          |          
|                    |                           |        |      | 1999            |     |            |         | 302,885             |  |            |         | 210,000         |  |  |           |        |     |  |         | 5,229 |  |   |       | 6,048,085 | (2)(3)(5)
|Daniel A. DeMatteo  |                           |        | 2001 |                 |     |            | 282,945 |                     |  |            | 567,800 |                 |  |  | 600,000   | (7)     |     |  |        |       |  |   | 6,963 | (2)      
|                    | President and Chief       |        |      | 2000            |     |            |         | 274,111             |  |            |         |                |  |  |           | 562,500 | (8) |  |         |      |  |   |       |          |          
|                    | Operating Officer         |        |      | 1999            |     |            |         | 252,404             |  |            |         | 175,000         |  |  |           |        |     |  |         | 4,358 |  |   |       | 6,040,883 | (2)(3)(5)
|David W. Carlson    |                           |        | 2001 |                 |     |            | 198,731 |                     |  |            | 225,000 |                 |  |  | 351,000   | (7)     |     |  |        |       |  |   | 7,966 | (2)      
|                    | Executive Vice President, |        |      | 2000            |     |            |         | 187,962             |  |            |         |                |  |  |           | 450,000 | (8) |  |         |      |  |   |       | 6,500     | (2)      
|                    | Chief Financial Officer   |        |      | 1999            |     |            |         | 172,500             |  |            |         | 84,000          |  |  |           |        |     |  |         | 2,988 |  |   |       | 3,762,324 | (2)(4)   
|                    | and Assistant Secretary   |        |      |                 |     |            |         |                     |  |            |         |                 |  |  |           |         |     |  |         |       |  |   |       |           |          
|John W. Woodson     |                           |        | 2001 |                 |     |            | 257,431 |                     |  |            | 175,000 |                 |  |  | 252,000   | (7)     |     |  |        |       |  |   | 6,361 | (2)      
|                    | President of Strip        |        |      | 2000            | (6) |            |         | 134,615             |  |            |         | 100,000         |  |  |           | 450,000 | (8) |  |         |      |  |   |       | 62,820    |          
|                    | Center Stores             |        |      | 1999            |     |            |         |                    |  |            |         |                |  |  |           |        |     |  |         |      |  |   |       |          |          
|Leonard Riggio      |                           |        | 2001 |                 |     |            | 250,000 |                     |  |            | 75,000  |                 |  |  | 4,500,000 | (8)     |     |  | 700,000 |       |  |   |      |          
|                    | Chairman of the Board(9)  |        |      | 2000            |     |            |         | 250,000             |  |            |         | 150,000         |  |  |           |        |     |  |         |      |  |   |       |          |          
|                    |                           |        |      | 1999            |     |            |         | 324,615             |  |            |         | 56,250          |  |  |           |        |     |  |         |      |  |   |       |          |          



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | None of the perquisites or other benefits paid to
	each named executive officer exceeded the lesser of $50,000 or
	10% of the total annual salary and bonus received by each named
	executive officer.                                                                                                                                                                                                                                          
|   
|(2) | Includes contributions under our 401(k) plan.                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(3) | Includes a $6,025,000 bonus in connection with
	the sale of Babbages Etc. to Barnes & Noble.                                                                                                                                                                                                                                                                                                                                                   
|   
|(4) | Includes a $3,750,000 bonus in connection with
	the sale of Babbages Etc. to Barnes & Noble.                                                                                                                                                                                                                                                                                                                                                   
|   
|(5) | Includes insurance premiums paid by us.                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(6) | Mr. Woodson commenced employment with us in
	June 2000. His annual salary was $250,000 for fiscal 2000.
	Mr. Woodson also received a signing bonus upon the
	commencement of his employment with us.                                                                                                                                                                                                                                            
|   
|(7) | Reflects options granted on February 13,
	2002, based on performance for the fiscal year ended
	February 2, 2002.                                                                                                                                                                                                                                                                                                                               
|   
|(8) | The securities underlying GameStop options
	reflect the issuance of replacement options previously issued to
	purchase shares of common stock of GameStop, Inc. and have the
	same economic and vesting terms as the options they replaced.                                                                                                                                                                                                     
|   
|(9) | Leonard Riggio was our Chairman of the Board
	through the fiscal year ended February 2, 2002 and until
	February 12, 2002. The amounts paid through October 1999
	reflect Mr. Riggios annual compensation from
	Babbages Etc. Since Barnes & Nobles acquisition
	of Babbages Etc. in November 1999, a portion of the
	compensation paid to Mr. Riggio by Barnes & Noble was
	allocated to us as selling, general and administrative expense.

Grants of Stock Options in Last Fiscal
Year

The following table shows all grants of options
to acquire shares of Barnes & Noble common stock and our
Class A common stock granted to the executive officers
named in the summary compensation table in the Executive
Compensation section for the year ended February 2,
2002. With the exception of the grant of options to Leonard
Riggio, the grant of options to acquire shares of our
Class A common stock were granted

30



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##### 



on February 13, 2002, based on performance
for the year ended February 2, 2002. The potential
realizable value is calculated based on the term of the option
at its date of grant. It is calculated assuming that the fair
market value of Barnes & Noble common stock and our
Class A common stock on the date of grant appreciates at
the indicated annual rates compounded annually for the entire
term of the option and that the option is exercised and sold on
the last day of its term for the appreciated stock. These
numbers are calculated based on the requirements of the
Securities and Exchange Commission and do not reflect our
estimate of future stock price growth.


|                    |                                   |            |  |           |  |          |  |          |   |            |   |                             |  |         |   |       |  |  |  |         |  |  |   |            |  |  |   |            | 
|------------------- | --------------------------------- | ---------- |  | --------- |  | -------- |  | -------- | - | ---------- | - | --------------------------- |  | ------- | - | ----- |  |  |  | ------- |  |  | - | ---------- |  |  | - | ---------- | 
|                    |                                   |            |  |           |  |          |  |          |   |            |   |                            
|                    |                                   |            |  | % of      |  |          |  |          |   |            |   | Potential Realizable Value 
|                    |                                   | Number of  |  | Total     |  |          |  |          |   |            |   | at Assumed Annual Rates    
|                    |                                   | Securities |  | Options   |  | Exercise |  | Market   |   |            |   | of Stock Price Appreciation
|                    |                                   | Underlying |  | Granted   |  | or Base  |  | Price on |   |            |   | for Option Term            
|                    |                                   | Options    |  | in Fiscal |  | Price    |  | Date of  |   | Expiration |   |                            
|                    |                                   | Granted    |  | Year      |  | ($/Shs.) |  | Grant    |   | Date       |   | 5% ($)                      |  | 10% ($)
|                    |                                   |            |  |           |  |          |  |          |   |            |   |                             |  |        
|R. Richard Fontaine |                                   |            |  |           |  |          |  |          |   |            |   |                             |  |         |   |       |  |  |  |         |  |  |   |            |  |  |   |           
|                    | GameStop Class A common stock     |            |  | 600,000   |  |          |  | 6.7      | % |            | $ | 18.00                       |  |         | $ | 18.00 |  |  |  | 2/12/12 |  |  | $ | 6,792,062  |  |  | $ | 17,212,419 | 
|Daniel A. DeMatteo  |                                   |            |  |           |  |          |  |          |   |            |   |                             |  |         |   |       |  |  |  |         |  |  |   |            |  |  |   |           
|                    | GameStop Class A common stock     |            |  | 600,000   |  |          |  | 6.7      | % |            | $ | 18.00                       |  |         | $ | 18.00 |  |  |  | 2/12/12 |  |  | $ | 6,792,062  |  |  | $ | 17,212,419 | 
|David W. Carlson    |                                   |            |  |           |  |          |  |          |   |            |   |                             |  |         |   |       |  |  |  |         |  |  |   |            |  |  |   |           
|                    | GameStop Class A common stock     |            |  | 351,000   |  |          |  | 3.9      | % |            | $ | 18.00                       |  |         | $ | 18.00 |  |  |  | 2/12/12 |  |  | $ | 3,973,356  |  |  | $ | 10,069,265 | 
|John W. Woodson     |                                   |            |  |           |  |          |  |          |   |            |   |                             |  |         |   |       |  |  |  |         |  |  |   |            |  |  |   |           
|                    | GameStop Class A common stock     |            |  | 252,000   |  |          |  | 2.8      | % |            | $ | 18.00                       |  |         | $ | 18.00 |  |  |  | 2/12/12 |  |  | $ | 2,852,666  |  |  | $ | 7,229,216  | 
|Leonard Riggio      |                                   |            |  |           |  |          |  |          |   |            |   |                             |  |         |   |       |  |  |  |         |  |  |   |            |  |  |   |           
|                    | GameStop Class A common stock     |            |  | 4,500,000 |  |          |  | 50.0     | % |            | $ | 4.51                        |  |         | $ | 4.51  |  |  |  | 6/05/11 |  |  | $ | 12,750,839 |  |  | $ | 32,313,128 | 
|                    | Barnes & Noble, Inc. common stock |            |  | 700,000   |  |          |  | 31.8     | % |            | $ | 23.65                       |  |         | $ | 23.65 |  |  |  | 3/12/11 |  |  | $ | 10,411,351 |  |  | $ | 26,384,406 | 

Fiscal Year End Option Value

The following table provides information for the
executive officers named in the summary compensation table in
the Executive Compensation section regarding
exercises of options to purchase shares of Barnes & Noble
common stock and options to purchase shares of our Class A
common stock during the year ended February 2, 2002 and our
options held as of February 2, 2002 by any of our named
executive officers. The number of shares of our Class A
common stock underlying the options reflects the issuance of
replacement options previously issued to purchase shares of
common stock of GameStop, Inc. and have the same economic and
vesting terms as the options they replaced. The values realized
upon exercise in the table have been calculated using the stock
price at the times of exercise. The year-end values in the table
for Barnes & Noble common stock have been calculated based
on the $33.50 per share closing price of the Barnes &
Noble common stock on February 1, 2002 (the last trading
date of the fiscal year), less the applicable exercise price.
There was no public trading market for our common stock as of
February 2, 2002. Accordingly, the year-end values in the
table for our Class A common stock have been calculated
based on the price at which the

31



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##### 



company completed its public offering of common
stock on February 12, 2002 of $18.00 per share, less the
applicable exercise price.


|                    |                               |             |  |          |  |                            |   |                         |  |             |  |               |  |  |  |         |  |  |   |            |  |  |   |           | 
|------------------- | ----------------------------- | ----------- |  | -------- |  | -------------------------- | - | ----------------------- |  | ----------- |  | ------------- |  |  |  | ------- |  |  | - | ---------- |  |  | - | --------- | 
|                    |                               |             |  |          |  |                            |   |                        
|                    |                               |             |  |          |  | Number of Securities       |   | Value of Unexercised   
|                    |                               |             |  |          |  | Underlying Unexercised     |   | In-the-Money Options at
|                    |                               | Shares      |  |          |  | Options at Fiscal Year End |   | Fiscal Year End(1)(2)  
|                    |                               | Acquired    |  | Value    |  |                            |   |                        
|                    |                               | On Exercise |  | Realized |  | Exercisable                |   | Unexercisable           |  | Exercisable |  | Unexercisable
|                    |                               |             |  |          |  |                            |   |                         |  |             |  |              
|                    |                               |             |  |          |  |                            |   |                        
|                    |                               |             |  |          |  | (Shs.)                     |   | ($)                    
|R. Richard Fontaine |                               |             |  |          |  |                            |   |                         |  |             |  |               |  |  |  |         |  |  |   |            |  |  |   |          
|                    | Barnes & Noble common stock   |             |  |         |  |                            |   |                        |  |             |  | 2,614         |  |  |  | 2,615   |  |  | $ | 36,759     |  |  | $ | 36,773    | 
|                    | GameStop Class A common stock |             |  |         |  |                            |   |                        |  |             |  | 187,500       |  |  |  | 375,000 |  |  |   | 2,713,750  |  |  |   | 5,427,500 | 
|Daniel A. DeMatteo  |                               |             |  |          |  |                            |   |                         |  |             |  |               |  |  |  |         |  |  |   |            |  |  |   |          
|                    | Barnes & Noble common stock   |             |  | 1,089    |  |                            | $ | 17,928                  |  |             |  | 1,090         |  |  |  | 2,179   |  |  |   | 15,321     |  |  |   | 30,642    | 
|                    | GameStop Class A common stock |             |  |         |  |                            |   |                        |  |             |  | 187,500       |  |  |  | 375,000 |  |  |   | 2,713,750  |  |  |   | 5,427,500 | 
|David W. Carlson    |                               |             |  |          |  |                            |   |                         |  |             |  |               |  |  |  |         |  |  |   |            |  |  |   |          
|                    | Barnes & Noble common stock   |             |  | 6,155    |  |                            |   | 99,026                  |  |             |  | 1,494         |  |  |  | 1,494   |  |  |   | 21,009     |  |  |   | 21,009    | 
|                    | GameStop Class A common stock |             |  |         |  |                            |   |                        |  |             |  | 150,000       |  |  |  | 300,000 |  |  |   | 2,171,000  |  |  |   | 4,342,000 | 
|John W. Woodson     |                               |             |  |          |  |                            |   |                         |  |             |  |               |  |  |  |         |  |  |   |            |  |  |   |          
|                    | Barnes & Noble common stock   |             |  |         |  |                            |   |                        |  |             |  |              |  |  |  |        |  |  |   |           |  |  |   |          | 
|                    | GameStop Class A common stock |             |  |         |  |                            |   |                        |  |             |  | 150,000       |  |  |  | 300,000 |  |  |   | 2,171,000  |  |  |   | 4,342,000 | 
|Leonard Riggio      |                               |             |  |          |  |                            |   |                         |  |             |  |               |  |  |  |         |  |  |   |            |  |  |   |          
|                    | Barnes & Noble common stock   |             |  |         |  |                            |   |                        |  |             |  | 1,318,750     |  |  |  | 700,000 |  |  |   | 28,566,502 |  |  |   | 6,895,000 | 
|                    | GameStop Class A common stock |             |  |         |  |                            |   |                        |  |             |  | 4,500,000     |  |  |  |        |  |  |   | 60,725,000 |  |  |   |          | 



---



|    |                                                                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The closing price of Barnes & Noble common
	stock on February 1, 2002 was $33.50 per share.                                                                                                                                                                                                                                                          
|   
|(2) | There was no public trading market for our common
	stock as of February 2, 2002. Accordingly, these values
	have been calculated based on the price at which the company
	completed its public offering of common stock on
	February 12, 2002 of $18.00 per share, less the applicable
	exercise price per share, multiplied by the number of shares.

Stock Incentive Plan

General.We have
issued stock options to our employees under our 2001 Incentive
Plan. The 2001 Incentive Plan provides for the grant of options
to key officers, employees, consultants, advisors and directors
of our company and our parent, our subsidiaries and affiliates
selected from time to time by our compensation committee. The
purpose of the 2001 Incentive Plan is to assist us in attracting
and retaining selected individuals to serve as directors,
officers, consultants, advisors and employees who will
contribute to our success and to achieve long-term objectives
which will inure to the benefit of all our stockholders through
the additional incentive inherent in the ownership of our
Class A common stock. Awards under the 2001 Incentive Plan
may take the form of stock options, including corresponding
share appreciation rights (SARs) and reload options,
restricted stock awards and stock purchase awards.

Options available and outstanding.A total of 13,310,250 shares of
Class A common stock are currently subject to outstanding
options. The maximum number of shares that may be the subject of
awards under the 2001 Incentive Plan is 15,000,000 shares and in
any given year, the maximum number of shares with respect to
which options or SARs may be granted to any employee is
4,500,000 shares.

2001 Incentive Plan Administration.Our compensation committee will
administer the 2001 Incentive Plan. Subject to the provisions of
the 2001 Incentive Plan, the compensation committee has
authority, in its sole discretion, to grant awards under the
2001 Incentive Plan, to interpret the provisions of the 2001
Incentive Plan and, subject to the requirements of applicable
law, to prescribe, amend, and rescind rules and regulations
relating to the 2001 Incentive Plan or any award thereunder as
it may deem necessary or advisable.

Options.The 2001
Incentive Plan permits the granting of incentive stock
options meeting the requirements of Section 422 of
the Internal Revenue Code of 1986, as amended, which we refer to
as the Code, and nonqualified stock options that do
not meet such requirements. The term of each option is
determined by the compensation committee, but no incentive stock
option may be exercised more than ten

32



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##### 



years after the date of grant. Options may also
be subject to restrictions on exercise, such as exercise in
periodic installments, as determined by the compensation
committee. In general, the exercise price for incentive stock
options must be at least equal to 100% of the fair market value
of the shares on the date of the grant and the exercise price
for nonqualified stock options will be determined by the
compensation committee at the time of the grant. The exercise
price can be paid in cash, or if approved by the compensation
committee, by delivery of a promissory note, by tendering shares
owned by the participant, or any combination of the foregoing.
Options are not transferable except by will or the laws of
descent and distribution and may generally be exercised only by
the participant (or his guardian or legal representative) during
his or her lifetime, provided, however, the nonqualified stock
options may, under certain circumstances, be transferable to
family members and trusts for the benefit of the participant or
his family members. Upon completion of the initial public
offering, we issued options to purchase shares of our
Class A common stock in replacement of options previously
issued to purchase common stock of GameStop, Inc. The
replacement options have the same economic and vesting terms as
the options they replaced.


Share Appreciation Rights.The 2001 Incentive Plan provides that
SARs may be granted in connection with the grant of options.
Each SAR must be associated with a specific option and must be
granted at the time of grant of such option. A SAR is
exercisable only to the extent the related option is
exercisable. Upon the exercise of a SAR, the recipient is
entitled to receive from us up to, but no more than, an amount
in cash or shares equal to the excess of (i) the fair
market value of one share on the date of such exercise over
(ii) the exercise price of any related option, multiplied
by the number of shares in respect of which such SAR shall have
been exercised. Upon the exercise of a SAR, the related option,
or the portion thereof in respect of which such SAR is
exercised, will terminate. Upon the exercise of an option
granted in tandem with a SAR, such tandem SAR will terminate.

Reload Options.The
compensation committee may grant, concurrently with the award of
any option, a reload option to purchase for cash or shares a
number of shares equal to (i) the number of shares
delivered by the participant to us to exercise the underlying
option and (ii) the number of shares used to satisfy any
tax withholding requirement incident to the exercise of the
underlying option. Although an underlying option may be an
incentive stock option, a reload option is not intended to
qualify as an incentive stock option. A reload option will have
the same expiration date as the underlying option and an
exercise price equal to the fair market value of the shares on
the date the underlying option is exercised. A reload option is
exercisable six months from the date of grant.

Restricted Stock.The compensation committee may award
restricted shares under the 2001 Incentive Plan. Restricted
shares give a participant the right to receive shares subject to
a risk of forfeiture based upon certain conditions. The
forfeiture restrictions on the shares may be based upon
performance standards, length of service or other criteria as
the compensation committee may determine. Until all restrictions
are satisfied, lapsed or waived, we will maintain custody over
the restricted shares but the participant will be able to vote
the shares and will be entitled to all distributions paid with
respect to the shares, as provided by the compensation
committee. During such restrictive period, the restricted shares
may not be sold, assigned, transferred, pledged or otherwise
encumbered. Upon termination of employment, the participant
forfeits the right to the shares to the extent the applicable
performance standards, length of service requirements, or other
measurement criteria have not been met.

Stock Purchase Awards.The 2001 Incentive Plan also permits
the grant of stock purchase awards. Participants who are granted
a stock purchase award are provided with a loan to enable them
to pay the purchase price for the shares acquired pursuant to
the award. The compensation committee will determine the term of
a stock purchase loan. The purchase price of shares acquired
with a stock purchase loan is the price equal to the fair market
value on the date of the award. The 2001 Incentive Plan provides
that up to 100% of the stock purchase loan may be forgiven over
the loan term subject to such terms and conditions as the
compensation committee shall determine, provided that the
participant has not resigned as an employee of our company. At
the end of the loan term, the unpaid balance of the stock
purchase loan will be due and payable. The compensation
committee will determine the interest rate, if any, on a stock
purchase loan. Stock purchase loans will be secured by a pledge
to us of the shares purchased pursuant to the stock purchase
award and such loans will be recourse or non-recourse as
determined by the compensation committee.

33



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##### 



Antidilution Provisions.The compensation committee may adjust
the number of shares authorized to be issued under the 2001
Incentive Plan and subject to outstanding awards (and the grant
or exercise price thereof) to prevent dilution or enlargement of
rights in the event of any dividend or other distribution,
recapitalization, stock split, reverse stock split,
reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase or exchange of shares or other
securities, the issuance of warrants or other rights to purchase
shares or other securities, or other similar capitalization
change.

Termination and Amendment.The 2001 Incentive Plan will terminate
by its terms and without any action by the Board of Directors in
2011. No awards may be made after that date. Awards outstanding
on such termination date will remain valid in accordance with
their terms.

The compensation committee may alter, amend,
suspend or terminate the 2001 Incentive Plan as it deems
advisable, subject to any requirement for stockholder approval
imposed by applicable law, including Sections 162(m) and
422 of the Code, or any rule of any stock exchange or quotation
system on which shares are listed or quoted; provided that the
compensation committee may not amend the 2001 Incentive Plan,
without the approval of our stockholders, to increase the number
of shares that may be the subject of options under the 2001
Incentive Plan.

Item
12.Security Ownership of
Certain Beneficial Owners and Management

All of our Class B common stock is currently
indirectly owned by Barnes & Noble, a publicly held
company that is listed on the New York Stock Exchange under the
symbol BKS and, therefore, none of our officers or
directors owns any of our Class B common stock. As of
April 11, 2002, Barnes & Noble beneficially owned 63.4%
of our outstanding common stock, which represents 94.5% of the
combined voting power of all classes of our voting stock. Except
for Barnes & Noble and Leonard Riggio, we are not aware
of any person or group that beneficially owns more than 5% of
the outstanding shares of our common stock.

The following table sets forth the number of
shares of our Class A common stock and currently
exercisable options to purchase such stock beneficially owned on
February 2, 2002 by each director and each of the executive
officers named in the summary compensation table in the
Executive Compensation section, and all of our
directors and executive officers as a group. Except as otherwise
noted, the individual director or executive officer or his
family members had sole voting and investment power with respect
to the identified securities. The total number of shares of our
Class A common stock outstanding as of April 11, 2002
was 20,804,688.

|                                                                |  |                           |           |            |  |  |      |  
|--------------------------------------------------------------- |  | ------------------------- | --------- | ---------- |  |  | ---- | -
|                                                                |  |                          
|                                                                |  | Shares Beneficially Owned
|                                                                |  | Class A Common Stock     
|                                                                |  |                          
|                                                                |  | Number of                 |           | Percentage
|Name                                                            |  | Shares(1)                 |           | of Class  
|                                                                |  |                           |           |           
|R. Richard Fontaine                                             |  |                           | 187,600   | (2)        |  |  | *    |  
|Daniel A. DeMatteo                                              |  |                           | 187,500   | (3)        |  |  | *    |  
|David W. Carlson                                                |  |                           | 150,000   | (3)        |  |  | *    |  
|John W. Woodson                                                 |  |                           | 150,000   | (3)        |  |  | *    |  
|Leonard Riggio                                                  |  |                           | 4,500,000 | (3)        |  |  | 17.8 | %
|Michael N. Rosen                                                |  |                           |          |            |  |  |     |  
|All directors and executive officers as a group
	(6 persons)(2) |  |                           | 5,175,100 |            |  |  | 19.9 | %



---



|    |                                                                          
|--- | -------------------------------------------------------------------------
|*   | Less than 1.0%                                                           
|   
|(1) | Includes options exercisable within 60 days
	following April 11, 2002.   
|   
|(2) | All but 100 of these shares are issuable upon
	exercise of stock options.
|   
|(3) | All of these shares are issuable upon exercise of
	stock options.        

34



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##### 



Changes in Control

Barnes & Noble has pledged to its lenders its
ownership interest in the entity that owns our shares of
Class B common stock as collateral for its credit facility.
If Barnes & Noble defaults on its credit facility, our
common stock owned by Barnes & Noble could be
transferred to its lenders or sold to third parties. There can
be no assurance that any new owner will have the qualifications
or ability to successfully operate our business.

Item
13.Certain Relationships and
Related Transactions

Agreements with Barnes & Noble

In connection with the consummation of our
recently completed common stock offering, we entered into
various agreements with Barnes & Noble relating to our
relationship with Barnes & Noble following the completion of
the offering.

Separation
Agreement

We entered into a separation
agreement with Barnes & Noble, which governs our
respective rights and duties with respect to the offering and
the possible distribution to Barnes & Noble stockholders of
its shares of our capital stock, if any, and contains covenants
designed to facilitate such a distribution and to protect its
intended tax-free nature. However, we cannot assure you as to
whether or when such a distribution will occur.

If Barnes & Noble decides to pursue a
distribution to its stockholders, we have agreed that we will
cooperate with Barnes & Noble in all respects to
accomplish a distribution and, at Barnes & Nobles
direction, promptly take all actions necessary or desirable to
effect a distribution to Barnes & Noble stockholders,
including the registration under the Securities Act of 1933, as
amended, of Barnes & Nobles shares of our capital
stock.

We have also agreed that, as a result of the
ownership by Barnes & Noble of a significant portion of
our common stock and in order for Barnes & Noble to
pursue a distribution to Barnes & Noble stockholders of our
common stock which would qualify as a tax-free distribution
under Section 355 of the Code to Barnes & Noble
and its stockholders (Section 355 distribution), we will
not take certain actions without the approval of
Barnes & Noble, including:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | issuing or agreeing to issue shares of our
	capital stock in an amount that would result in
	Barnes & Noble ceasing to own an amount of our capital
	stock which constitutes control for purposes of
	Section 368(c) of the Code or any successor statute or
	provision, as such definition may be amended from time to time;                                                                                        
|
| |  | until two years after a Section 355
	distribution, entering into or permitting any transaction or
	series of transactions which would result in a person or persons
	acquiring or having the right to acquire shares of our capital
	stock that would comprise 50% or more of either the value of all
	outstanding shares of our capital stock or the total combined
	voting power of our outstanding voting stock; and
|
| |  | until two years after a Section 355
	distribution, liquidating, disposing of, or otherwise
	discontinuing the conduct of any portion of our active trade or
	business.                                                                                                                                                                                                                                                 

We have generally agreed to indemnify
Barnes & Noble and its affiliates against any and all
tax-related losses incurred by Barnes & Noble in
connection with any proposed tax assessment or tax controversy
with respect to a Section 355 distribution to Barnes & Noble
stockholders to the extent caused by any breach by us of any of
our representations, warranties or covenants made in the
separation agreement. This indemnification does not apply to
actions which Barnes & Noble permits us to take as a
result of a determination under the tax-related covenants
described above.

35



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##### 



In addition, we have agreed that, so long as
Barnes & Noble owns at least 50% of our existing common
stock, we will not, without their approval:



| |   |                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | take any action which has the effect of limiting
	Barnes & Nobles ability to freely sell, pledge or
	otherwise dispose of shares of our common stock or limiting the
	legal rights of or denying any benefit to Barnes &
	Noble as a stockholder of us in a manner not applicable to our
	stockholders generally;                                
|
| |  | issue any shares of common stock or any rights,
	warrants or options to acquire our common stock, if after giving
	effect to such issuance, Barnes & Noble would own less
	than 50% of the then outstanding shares of our common stock; or                                                                                                        
|
| |  | to the extent that Barnes & Noble is a
	party to, or enters into, any agreements that provide that
	actions of its subsidiaries may result in its being in breach or
	default under any agreement, and we have been advised of the
	existence of these agreements, take any actions that may result
	in Barnes & Noble being in breach or default.

In addition, we have agreed that, for so long as
Barnes & Noble is required to consolidate our results
of operations and financial position or account for its
investment in our company, we will (1) provide
Barnes & Noble with financial information regarding our
company and our subsidiaries, copies of all quarterly and annual
financial information and other reports and documents we intend
to file with the SEC prior to such filings, as well as final
copies upon filing and copies of our budgets and financial
projections, as well as the opportunity to meet with our
management to discuss such budgets and projections;
(2) consult with Barnes & Noble regarding the
timing and content of earnings releases; (3) cooperate
fully, and cause our accountants to cooperate fully, with
Barnes & Noble in connection with any of its public
filings; (4) use our best efforts to enable our auditors to
complete their audit of our financial statements such that they
will date their opinion the same date that they date their
opinion on Barnes & Nobles financial statements;
(5) provide to Barnes & Noble and its auditors all
information required for Barnes & Noble to meet its
schedule for the filing and distribution of its financial
statements; (6) make available to Barnes & Noble
and its auditors work papers related to the annual audit of our
company as well as access to the personnel who perform the
annual audit and our and our subsidiaries books and
records so that Barnes & Noble and its auditors may
conduct reasonable audits relating to our financial statements;
(7) adhere to generally accepted accounting principles,
applied in a manner consistent with Barnes & Noble; and
(8) notify and consult with Barnes & Noble
regarding any changes to our accounting principles.

We have generally agreed to indemnify
Barnes & Noble and its affiliates against all
liabilities arising out of any incorrect, inaccurate or
incomplete financial or other information we provide to
Barnes & Noble pursuant to the terms of the separation
agreement.

Insurance
Agreement

We entered into an insurance
agreement with Barnes & Noble, pursuant to which
Barnes & Noble will allow us to participate in
Barnes & Nobles workers compensation,
property and general liability and directors and
officers liability insurance programs. We will reimburse
Barnes & Noble for our pro rata share of the cost of
providing these insurance programs. In fiscal 2000 and 2001, as
a subsidiary of Barnes & Noble, Barnes & Noble
allocated approximately $632,000 and $1,291,000, respectively,
to us in relation to our insurance program.

The insurance agreement will remain in force
unless terminated:



| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | by mutual agreement of us and Barnes &
	Noble;                                             
|
| |  | by us, as to all or any portion of the services
	upon not less than 180 days prior notice;
|
| |  | by Barnes & Noble upon not less than
	180 days prior notice;                              
|
| |  | by either us or Barnes & Noble because
	of an uncured default by either of us;             

36



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##### 





| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | by declaration of the agreements invalidity
	under applicable law or force majeure; or              
|
| |  | automatically, in the event of the bankruptcy or
	a change of control of either us or Barnes & Noble.

Operating
Agreement

We entered into an operating
agreement with Barnes & Noble, pursuant to which
we will operate the existing video game departments in 12
Barnes & Noble stores. We will pay Barnes &
Noble a licensing fee equal to 7.0% of the aggregate gross sales
of each such department. In fiscal 2000 and 2001,
Barnes & Noble allocated approximately $886,000 and
$1,098,000, respectively, to us in connection with our operation
of such departments in Barnes & Noble stores.

The operating agreement will remain in force
unless terminated:



| |   |                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | by mutual agreement of us and Barnes &
	Noble;                                                                                                                              
|
| |  | automatically, in the event that we no longer
	operate any department within Barnes & Nobles
	stores;                                                                      
|
| |  | by us or Barnes & Noble, with respect to
	any department, upon not less than 30 days prior notice;                                                                          
|
| |  | by Barnes & Noble because of an uncured
	default by us;                                                                                                                     
|
| |  | automatically, with respect to any department, if
	the applicable store lease in which we operate that department
	expires or is terminated prior to its expiration date; or
|
| |  | automatically, in the event of the bankruptcy or
	a change in control of either us or Barnes & Noble.                                                                       

Tax
Disaffiliation Agreement

We entered into a tax disaffiliation
agreement with Barnes & Noble which governs the
allocation of federal, state, local and foreign tax liabilities
and contains agreements with respect to other tax matters
arising prior to and after the date of the offering. The tax
disaffiliation agreement became effective at the time of the
offering and, among other things, sets forth the procedures for
amending returns filed prior to the date of the offering, tax
audits and contests and record retention. In general, we are
responsible for filing and paying our separate taxes for periods
after the offering and Barnes & Noble is responsible
for filing and paying its separate taxes for periods after the
offering. In general, with respect to consolidated or combined
returns that include Barnes & Noble and us prior to the
offering, Barnes & Noble is responsible for filing and
paying the related tax liabilities and will retain any related
tax refunds.

Under the tax disaffiliation agreement, without
the prior written consent of Barnes & Noble, we may not
amend any tax return for a period in which we were a member of
Barnes & Nobles consolidated tax group.
Barnes & Noble has the sole right to represent the
interests of its consolidated tax group, including our company,
in any tax audits, litigation or appeals that involve, directly
or indirectly, periods prior to the time that we ceased to be a
member of their consolidated tax group (the date of the
offering), unless we are solely liable for the taxes at issue
and any redetermination of taxes would not result in any
additional tax liability or detriment to any member of
Barnes & Nobles consolidated tax group. In
addition, we and Barnes & Noble have agreed to provide
each other with the cooperation and information reasonably
requested by the other in connection with the preparation or
filing of any amendment to any tax return, the determination and
payment of any amounts owed relating to periods prior to the
date of the offering and in the conduct of any tax audits,
litigation or appeals.

We and Barnes & Noble have agreed to
indemnify each other for tax or other liabilities resulting from
the failure to pay any taxes required to be paid under the tax
disaffiliation agreement, tax or other liabilities resulting
from negligence in supplying inaccurate or incomplete
information or the failure to cooperate with the preparation of
any tax return or the conduct of any tax audits, litigation or
appeals. The tax disaffiliation agreement requires us to retain
records, documents and other information necessary for the audit
of tax returns relating to periods prior to the date we ceased
to be a member of Barnes & Nobles consolidated
tax group and to provide reasonable access to Barnes &
Noble with respect to such records, documents and information.

37



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##### 



Registration
Rights Agreement

In the event that Barnes & Noble does
not divest itself of all of its shares of our common stock in a
distribution, Barnes & Noble could not freely sell all
of its shares without registration under the Securities Act.
Accordingly, we entered into a registration rights agreement
with Barnes & Noble to provide it with registration
rights relating to the shares of our common stock which it holds.

The registration rights agreement provides
Barnes & Noble with registration rights relating to the
shares of our common stock held by Barnes & Noble
immediately after the offering and any shares of our common
stock Barnes & Noble acquires thereafter.
Barnes & Noble is able to require us to register under
the Securities Act all or any portion of our shares covered by
the registration rights agreement. In addition, the registration
rights agreement provides for various piggyback registration
rights for Barnes & Noble. Whenever we propose to
register any of our securities under the Securities Act for
ourselves or others, subject to customary exceptions, we must
provide prompt notice to Barnes & Noble and include in
that registration all shares of our stock which
Barnes & Noble owns and requests to be included.

The registration rights agreement sets forth
customary registration procedures, including an agreement by us
to make available our senior management for roadshow
presentations. All registration expenses incurred in connection
with any registration, other than underwriting commissions, will
be paid by us. In addition, we are required to reimburse
Barnes & Noble for the fees and disbursements of its
outside counsel retained in connection with any such
registration. The registration rights agreement also imposes
customary indemnification and contribution obligations on us for
the benefit of Barnes & Noble and any underwriters,
although Barnes & Noble must indemnify us for any
liabilities resulting from information provided by
Barnes & Noble.

Barnes & Nobles rights under the
registration rights agreement remain in effect with respect to
the shares covered by the agreement until:



| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | those shares have been sold under an effective
	registration statement under the Securities Act;                                                                     
|
| |  | those shares have been sold to the public under
	Rule 144 under the Securities Act; or                                                                               
|
| |  | those shares have been transferred in a
	transaction where a subsequent public distribution of those
	shares would not require registration under the Securities Act.

Intercompany Loan

Barnes & Noble incurred an aggregate of
approximately $202.4 million of indebtedness in connection
with its acquisition of Babbages Etc. LLC in October 1999
and an aggregate of approximately $159.1 million of
indebtedness in connection with its acquisition of Funco, Inc.
(now known as GameStop, Inc.) in June 2000, for an aggregate of
approximately $361.5 million of indebtedness.
Barnes & Noble and we have treated this amount plus
additional amounts that Barnes & Noble has provided
from time to time to fund our operations as an intercompany loan
owed to Barnes & Noble by us. Immediately prior to the
closing of the offering, Barnes & Noble contributed to
us as additional paid-in capital the difference between the
aggregate amount of the intercompany loan balance and
$250.0 million. This $250.0 million was evidenced by a
demand note and repaid with a portion of the net proceeds from
the offering. The capital contribution by Barnes &
Noble was $150.0 million as of the closing of the offering.

Relationship with Barnes &
Noble.com

On May 1, 2001, we entered into an agreement
with barnesandnoble.com llc, a company in which
Barnes & Noble owns an approximate 36% interest,
pursuant to which we sell video game products and PC
entertainment software through barnesandnoble.coms web
site. We pay barnesandnoble.com a referral fee based on our net
sales revenue resulting from purchases made through their web
site.

Other Relationships

In October 1999, Barnes & Noble acquired
Babbages Etc. for $208.7 million from the owners of
Babbages Etc., which included Leonard Riggio,
R. Richard Fontaine and Daniel A. DeMatteo. Because our

38



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##### 



earnings before interest, taxes, depreciation and
amortization for fiscal 2001 exceeded $54.3 million,
Barnes & Noble made an additional payment to the former
owners of Babbages Etc. of approximately $9.7 million
in March 2002.


In fiscal 2001, we purchased approximately
$125,000 of merchandise from Barnes & Noble.

Michael N. Rosen, our Secretary and one of our
directors, is the Chairman of Robinson Silverman Pearce
Aronsohn & Berman LLP. This law firm represents
Barnes & Noble and its subsidiaries, including us.
Mr. Rosen is also the Secretary and a director of
Barnes & Noble.

PART IV



|         |                                                                  
|-------- | -----------------------------------------------------------------
|Item 14. | Exhibits, Financial Statement Schedules,
	and Reports on Form 8-K

(a) The following documents are filed as a
part of this Form 10-K:



| |                                                                                
| | -------------------------------------------------------------------------------
| | (1) Index and Consolidated Financial
	Statements                               
|
| | (2) Financial Statement Schedules
	required to be filed by Item 8 of this form:



| |                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following financial statement schedule for
	the 39 weeks ended October 30, 1999, the thirteen
	weeks ended January 29, 2000, the 53 weeks ended
	February 3, 2001 and the 52 weeks ended
	February 2, 2002 is filed as part of this report on
	Form 10-K and should be read in conjunction with our
	Consolidated Financial Statements appearing elsewhere in this
	Form 10-K:

Schedule II  Valuation and
Qualifying Accounts

For the 39 weeks ended October 30,
1999, the thirteen weeks ended January 29, 2000, the
53 weeks ended February 3, 2001 and the 52 weeks
ended February 2, 2002

|                                                |  |                |       |            |  |                  |        |            |  |            |       |  |  |   |        |  |  |   |        | 
|----------------------------------------------- |  | -------------- | ----- | ---------- |  | ---------------- | ------ | ---------- |  | ---------- | ----- |  |  | - | ------ |  |  | - | ------ | 
|                                                |  | Balance at     |       | Charged to |  | Charged to       |        | Write-offs |  | Balance at
|                                                |  | Beginning      |       | Costs and  |  | Other Accounts  |        | Net of     |  | End of    
|                                                |  | of Period      |       | Expenses   |  | Accounts Payable |        | Recoveries |  | Period    
|                                                |  |                |       |            |  |                  |        |            |  |           
|                                                |  |                |       |           
|                                                |  | (In thousands) |       |           
|Inventory Reserve, deducted from asset accounts |  |                |       |            |  |                  |        |            |  |            |       |  |  |   |        |  |  |   |        | 
|                                               
|Predecessor:                                    |  |                |       |            |  |                  |        |            |  |            |       |  |  |   |        |  |  |   |        | 
|39 Weeks Ended October 30, 1999                 |  | $              | 4,371 |            |  | $                | 5,567  |            |  | $          | 1,816 |  |  | $ | 6,335  |  |  | $ | 5,419  | 
|                                               
|Successor:                                      |  |                |       |            |  |                  |        |            |  |            |       |  |  |   |        |  |  |   |        | 
|13 Weeks Ended January 29, 2000                 |  |                | 5,419 |            |  |                  | 3,439  |            |  |            | 1,992 |  |  |   | 3,356  |  |  |   | 7,494  | 
|53 Weeks Ended February 3, 2001                 |  |                | 7,494 |            |  |                  | 10,649 |            |  |            | 5,314 |  |  |   | 15,059 |  |  |   | 8,398  | 
|52 Weeks Ended February 2, 2002                 |  |                | 8,398 |            |  |                  | 16,578 |            |  |            | 7,878 |  |  |   | 22,454 |  |  |   | 10,400 | 

All other schedules are omitted because they are
not applicable.

(b) Reports on Form 8-K

None.

(c) Exhibits:



| |                                                             
| | ------------------------------------------------------------
| | The following exhibits are filed as part of this
	Form 10-K:

|        |      |             |  |                                                                           
|------- | ---- | ----------- |  | --------------------------------------------------------------------------
|Exhibit |      |            
|Number  |      | Description
|        |      |            
|        | 3.1  |             |  | Form of Amended and Restated Certificate of
	Incorporation.**             
|        | 3.2  |             |  | Bylaws.**                                                                 
|        | 10.1 |             |  | Separation Agreement, between Barnes &
	Noble and GameStop Corp.***       
|        | 10.2 |             |  | Tax Disaffiliation Agreement, between
	Barnes & Noble and GameStop Corp.**
|        | 10.3 |             |  | Insurance Agreement, between Barnes &
	Noble and GameStop Corp.**         

39



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##### 



|        |       |             |  |                                                                                                                                                                                      
|------- | ----- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.4  |             |  | Operating Agreement, between Barnes &
	Noble and GameStop Corp.**                                                                                                                    
|        | 10.5  |             |  | 2001 Incentive Plan.***                                                                                                                                                              
|        | 10.6  |             |  | Lease, dated as of March 6, 1997, between
	RREEF Mid-Cities Industrial L.P. and Babbages Etc. LLC.**                                                                                
|        | 10.7  |             |  | First Amendment to Lease, dated as of
	December 30, 1999, between RREEF Mid-Cities Industrial L.P.
	and Babbages Etc. LLC.**                                                        
|        | 10.8  |             |  | Registration Rights Agreement, between Barnes
	& Noble and GameStop Corp.**                                                                                                          
|        | 10.9  |             |  | Form of Revolving Credit Agreement, among
	GameStop Corp., Fleet National Bank, as Administrative Agent,
	the Banks party thereto and Fleet Securities, Inc., as
	Arranger.**        
|        | 10.10 |             |  | Form of Security Agreement by GameStop Corp. in
	favor of Fleet National Bank, as secured party and as
	Administrative Agent.**                                                      
|        | 10.11 |             |  | Form of Subsidiary Guaranty by and among
	GameStop, Inc., Babbages Etc. LLC, Sunrise Publications,
	Inc. and GameStop.com, Inc. and Fleet National Bank, as
	Administrative Agent.**
|        | 10.12 |             |  | Form of Securities Collateral Pledge Agreement
	between Gamestop Corp. and Fleet National Bank, as
	Administrative Agent.**                                                          
|        | 10.13 |             |  | Form of Patent and Trademark Securities Agreement
	between GameStop Corp. and Fleet National Bank, as secured party
	and as Administrative Agent.**                                  
|        | 11.1  |             |  | Statement re: Calculation of Net Earnings (Loss)
	Per Common Share.                                                                                                                  
|        | 21.1  |             |  | Subsidiaries.*                                                                                                                                                                       
|        | 23.1  |             |  | Consent of BDO Seidman, LLP.                                                                                                                                                         
|        | 23.2  |             |  | Consent of Ernst & Young LLP.                                                                                                                                                        



---



|    |                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Incorporated by reference to the
	Registrants Amendment No. 1 to Form S-1 filed
	with the Securities and Exchange Commission on October 15,
	2001 (No. 333-68294).
|   
|**  | Incorporated by reference to the
	Registrants Amendment No. 3 to Form S-1 filed
	with the Securities and Exchange Commission on January 24,
	2002 (No. 333-68294).
|   
|*** | Incorporated by reference to the
	Registrants Amendment No. 4 to Form S-1 filed
	with the Securities and Exchange Commission on February 5,
	2002 (No. 333-68294).

40



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##### 



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this Form 10-K to be signed on its behalf
by the undersigned, thereunto duly authorized.



|                 |               
|---------------- | --------------
|Date May 1, 2002 | GAMESTOP CORP.



| |     |                        
| | --- | -----------------------
| | By: | /s/ R. RICHARD FONTAINE

| |                                                   
| | --------------------------------------------------
| |                                                   
| | R. Richard Fontaine                               
| | Chairman of the Board and Chief Executive
	Officer

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Form 10-K has been signed below
by the following persons on behalf of the registrant and in the
capacities and on the date indicated.

|                                           |  |                                                                                                                          |  |             |  |     
|------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------ |  | ----------- |  | ----
|                                           |  | Name                                                                                                                     |  | Capacity    |  | Date
|                                           |  |                                                                                                                          |  |             |  |     
|/s/ R. RICHARD FONTAINER. Richard Fontaine |  | Chairman of the Board, Chief Executive Officer
	and Director (Principal Executive Officer)                               |  | May 1, 2002
|                                          
|/s/ DAVID W. CARLSONDavid W. Carlson       |  | Executive Vice President, Chief Financial Officer
	and Assistant Secretary (Principal Accounting and Financial
	Officer) |  | May 1, 2002
|                                          
|/s/ MICHAEL N. ROSENMichael N. Rosen       |  | Secretary and Director                                                                                                   |  | May 1, 2002
|                                          
|/s/ LEONARD RIGGIOLeonard Riggio           |  | Director                                                                                                                 |  | May 1, 2002

41



---



##### 



INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                   |                                              |      |      |      | 
|-------------------------------------------------- | -------------------------------------------- | ---- | ---- | ---- | 
|                                                   |                                              | Page
|                                                   |                                              |     
|GameStop Corp. Consolidated Financial
	Statements: |                                              |      |      |     
|Report of Independent Certified Public Accountants |                                              |      | F-2  |     
|Consolidated Financial Statements:                 |                                              |      |      |     
|                                                   | Balance Sheets                               |      |      | F-3  | 
|                                                   | Statements of Operations                     |      |      | F-4  | 
|                                                   | Statements of Stockholders Equity (Deficit) |      |      | F-5  | 
|                                                   | Statements of Cash Flows                     |      |      | F-6  | 
|                                                   | Notes to Consolidated Financial Statements   |      |      | F-7  | 
|Funco, Inc. Consolidated Financial
	Statements:    |                                              |      |      |     
|Independent Auditors Report                       |                                              |      | F-19 |     
|Consolidated Financial Statements:                 |                                              |      |      |     
|                                                   | Balance Sheets                               |      |      | F-20 | 
|                                                   | Statements of Income                         |      |      | F-21 | 
|                                                   | Statement of Shareholders Equity            |      |      | F-22 | 
|                                                   | Statements of Cash Flows                     |      |      | F-23 | 
|                                                   | Notes to Consolidated Financial Statements   |      |      | F-24 | 

F-1



---



##### 



REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS

To the Board of Directors and the Stockholders of

GameStop Corp.


Grapevine, Texas


We have audited the accompanying consolidated
balance sheets of GameStop Corp. as of February 3, 2001 and
February 2, 2002 and the related consolidated statements of
operations, stockholders equity (deficit), and cash flows
for the 13 weeks ended January 29, 2000, 53 weeks
ended February 3, 2001, 52 weeks ended
February 2, 2002 (Successor Company) and the 39 weeks
ended October 30, 1999 (Predecessor Company). We have also
audited the schedule listed in Item 14(a)(2) of this Form
10-K. These financial statements and the schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and the schedule based on our audits.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of GameStop Corp. as of
February 3, 2001 and February 2, 2002 and the results
of its operations and its cash flows for the 13 weeks ended
January 29, 2000, 53 weeks ended February 3, 2001
and 52 weeks ended February 2, 2002 (Successor
Company) and 39 weeks ended October 30, 1999
(Predecessor Company) in conformity with accounting principles
generally accepted in the United States of America.

Also, in our opinion, the schedule presents
fairly, in all material respects, the information set forth
therein.

As discussed in Note 2 of the consolidated
financial statements, the Predecessor Company was acquired on
October 30, 1999 in a business combination accounted for as
a purchase. As a result, the consolidated financial statements
of the Successor Company are presented on a new basis of
accounting from the consolidated financial statements of the
Predecessor Company and, therefore, are not comparable.



| |                     
| | --------------------
| | /s/ BDO Seidman, LLP
| |                     
| | BDO SEIDMAN, LLP    

Dallas, Texas

March 21, 2002


F-2



---



##### 



GAMESTOP CORP.

CONSOLIDATED BALANCE SHEETS

|                                                 |                                                                                                           |                                                       |         |             |         |             |         |         |         |   |         |         |         | 
|------------------------------------------------ | --------------------------------------------------------------------------------------------------------- | ----------------------------------------------------- | ------- | ----------- | ------- | ----------- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                 |                                                                                                           |                                                       |         |             |         | February 2,
|                                                 |                                                                                                           |                                                       |         |             |         | 2002       
|                                                 |                                                                                                           | February 3,                                           |         | February 2, |         | Pro Forma  
|                                                 |                                                                                                           | 2001                                                  |         | 2002        |         | (Note 12)  
|                                                 |                                                                                                           |                                                       |         |             |         |            
|                                                 |                                                                                                           |                                                       |         |             |         | (Unaudited)
|                                                 |                                                                                                           |                                                      
|                                                 |                                                                                                           | (In thousands)                                       
|ASSETS:                                         
|Current assets:                                  |                                                                                                           |                                                       |         |             |         |             |         |         |         |   |         |        
|                                                 | Cash and cash equivalents                                                                                 |                                                       | $       | 8,641       |         |             | $       | 80,750  |         |   | $       | 80,750  |        
|                                                 | Receivables, net                                                                                          |                                                       |         | 3,726       |         |             |         | 5,930   |         |   |         | 5,930   |        
|                                                 | Merchandise inventories                                                                                   |                                                       |         | 108,853     |         |             |         | 138,351 |         |   |         | 138,351 |        
|                                                 | Prepaid expenses and other current assets                                                                 |                                                       |         | 13,682      |         |             |         | 8,255   |         |   |         | 8,255   |        
|                                                 | Deferred taxes                                                                                            |                                                       |         | 3,533       |         |             |         | 3,418   |         |   |         | 3,418   |        
|                                                 |                                                                                                           |                                                       |         |             |         |             |         |         |         |   |         |        
|                                                 |                                                                                                           | Total current assets                                  |         |             | 138,435 |             |         |         | 236,704 |   |         |         | 236,704 | 
|                                                 |                                                                                                           |                                                       |         |             |         |             |         |         |         |   |         |        
|Property and equipment:                          |                                                                                                           |                                                       |         |             |         |             |         |         |         |   |         |        
|                                                 | Leasehold improvements                                                                                    |                                                       |         | 20,874      |         |             |         | 27,898  |         |   |         | 27,898  |        
|                                                 | Fixtures and equipment                                                                                    |                                                       |         | 45,236      |         |             |         | 57,579  |         |   |         | 57,579  |        
|                                                 |                                                                                                           |                                                       |         |             |         |             |         |         |         |   |         |        
|                                                 |                                                                                                           |                                                       | 66,110  |             |         |             | 85,477  |         |         |   | 85,477  |        
|                                                 | Less accumulated depreciation and amortization                                                            |                                                       |         | 14,742      |         |             |         | 33,854  |         |   |         | 33,854  |        
|                                                 |                                                                                                           |                                                       |         |             |         |             |         |         |         |   |         |        
|                                                 |                                                                                                           | Net property and equipment                            |         |             | 51,368  |             |         |         | 51,623  |   |         |         | 51,623  | 
|                                                 |                                                                                                           |                                                       |         |             |         |             |         |         |         |   |         |        
|Goodwill, net                                    |                                                                                                           |                                                       | 319,418 |             |         |             | 317,957 |         |         |   | 317,957 |        
|Other noncurrent assets                          |                                                                                                           |                                                       | 536     |             |         |             | 559     |         |         |   | 559     |        
|                                                 |                                                                                                           |                                                       |         |             |         |             |         |         |         |   |         |        
|                                                 |                                                                                                           | Total other assets                                    |         |             | 319,954 |             |         |         | 318,516 |   |         |         | 318,516 | 
|                                                 |                                                                                                           |                                                       |         |             |         |             |         |         |         |   |         |        
|                                                 |                                                                                                           | Total assets                                          |         | $           | 509,757 |             |         | $       | 606,843 |   |         | $       | 606,843 | 
|                                                 |                                                                                                           |                                                       |         |             |         |             |         |         |         |   |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY
	(DEFICIT):
|Current liabilities:                             |                                                                                                           |                                                       |         |             |         |             |         |         |         |   |         |        
|                                                 | Accounts payable                                                                                          |                                                       | $       | 102,837     |         |             | $       | 148,597 |         |   | $       | 148,597 |        
|                                                 | Accrued liabilities                                                                                       |                                                       |         | 37,324      |         |             |         | 57,000  |         |   |         | 57,000  |        
|                                                 |                                                                                                           |                                                       |         |             |         |             |         |         |         |   |         |        
|                                                 |                                                                                                           | Total current liabilities                             |         |             | 140,161 |             |         |         | 205,597 |   |         |         | 205,597 | 
|                                                 |                                                                                                           |                                                       |         |             |         |             |         |         |         |   |         |        
|Payable to Barnes & Noble, Inc.                  |                                                                                                           |                                                       | 385,148 |             |         |             | 399,623 |         |         |   | 250,000 |        
|Deferred taxes                                   |                                                                                                           |                                                       | 2,862   |             |         |             | 3,065   |         |         |   | 3,065   |        
|Other long-term liabilities                      |                                                                                                           |                                                       | 2,196   |             |         |             | 2,543   |         |         |   | 2,543   |        
|                                                 |                                                                                                           |                                                       |         |             |         |             |         |         |         |   |         |        
|                                                 |                                                                                                           |                                                       | 390,206 |             |         |             | 405,231 |         |         |   | 255,608 |        
|                                                 |                                                                                                           |                                                       |         |             |         |             |         |         |         |   |         |        
|                                                 |                                                                                                           | Total liabilities                                     |         |             | 530,367 |             |         |         | 610,828 |   |         |         | 461,205 | 
|                                                 |                                                                                                           |                                                       |         |             |         |             |         |         |         |   |         |        
|Stockholders equity (deficit):                  |                                                                                                           |                                                       |         |             |         |             |         |         |         |   |         |        
|                                                 | Preferred stock  authorized 5,000
	shares; no shares issued or outstanding                               |                                                       |         |            |         |             |         |        |         |   |         |        |        
|                                                 | Class A common stock  $.001 par
	value; authorized 300,000 shares; no shares issued and
	outstanding     |                                                       |         |            |         |             |         |        |         |   |         |        |        
|                                                 | Class B common stock  $.001 par
	value; authorized 100,000 shares; 36,009 shares issued and
	outstanding |                                                       |         | 36          |         |             |         | 36      |         |   |         | 36      |        
|                                                 | Additional paid-in-capital                                                                                |                                                       |         | (15,902     | )       |             |         | (6,237  | )       |   |         | 143,386 |        
|                                                 | Retained earnings (deficit)                                                                               |                                                       |         | (4,744      | )       |             |         | 2,216   |         |   |         | 2,216   |        
|                                                 |                                                                                                           |                                                       |         |             |         |             |         |         |         |   |         |        
|                                                 |                                                                                                           | Total stockholders equity (deficit)                  |         |             | (20,610 | )           |         |         | (3,985  | ) |         |         | 145,638 | 
|                                                 |                                                                                                           |                                                       |         |             |         |             |         |         |         |   |         |        
|                                                 |                                                                                                           | Total liabilities and stockholders equity
	(deficit) |         | $           | 509,757 |             |         | $       | 606,843 |   |         | $       | 606,843 | 
|                                                 |                                                                                                           |                                                       |         |             |         |             |         |         |         |   |         |        

See accompanying notes to consolidated financial
statements.

F-3



---



##### 



GAMESTOP CORP.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                   |                                                      |                                       |         |                   |   |             |         |             |  |   |         |         |   |   |           |         | 
|-------------------------------------------------- | ---------------------------------------------------- | ------------------------------------- | ------- | ----------------- | - | ----------- | ------- | ----------- |  | - | ------- | ------- | - | - | --------- | ------- | 
|                                                   |                                                      | Predecessor                           |         |                  
|                                                   |                                                      | Company                               |         | Successor Company
|                                                   |                                                      |                                       |         |                  
|                                                   |                                                      | 39 Weeks                              |         | 13 Weeks          |   | 53 Weeks    |         | 52 Weeks   
|                                                   |                                                      | Ended                                 |         | Ended             |   | Ended       |         | Ended      
|                                                   |                                                      | October 30,                           |         | January 29,       |   | February 3, |         | February 2,
|                                                   |                                                      | 1999                                  |         | 2000              |   | 2001        |         | 2002       
|                                                   |                                                      |                                       |         |                   |   |             |         |            
|                                                   |                                                      |                                      
|                                                   |                                                      | (In thousands, except per share data)
|Sales                                              |                                                      | $                                     | 329,392 |                   |   | $           | 223,748 |             |  | $ | 756,697 |         |   | $ | 1,121,138 |        
|Cost of sales                                      |                                                      |                                       | 246,865 |                   |   |             | 174,808 |             |  |   | 570,995 |         |   |   | 854,035   |        
|                                                   |                                                      |                                       |         |                   |   |             |         |             |  |   |         |         |   |   |           |        
|                                                   | Gross profit                                         |                                       |         | 82,527            |   |             |         | 48,940      |  |   |         | 185,702 |   |   |           | 267,103 | 
|Selling, general and administrative expenses       |                                                      |                                       | 68,112  |                   |   |             | 30,019  |             |  |   | 157,891 |         |   |   | 202,719   |        
|Acquisition incentive bonuses                      |                                                      |                                       | 26,789  |                   |   |             |        |             |  |   |        |         |   |   |          |        
|Depreciation and amortization                      |                                                      |                                       | 4,475   |                   |   |             | 1,926   |             |  |   | 12,974  |         |   |   | 19,172    |        
|Amortization of goodwill                           |                                                      |                                       |        |                   |   |             | 1,687   |             |  |   | 9,223   |         |   |   | 11,125    |        
|                                                   |                                                      |                                       |         |                   |   |             |         |             |  |   |         |         |   |   |           |        
|                                                   | Operating earnings (loss)                            |                                       |         | (16,849           | ) |             |         | 15,308      |  |   |         | 5,614   |   |   |           | 34,087  | 
|Interest income                                    |                                                      |                                       | (169    | )                 |   |             | (224    | )           |  |   | (58     | )       |   |   | (123      | )      
|Interest expense                                   |                                                      |                                       | 1,141   |                   |   |             | 3,347   |             |  |   | 23,469  |         |   |   | 19,575    |        
|                                                   |                                                      |                                       |         |                   |   |             |         |             |  |   |         |         |   |   |           |        
|                                                   | Earnings (loss) before income tax expense
	(benefit) |                                       |         | (17,821           | ) |             |         | 12,185      |  |   |         | (17,797 | ) |   |           | 14,635  | 
|Income tax expense (benefit)                       |                                                      |                                       | 100     |                   |   |             | 4,968   |             |  |   | (5,836  | )       |   |   | 7,675     |        
|                                                   |                                                      |                                       |         |                   |   |             |         |             |  |   |         |         |   |   |           |        
|                                                   | Net earnings (loss)                                  |                                       | $       | (17,921           | ) |             | $       | 7,217       |  |   | $       | (11,961 | ) |   | $         | 6,960   | 
|                                                   |                                                      |                                       |         |                   |   |             |         |             |  |   |         |         |   |   |           |        
|Earnings (loss) before income taxes                |                                                      |                                       | (17,821 | )                 |   |             |         |             |  |   |         |         |   |   |           |        
|Pro forma income tax expense (benefit)             |                                                      |                                       | (7,142  | )                 |   |             |         |             |  |   |         |         |   |   |           |        
|                                                   |                                                      |                                       |         |                   |   |             |         |             |  |   |         |         |   |   |           |        
|Pro forma net earnings (loss)                      |                                                      | $                                     | (10,679 | )                 |   |             |         |             |  |   |         |         |   |   |           |        
|                                                   |                                                      |                                       |         |                   |   |             |         |             |  |   |         |         |   |   |           |        
|Net earnings (loss) per common
	share  basic      |                                                      |                                       |         |                   |   | $           | 0.20    |             |  | $ | (0.33   | )       |   | $ | 0.19      |        
|                                                   |                                                      |                                       |         |                   |   |             |         |             |  |   |         |         |   |   |           |        
|Weighted average shares of common
	stock  basic   |                                                      |                                       |         |                   |   |             | 36,009  |             |  |   | 36,009  |         |   |   | 36,009    |        
|                                                   |                                                      |                                       |         |                   |   |             |         |             |  |   |         |         |   |   |           |        
|Net earnings (loss) per common
	share  diluted    |                                                      |                                       |         |                   |   | $           | 0.20    |             |  | $ | (0.33   | )       |   | $ | 0.18      |        
|                                                   |                                                      |                                       |         |                   |   |             |         |             |  |   |         |         |   |   |           |        
|Weighted average shares of common
	stock  diluted |                                                      |                                       |         |                   |   |             | 36,009  |             |  |   | 36,009  |         |   |   | 39,397    |        
|                                                   |                                                      |                                       |         |                   |   |             |         |             |  |   |         |         |   |   |           |        

See accompanying notes to consolidated financial
statements.

F-4



---



##### 



GAMESTOP CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY (DEFICIT)

|                                                                                                                                       |  |                |       |              |  |            |   |          |  |         |    |         |  |           |        |       |  |  |     |  |  |   |         |   |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----- | ------------ |  | ---------- | - | -------- |  | ------- | -- | ------- |  | --------- | ------ | ----- |  |  | --- |  |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                                                                       |  |                |       |              |  |            |   |          |  |        
|                                                                                                                                       |  |                |       | Common Stock |  | Additional |   | Retained |  |        
|                                                                                                                                       |  | Members       |       |              |  | Paid in    |   | Earnings |  |        
|                                                                                                                                       |  | Equity         |       | Shares       |  | Class A    |   | Shares   |  | Class B |    | Capital |  | (Deficit) |        | Total
|                                                                                                                                       |  |                |       |              |  |            |   |          |  |         |    |         |  |           |        |      
|                                                                                                                                       |  |               
|                                                                                                                                       |  | (In thousands)
|Predecessor Company                                                                                                                    |  |                |       |              |  |            |   |          |  |         |    |         |  |           |        |       |  |  |     |  |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at January 30, 1999                                                                                                            |  | $              | 5,000 |              |  |            |  |          |  |         | $ |         |  |           |       |       |  |  | $  |  |  | $ |        |   |  | $ | 24,805  |   |  | $ | 29,805  |  
|Distributions                                                                                                                          |  |                |      |              |  |            |  |          |  |         |   |         |  |           |       |       |  |  |    |  |  |   |        |   |  |   | (27,750 | ) |  |   | (27,750 | )
|Net loss for the 39 weeks ended
	October 30, 1999                                                                                      |  |                |      |              |  |            |  |          |  |         |   |         |  |           |       |       |  |  |    |  |  |   |        |   |  |   | (17,921 | ) |  |   | (17,921 | )
|                                                                                                                                       |  |                |       |              |  |            |   |          |  |         |    |         |  |           |        |       |  |  |     |  |  |   |         |   |  |   |         |   |  |   |         |  
|                                                                                                                                       |  |                | 5,000 |              |  |            |  |          |  |         |   |         |  |           |       |       |  |  |    |  |  |   |        |   |  |   | (20,866 | ) |  |   | (15,866 | )
|                                                                                                                                       |  |                |       |              |  |            |   |          |  |         |    |         |  |           |        |       |  |  |     |  |  |   |         |   |  |   |         |   |  |   |         |  
|Successor Company                                                                                                                      |  |                |       |              |  |            |   |          |  |         |    |         |  |           |        |       |  |  |     |  |  |   |         |   |  |   |         |   |  |   |         |  
|Issuance of common stock for members equity
	and elimination of deficit upon acquisition by Barnes &
	Noble, Inc. on October 30, 1999 |  |                |      |              |  |            |  |          |  |         |   |         |  |           | 36,009 |       |  |  | 36  |  |  |   | (15,902 | ) |  |   |        |   |  |   | (15,866 | )
|Net earnings for the 13 weeks ended
	January 29, 2000                                                                                  |  |                |      |              |  |            |  |          |  |         |   |         |  |           |       |       |  |  |    |  |  |   |        |   |  |   | 7,217   |   |  |   | 7,217   |  
|                                                                                                                                       |  |                |       |              |  |            |   |          |  |         |    |         |  |           |        |       |  |  |     |  |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at January 29, 2000                                                                                                            |  |                |      |              |  |            |  |          |  |         |   |         |  |           | 36,009 |       |  |  | 36  |  |  |   | (15,902 | ) |  |   | 7,217   |   |  |   | (8,649  | )
|Net loss for the 53 weeks ended
	February 3, 2001                                                                                      |  |                |      |              |  |            |  |          |  |         |   |         |  |           |       |       |  |  |    |  |  |   |        |   |  |   | (11,961 | ) |  |   | (11,961 | )
|                                                                                                                                       |  |                |       |              |  |            |   |          |  |         |    |         |  |           |        |       |  |  |     |  |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at February 3, 2001                                                                                                            |  |                |      |              |  |            |  |          |  |         |   |         |  |           | 36,009 |       |  |  | 36  |  |  |   | (15,902 | ) |  |   | (4,744  | ) |  |   | (20,610 | )
|Additional acquisition payments due to former
	owners                                                                                  |  |                |      |              |  |            |  |          |  |         |   |         |  |           |       |       |  |  |    |  |  |   | 9,665   |   |  |   |        |   |  |   | 9,665   |  
|Net earnings for the 52 weeks ended
	February 2, 2002                                                                                  |  |                |      |              |  |            |  |          |  |         |   |         |  |           |       |       |  |  |    |  |  |   |        |   |  |   | 6,960   |   |  |   | 6,960   |  
|                                                                                                                                       |  |                |       |              |  |            |   |          |  |         |    |         |  |           |        |       |  |  |     |  |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at February 2, 2002                                                                                                            |  | $              |      |              |  |            |  |          |  |         | $ |         |  |           | 36,009 |       |  |  | $36 |  |  | $ | (6,237  | ) |  | $ | 2,216   |   |  | $ | (3,985  | )
|                                                                                                                                       |  |                |       |              |  |            |   |          |  |         |    |         |  |           |        |       |  |  |     |  |  |   |         |   |  |   |         |   |  |   |         |  

See accompanying notes to consolidated financial
statements.

F-5



---



##### 



GAMESTOP CORP.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                      |                                                                                                              |                                                                                           |                                                            |                   |       |             |        |             |         |         |       |          |         |         |        |         |        |         |  
|----------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ----------------- | ----- | ----------- | ------ | ----------- | ------- | ------- | ----- | -------- | ------- | ------- | ------ | ------- | ------ | ------- | -
|                                                      |                                                                                                              | Predecessor                                                                               |                                                            |                  
|                                                      |                                                                                                              | Company                                                                                   |                                                            | Successor Company
|                                                      |                                                                                                              |                                                                                           |                                                            |                  
|                                                      |                                                                                                              | 39 Weeks                                                                                  |                                                            | 13 Weeks          |       | 53 Weeks    |        | 52 Weeks   
|                                                      |                                                                                                              | Ended                                                                                     |                                                            | Ended             |       | Ended       |        | Ended      
|                                                      |                                                                                                              | October 30,                                                                               |                                                            | January 29,       |       | February 3, |        | February 2,
|                                                      |                                                                                                              | 1999                                                                                      |                                                            | 2000              |       | 2001        |        | 2002       
|                                                      |                                                                                                              |                                                                                           |                                                            |                   |       |             |        |            
|                                                      |                                                                                                              |                                                                                          
|                                                      |                                                                                                              | (In thousands)                                                                           
|Cash flows from operating activities:                 |                                                                                                              |                                                                                           |                                                            |                   |       |             |        |             |         |         |       |          |         |         |        |        
|                                                      | Net earnings (loss)                                                                                          |                                                                                           | $                                                          | (17,921           | )     |             | $      | 7,217       |         |         | $     | (11,961  | )       |         | $      | 6,960   |       
|                                                      | Adjustments to reconcile net earnings
	(loss) to net cash flows provided by (used in) operating
	activities: |                                                                                           |                                                            |                   |       |             |        |             |         |         |       |          |         |         |        |         |       
|                                                      |                                                                                                              | Depreciation and amortization                                                             |                                                            |                   | 4,475 |             |        |             | 1,926   |         |       |          | 12,974  |         |        |         | 19,172 |        
|                                                      |                                                                                                              | Amortization of goodwill                                                                  |                                                            |                   |      |             |        |             | 1,687   |         |       |          | 9,223   |         |        |         | 11,125 |        
|                                                      |                                                                                                              | Amortization of loan cost                                                                 |                                                            |                   | 207   |             |        |             |        |         |       |          |        |         |        |         |       |        
|                                                      |                                                                                                              | Deferred taxes                                                                            |                                                            |                   |      |             |        |             | 657     |         |       |          | 2,090   |         |        |         | 319    |        
|                                                      |                                                                                                              | Loss (gain) on disposal of property and
	equipment                                        |                                                            |                   | 40    |             |        |             |        |         |       |          | (112    | )       |        |         | 1,035  |        
|                                                      |                                                                                                              | Increase in other long-term liabilities for
	scheduled rent increases in long-term leases |                                                            |                   | 278   |             |        |             | 108     |         |       |          | 326     |         |        |         | 347    |        
|                                                      |                                                                                                              | Changes in operating assets and liabilities, net
	Receivables, net                        |                                                            |                   | (195  | )           |        |             | 136     |         |       |          | (769    | )       |        |         | (2,204 | )      
|                                                      |                                                                                                              |                                                                                           | Merchandise inventories                                    |                   |       | (15,816     | )      |             |         | 14,675  |       |          |         | (10,800 | )      |         |        | (29,498 | )
|                                                      |                                                                                                              |                                                                                           | Prepaid expenses and other current assets                  |                   |       | 17          |        |             |         | (34     | )     |          |         | (1,986  | )      |         |        | 5,427   |  
|                                                      |                                                                                                              |                                                                                           | Accounts payable and accrued liabilities                   |                   |       | 58,783      |        |             |         | (27,760 | )     |          |         | 518     |        |         |        | 65,436  |  
|                                                      |                                                                                                              |                                                                                           |                                                            |                   |       |             |        |             |         |         |       |          |         |         |        |        
|                                                      |                                                                                                              |                                                                                           | Net cash flows provided by (used in) operating
	activities |                   |       | 29,868      |        |             |         | (1,388  | )     |          |         | (497    | )      |         |        | 78,119  |  
|                                                      |                                                                                                              |                                                                                           |                                                            |                   |       |             |        |             |         |         |       |          |         |         |        |        
|Cash flows from investing activities:                 |                                                                                                              |                                                                                           |                                                            |                   |       |             |        |             |         |         |       |          |         |         |        |        
|                                                      | Purchase of property and equipment                                                                           |                                                                                           |                                                            | (12,073           | )     |             |        | (4,290      | )       |         |       | (25,131  | )       |         |        | (20,462 | )     
|                                                      | Acquisition of Babbages Etc., LLC by Barnes
	& Noble, Inc., net of cash received                            |                                                                                           |                                                            |                  |       |             |        | (175,760    | )       |         |       |         |         |         |        |        |       
|                                                      | Acquisition of Funco, Inc., net of cash received                                                             |                                                                                           |                                                            |                  |       |             |        |            |         |         |       | (156,764 | )       |         |        |        |       
|                                                      | Net increase (decrease) in other noncurrent
	assets                                                          |                                                                                           |                                                            | (1,300            | )     |             |        | (67         | )       |         |       | 1,227    |         |         |        | (23     | )     
|                                                      |                                                                                                              |                                                                                           |                                                            |                   |       |             |        |             |         |         |       |          |         |         |        |        
|                                                      | Net cash flows used in investing activities                                                                  |                                                                                           |                                                            | (13,373           | )     |             |        | (180,117    | )       |         |       | (180,668 | )       |         |        | (20,485 | )     
|                                                      |                                                                                                              |                                                                                           |                                                            |                   |       |             |        |             |         |         |       |          |         |         |        |        
|Cash flows from financing activities:                 |                                                                                                              |                                                                                           |                                                            |                   |       |             |        |             |         |         |       |          |         |         |        |        
|                                                      | Repayment of subordinated debt  affiliates                                                                  |                                                                                           |                                                            | (10,000           | )     |             |        |            |         |         |       |         |         |         |        |        |       
|                                                      | Increase in payable to Barnes & Noble, Inc.
	attributable to:                                                |                                                                                           |                                                            |                   |       |             |        |             |         |         |       |          |         |         |        |         |       
|                                                      |                                                                                                              | Babbages Etc. LLC purchase                                                               |                                                            |                   |      |             |        |             | 175,760 |         |       |          |        |         |        |         |       |        
|                                                      |                                                                                                              | Funco, Inc. purchase                                                                      |                                                            |                   |      |             |        |             |        |         |       |          | 159,144 |         |        |         |       |        
|                                                      | Net increase in other payable to Barnes &                                                                    |                                                                                           |                                                            |                   |       |             |        |             |         |         |       |          |         |         |        |         |       
|                                                      |                                                                                                              | Noble, Inc.                                                                               |                                                            |                   |      |             |        |             | 1,227   |         |       |          | 24,050  |         |        |         | 14,475 |        
|                                                      | Distribution to members                                                                                      |                                                                                           |                                                            | (27,750           | )     |             |        |            |         |         |       |         |         |         |        |        |       
|                                                      |                                                                                                              |                                                                                           |                                                            |                   |       |             |        |             |         |         |       |          |         |         |        |        
|                                                      | Net cash flows provided by (used in) financing
	activities                                                   |                                                                                           |                                                            | (37,750           | )     |             |        | 176,987     |         |         |       | 183,194  |         |         |        | 14,475  |       
|                                                      |                                                                                                              |                                                                                           |                                                            |                   |       |             |        |             |         |         |       |          |         |         |        |        
|Net increase (decrease) in cash and cash
	equivalents |                                                                                                              |                                                                                           | (21,255                                                    | )                 |       |             | (4,518 | )           |         |         | 2,029 |          |         |         | 72,109 |        
|Cash and cash equivalents at beginning of period      |                                                                                                              |                                                                                           | 32,385                                                     |                   |       |             | 11,130 |             |         |         | 6,612 |          |         |         | 8,641  |        
|                                                      |                                                                                                              |                                                                                           |                                                            |                   |       |             |        |             |         |         |       |          |         |         |        |        
|Cash and cash equivalents at end of period            |                                                                                                              | $                                                                                         | 11,130                                                     |                   |       | $           | 6,612  |             |         | $       | 8,641 |          |         | $       | 80,750 |        
|                                                      |                                                                                                              |                                                                                           |                                                            |                   |       |             |        |             |         |         |       |          |         |         |        |        

See accompanying notes to consolidated financial
statements.

F-6



---



##### 



GAMESTOP CORP.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Summary of
Significant Accounting Policies

Background
and Basis of Presentation

GameStop Corp. (GameStop or the Company) was
incorporated under the laws of the State of Delaware in August
2001 as a holding company for GameStop, Inc. GameStop Corp. is a
wholly-owned subsidiary of Barnes & Noble, Inc.
(Barnes & Noble).

GameStop is principally engaged in the sale of
video game systems and software, personal computer software and
related accessories through its GameStop, Babbages,
Software Etc., and FuncoLand trade names, a Web site
(gamestop.com) and Game Informer magazine. The Company
operates their business as a single segment. The Companys
stores, which totaled 1,038 at February 2, 2002, are
located in major regional shopping malls and strip centers in
49 states, Puerto Rico and Guam.

The Company began operations in November 1996
when Leonard Riggio, the Chairman of the Board, formed
Babbages Etc. LLC (Babbages) and acquired most of
the assets of Neostar Retail Group, Inc. at an auction held in
the U.S. Bankruptcy Court. In October 1999, Mr. Riggio sold
Babbages to Barnes & Noble and Babbages
became a wholly-owned subsidiary of Barnes & Noble. As
a result of the acquisition of Babbages, on
October 30, 1999, a change in control occurred, and a new
reporting entity exists. The consolidated financial statements
reflect push-down accounting in accordance with
Securities and Exchange Commission (SEC) Staff Accounting
Bulletin No. 54 (SAB 54) under which the allocation of
the purchase price and the related acquisition debt were
recorded on the Companys financial statements and the
deficit in retained earnings was eliminated. Because the
financial statements of the Company subsequent to the
acquisition by Barnes & Noble are not directly comparable to
those of the Company prior to the acquisition, a distinction was
made between the Predecessor Company and the
Successor Company throughout the financial
statements to clearly separate the financial position, results
of operations and cash flows of the Company before and after the
change in control.

During June 2000, Barnes & Noble acquired
Funco, Inc., a publicly traded company on the NASDAQ National
Market and, thereafter, through a corporate restructuring,
Babbages became a wholly-owned subsidiary of Funco, Inc.
In December 2000, the name of Funco, Inc. was changed to
GameStop, Inc.

Upon the effective date of the initial public
offering (see Note 12), the Companys Board of
Directors approved the authorization of 5,000 shares of
preferred stock, 300,000 shares of Class A common stock and
100,000 shares of Class B common stock. At the same time,
the Companys common stock outstanding was converted to
36,009 shares of Class B common stock. The consolidated
financial statements and related net earnings (loss) per
common share reflect the authorized number of shares as if the
shares were authorized on October 31, 1999.

Consolidation

The consolidated financial statements include the
accounts of GameStop Corp. and its wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been
eliminated in consolidation. All dollar and share amounts in the
consolidated financial statements and notes to the consolidated
financial statements are stated in thousands unless otherwise
indicated.

Year-End

The Companys fiscal year is composed of the
52 or 53 weeks ending on the Saturday closest to the last
day of January. Fiscal 1999 consisted of the 52 weeks ending on
January 29, 2000. Fiscal 2000 consisted of the
53 weeks ending on February 3, 2001. Fiscal 2001
consisted of the 52 weeks ending on February 2, 2002.

F-7



---



##### 



GAMESTOP CORP.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Cash and Cash
Equivalents

The Company considers all short-term,
highly-liquid instruments purchased with an original maturity of
three months or less to be cash equivalents. The Companys
cash and cash equivalents are carried at cost, which
approximates market value, and consist primarily of time
deposits.

Merchandise
Inventories

Our merchandise inventories are carried at the
lower of cost or market using the average cost method. Used
video game products traded in by customers are recorded as
inventory at the amount of the store credit given to the
customer. In valuing inventory, management is required to make
assumptions regarding the necessity of reserves required to
value potentially obsolete or over-valued items at the lower of
cost or market. Management considers quantities on hand, recent
sales, potential price protections and returns to vendors, among
other factors, when making these assumptions.

Property and
Equipment

Property and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation is
computed using the straight-line method over estimated useful
lives (ranging from two to eight years). Maintenance and repairs
are expensed as incurred, while betterments and major remodeling
costs are capitalized. Leasehold improvements are capitalized
and amortized over the shorter of their estimated useful lives
or the terms of the respective leases (ranging from three to ten
years). Capitalized lease acquisition costs are being amortized
over the average lease terms of the underlying leases. Costs
incurred in purchasing management information systems are
capitalized and included in property and equipment; these costs
are amortized over their estimated useful lives from the date
the systems become operational.

Long-Lived
Assets

The Companys long-lived assets include
property and equipment and goodwill. At February 2, 2002,
the Company had $51.6 million of property and equipment,
net of accumulated depreciation and 318.0 million of
goodwill, net of amortization, accounting for approximately
60.9% of the Companys total assets. The goodwill was
recorded in the acquisition of Funco, Inc. and through the
application of push-down accounting in accordance
with SAB 54 in connection with the acquisition of
Babbages by a subsidiary of Barnes & Noble. Goodwill
represents the excess purchase price over tangible net assets
acquired and is being amortized on a straight-line basis over a
30-year period. Accumulated amortization at February 3,
2001 and February 2, 2002 was $10,910 and $22,035,
respectively. The amortization of goodwill associated with the
acquisition of Babbages is deductible for tax purposes,
whereas the amortization of goodwill associated with the Funco
acquisition is not deductible for tax purposes. This
non-deductible goodwill amortization affects our effective tax
rate as a stand-alone corporation. The Company periodically
reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that their carrying amounts
may not be recoverable or their depreciation or amortization
periods should be accelerated. The Company assesses
recoverability based on several factors, including
managements intention with respect to its stores and those
stores projected undiscounted cash flows. An impairment
loss would be recognized for the amount by which the carrying
amount of the assets exceeds the present value of their
projected cash flows. No write-downs have been necessary through
February 2, 2002. For a further discussion, see Recently
Issued Accounting Pronouncements.

Revenue
Recognition

Revenue from the sales of the Companys
products is recognized at the time of sale. The sales of used
video game products are recorded at the retail price charged to
the customer. Sales returns (which are not significant) are
recognized at the time returns are made.

F-8



---



##### 



GAMESTOP CORP.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Subscription and advertising revenues are
recorded upon release of magazines for sale to consumers and are
stated net of sales discounts. Magazine subscription revenue is
recognized on a straight-line basis over the subscription period.

Pre-Opening
Expenses

All costs associated with the opening of new
stores are expensed as incurred. Pre-opening expenses are
included in selling, general and administrative expenses in the
accompanying consolidated statements of operations.

Closed Store
Expenses

Upon a formal decision to close or relocate a
store, the Company charges unrecoverable costs to expense. Such
costs include the net book value of abandoned fixtures and
leasehold improvements and a provision for future lease
obligations, net of expected sublease recoveries. Costs
associated with store closings are included in selling, general
and administrative expenses in the accompanying consolidated
statements of operations.

Advertising
Expenses

The Company expenses advertising for newspapers
and other media when the advertising takes place. Advertising
expenses for newspapers and other media during the 39 weeks
ended October 30, 1999, the 13 weeks ended January 29,
2000, the 53 weeks ended February 3, 2001 and the 52 weeks
ended February 2, 2002, were $23, $56, $228 and $838,
respectively.

Income
Taxes

For periods prior to the acquisition of
Babbages by Barnes & Noble, the Company was not
subject to federal and most state income taxes, and its income
was taxed directly to its members. Pro forma income taxes on the
accompanying consolidated statements of operations represents
what income taxes would have been had the predecessor been taxed
as a C corporation in all jurisdictions for the
39-week period ended October 30, 1999. From the date of
acquisition by Barnes & Noble, GameStop has been included in
the consolidated federal tax return of Barnes & Noble. The
income tax provisions (benefits) recorded in the financial
statements flow through the payable to Barnes & Noble.

Following the closing of the initial public
offering (see Note 12), Barnes & Noble owned less
than 80% of GameStop Corp. and, accordingly, will not be
permitted to consolidate GameStops operations for income
tax purposes. Accordingly, the financial statements for periods
subsequent to the acquisition reflect income tax expense as if
GameStop had filed separate income tax returns. As a result, the
Company accounts for income taxes in accordance with the
provisions of SFAS 109 Accounting for Income
Taxes. SFAS 109 utilizes an asset and liability
approach, and deferred taxes are determined based on the
estimated future tax effect of differences between the financial
reporting and tax bases of assets and liabilities using enacted
tax rates.

Net Earnings
(Loss) Per Common Share

Net earnings (loss) per common share is
presented under Statement of Financial Accounting Standards
No. 128, Earnings Per Share (SFAS 128).
Basic earnings (loss) per common share is computed using
the weighted average number of common shares outstanding during
the period and excludes any dilutive effects of the
Companys outstanding options.

Diluted earnings per common share is computed
using the weighted average number of common and dilutive common
shares outstanding during the period. Due to the Companys
net loss for the 39 weeks ended October 30, 1999 and
the 53 weeks ended February 3, 2001, potentially
dilutive securities have been excluded from the computation for
those periods, as their effect is anti-dilutive.

F-9



---



##### 



GAMESTOP CORP.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Stock
Options

The Company accounts for all transactions under
which employees receive shares of stock or other equity
instruments in the Company or its parent in amounts based on the
price of its stock in accordance with the provisions of
Accounting Principles Board Opinion 25 
Accounting for Stock Issued to Employees.

Use of
Estimates

The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. In preparing these
financial statements, management has made its best estimates and
judgments of certain amounts included in the financial
statements, giving due consideration to materiality. Changes in
the estimates and assumptions used by management could have
significant impact on the Companys financial results.
Actual results could differ from those estimates.

Fair Values
of Financial Instruments

The carrying values of cash and cash equivalents
reported in the accompanying consolidated balance sheets
approximate fair value due to the short-term maturities of these
assets.

Recently
Issued Accounting Pronouncements

In June 2001, the Financial Accounting Standards
Board finalized FASB Statements No. 141, Business
Combinations (SFAS 141), No. 142, Goodwill and
Other Intangible Assets (SFAS 142),
No. 143, Accounting for Asset Retirement Obligations
(SFAS 143) and No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS
144).

SFAS 141 requires the use of the purchase method
of accounting and prohibits the use of the pooling-of-interests
method of accounting for business combinations initiated after
June 30, 2001. SFAS 141 also requires that the Company
recognize acquired intangible assets apart from goodwill if the
acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after
June 30, 2001 and for purchase business combinations
completed on or after July 1, 2001. It also requires, upon
adoption of SFAS 142, that the Company reclassify the
carrying amounts of certain intangible assets and goodwill based
on the criteria in SFAS 141.

SFAS 142 requires, among other things, that
companies no longer amortize goodwill, but instead test goodwill
for impairment at least annually. In addition, SFAS 142
requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill,
reassess the useful lives of other existing recognized
intangible assets, and cease amortization of intangible assets
with an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is
required to be applied in fiscal years beginning after
December 15, 2001 to all goodwill and other intangible
assets recognized at that date, regardless of when those assets
were initially recognized. SFAS 142 requires the Company to
complete a transitional goodwill impairment test six months from
the date of adoption. The Company is also required to reassess
the useful lives of other intangible assets within the first
interim quarter after adoption of SFAS 142.

The Companys previous business combinations
were accounted for using the purchase method. As of
February 2, 2002, the net carrying amount of goodwill was
$317,957. Amortization expense during the 52 weeks ended
February 2, 2002 was $11,125. The Company intends to
complete the transitional goodwill impairment test within six
months from the date of adoption. Currently, the Company is
assessing but has not

F-10



---



##### 



GAMESTOP CORP.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


yet determined how the adoption of SFAS 141
and SFAS 142 will impact its financial position and results
of operations.

SFAS 143 requires that the fair value for an
asset retirement obligation be recognized in the period in which
it is incurred if a reasonable estimate of fair value can be
made, and that the carrying amount of the asset, including
capitalized asset retirement costs, be tested for impairment.
SFAS 143 is effective for fiscal years beginning after
June 15, 2002. Management does not believe this statement
will have a material effect on the Companys financial
position or results of operations.

SFAS 144 prescribes financial accounting and
reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of, and specifies when to test
a long-lived asset for recoverability. SFAS 144 is effective for
fiscal years beginning after December 15, 2001. Management
does not believe this statement will have a material effect on
the Companys financial position or results of operations.

2.     Acquisitions

On October 30, 1999, the net assets of
Babbages were purchased by Barnes & Noble. The
acquisition was accounted for by Barnes & Noble under the
purchase method of accounting and the $198,967 excess of the
$186,520 purchase price over the fair value of the net
liabilities assumed has been recorded as goodwill by the Company
through the application of push-down accounting in
accordance with SAB 54. In connection with the acquisition
of Babbages, its management approved bonuses for its
employees aggregating $26,789 which were charged to operations
during the 39 weeks ended October 30, 1999.

The purchase agreement between Babbages and
Barnes & Noble stipulated certain financial performance
targets, which if met, would provide additional payments to the
former owners of Babbages. GameStops results from
operations met the specified financial performance targets for
the fiscal year ended February 2, 2002. As a result, Barnes
& Noble will make an additional payment in the amount of
$9,665 to the former owners of Babbages, and GameStop has
recognized additional goodwill and paid in capital in the amount
of $9,665 at February 2, 2002.

On June 14, 2000, a wholly-owned subsidiary
of Barnes & Noble acquired all of the outstanding shares of
Funco, Inc., a Minneapolis-based electronic games retailer. The
acquisition was accounted for by Barnes & Noble under the
purchase method of accounting. The excess of the $167,560
acquisition cost over the fair value of the net assets acquired,
in the amount of $131,360, has been recorded as goodwill.

The Company has allocated the purchase price to
assets and liabilities based on managements best estimates
of the respective fair values with the excess cost over the net
assets acquired allocated to goodwill as follows:

|                                         |  |   |         |  
|---------------------------------------- |  | - | ------- | -
|Purchase price                           |  | $ | 159,162 |  
|Adjustment to accrued liabilities        |  |   | 145     |  
|Acquisition costs                        |  |   | 8,253   |  
|                                         |  |   |         |  
|Total Cost of Acquisition                |  | $ | 167,560 |  
|                                         |  |   |         |  
|Total Cost of Acquisition                |  | $ | 167,560 |  
|Less: cash received                      |  |   | (10,651 | )
|Adjustment to accrued liabilities        |  |   | (145    | )
|                                         |  |   |         |  
|Cash paid for Funco (investing activity) |  | $ | 156,764 |  
|                                         |  |   |         |  

F-11



---



##### 



GAMESTOP CORP.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                            |  |   |         |  
|--------------------------- |  | - | ------- | -
|Cash                        |  | $ | 10,651  |  
|Receivables, net            |  |   | 535     |  
|Inventory                   |  |   | 28,662  |  
|Prepaids and other          |  |   | 10,800  |  
|Fixed assets, net           |  |   | 12,632  |  
|Other noncurrent assets     |  |   | 1,806   |  
|Accounts payable            |  |   | (11,864 | )
|Accrued liabilities         |  |   | (16,515 | )
|Other long-term liabilities |  |   | (507    | )
|Goodwill                    |  |   | 131,360 |  
|                            |  |   |         |  
|Total Cost of Acquisition   |  | $ | 167,560 |  
|                            |  |   |         |  

The unaudited pro forma consolidated statements
of operations data for the 39 weeks ended October 30,
1999, 13 weeks ended January 29, 2000, and
53 weeks ended February 3, 2001, set forth below gives
effect to the acquisitions of Babbages Etc. LLC and Funco,
Inc. as if they occurred on January 30, 1999. The unaudited
pro forma results include adjustments to reflect a full year of
amortization of goodwill recorded in conjunction with the
acquisition and interest on the acquisition debt.

|                                                   |  |                  |         |                   |  |                  |         |  |  |   |         |  
|-------------------------------------------------- |  | ---------------- | ------- | ----------------- |  | ---------------- | ------- |  |  | - | ------- | -
|                                                   |  | Predecessor      |         |                  
|                                                   |  | Company          |         | Successor Company
|                                                   |  |                  |         |                  
|                                                   |  | 39 Weeks Ended   |         | 13 Weeks Ended    |  | 53 Weeks Ended  
|                                                   |  | October 30, 1999 |         | January 29, 2000  |  | February 3, 2001
|                                                   |  |                  |         |                   |  |                 
|                                                   |  | (In thousands)   |         |                  
|                                                   |  |                  |         | (In thousands)   
|Sales                                              |  | $                | 474,300 |                   |  | $                | 328,600 |  |  | $ | 828,000 |  
|Net earnings (loss)                                |  | $                | (23,600 | )                 |  | $                | 9,526   |  |  | $ | (16,439 | )
|Net earnings (loss) per share 
	basic and diluted |  |                  |         |                   |  | $                | 0.26    |  |  | $ | (0.46   | )

3.     Payable to
Barnes & Noble

On November 18, 1997, Barnes & Noble
obtained an $850,000, five-year senior revolving credit facility
(the Revolving Credit Facility) with a syndicate led by the
Chase Manhattan Bank. The Revolving Credit Facility permits
borrowings at various interest rate options based upon the prime
rate or London Interbank Office Rate (LIBOR) depending upon
certain financial tests. The Revolving Credit Facility contains
covenants, limitations, and events of default typical of credit
facilities of this size and nature, including financial
covenants which require and which limit capital expenditures
pertaining to Barnes & Noble. The Revolving Credit Facility
is secured by the capital stock, accounts receivable and general
intangibles of the subsidiaries (including the Company) of
Barnes & Noble.

Amounts available under the Revolving Credit
Facility were used to fund the acquisitions described in
Note 2, and Barnes & Noble has allocated such debt to
the Company, as reflected in the accompanying consolidated
balance sheets. Barnes & Noble charged the Company interest
of $3,121, $23,462 and $19,575, relating to this debt for the
periods ended January 29, 2000, February 3, 2001 and
February 2, 2002, respectively.

F-12



---



##### 



GAMESTOP CORP.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


4.     Receivables,
Net

Receivables represent primarily bankcard and
other receivables as follows:

|                                |  |                |       |             |  |   |       |  
|------------------------------- |  | -------------- | ----- | ----------- |  | - | ----- | -
|                                |  | February 3,    |       | February 2,
|                                |  | 2001           |       | 2002       
|                                |  |                |       |            
|                                |  |               
|                                |  | (In thousands)
|Bankcard receivables            |  | $              | 2,656 |             |  | $ | 4,090 |  
|Other receivables               |  |                | 1,198 |             |  |   | 1,973 |  
|Allowance for doubtful accounts |  |                | (128  | )           |  |   | (133  | )
|                                |  |                |       |             |  |   |       |  
|Total receivables, net          |  | $              | 3,726 |             |  | $ | 5,930 |  
|                                |  |                |       |             |  |   |       |  

5.     Leases

The Company leases retail stores, warehouse
facilities, office space and equipment. These are generally
leased under noncancelable agreements that expire at various
dates through 2013 with various renewal options for additional
periods. The agreements, which have been classified as operating
leases, generally provide for both minimum and percentage
rentals and require the Company to pay all insurance, taxes and
other maintenance costs. Percentage rentals are based on sales
performance in excess of specified minimums at various stores.

Approximate rental expenses under operating
leases are as follows:

|                   |  |                |        |                   |  |             |        |             |  |   |        |  |  |   |        | 
|------------------ |  | -------------- | ------ | ----------------- |  | ----------- | ------ | ----------- |  | - | ------ |  |  | - | ------ | 
|                   |  | Predecessor    |        |                  
|                   |  | Company        |        | Successor Company
|                   |  |                |        |                  
|                   |  | 39 Weeks       |        | 13 Weeks          |  | 53 Weeks    |        | 52 Weeks   
|                   |  | Ended          |        | Ended             |  | Ended       |        | Ended      
|                   |  | October 30,    |        | January 29,       |  | February 3, |        | February 2,
|                   |  | 1999           |        | 2000              |  | 2001        |        | 2002       
|                   |  |                |        |                   |  |             |        |            
|                   |  |               
|                   |  | (in thousands)
|Minimum            |  | $              | 17,000 |                   |  | $           | 6,000  |             |  | $ | 35,000 |  |  | $ | 42,000 | 
|Percentage rentals |  |                | 4,000  |                   |  |             | 4,000  |             |  |   | 6,000  |  |  |   | 11,000 | 
|                   |  |                |        |                   |  |             |        |             |  |   |        |  |  |   |        | 
|                   |  | $              | 21,000 |                   |  | $           | 10,000 |             |  | $ | 41,000 |  |  | $ | 53,000 | 
|                   |  |                |        |                   |  |             |        |             |  |   |        |  |  |   |        | 

Future minimum annual rentals, excluding
percentage rentals, required under leases that had initial,
noncancelable lease terms greater than one year, as of
February 2, 2002 are approximately

|             |  |                |         | 
|------------ |  | -------------- | ------- | 
|Year Ended   |  | Amount        
|             |  |               
|             |  | (In thousands)
|January 2003 |  | $              | 39,000  | 
|January 2004 |  |                | 31,000  | 
|January 2005 |  |                | 25,000  | 
|January 2006 |  |                | 20,000  | 
|January 2007 |  |                | 17,000  | 
|Thereafter   |  |                | 44,000  | 
|             |  |                |         | 
|             |  | $              | 176,000 | 
|             |  |                |         | 

6.     Litigation

Various claims and lawsuits arising in the normal
course of business are pending against the Company. The subject
matter of these proceedings primarily includes commercial
disputes and employment issues. The

F-13



---



##### 



GAMESTOP CORP.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


results of these proceedings are not expected to
have a material adverse effect on the Companys
consolidated financial position or results of operations.

7.     Income
Taxes

For periods prior to the acquisition of
Babbages Etc. LLC by Barnes & Noble, the
Companys predecessor was not subject to federal and most
state income taxes, and its income was taxed directly to its
members. Accordingly, the consolidated statement of operations
includes the actual state taxes paid totaling $100 for the
39 weeks ended October 30, 1999.

Subsequent to the acquisition, the financial
statements reflect income taxes as if the Company had filed
separate tax returns as a C corporation on a
stand-alone basis.

The historical provision for income tax consisted
of the following:

|                                   |         |                  |       |                  |  |                  |        |        |   |   |       |       | 
|---------------------------------- | ------- | ---------------- | ----- | ---------------- |  | ---------------- | ------ | ------ | - | - | ----- | ----- | 
|                                   |         | 13 Weeks Ended   |       | 53 Weeks Ended   |  | 52 Weeks Ended  
|                                   |         | January 29, 2000 |       | February 3, 2001 |  | February 2, 2002
|                                   |         |                  |       |                  |  |                 
|                                   |         |                 
|                                   |         | (In thousands)  
|Current tax expense (benefit):     |         |                  |       |                  |  |                  |        |        |   |   |       |      
|                                   | Federal |                  | $     | 3,453            |  |                  | $      | (6,349 | ) |   | $     | 5,892 | 
|                                   | State   |                  |       | 858              |  |                  |        | (1,577 | ) |   |       | 1,464 | 
|                                   |         |                  |       |                  |  |                  |        |        |   |   |       |      
|                                   |         |                  | 4,311 |                  |  |                  | (7,926 | )      |   |   | 7,356 |      
|                                   |         |                  |       |                  |  |                  |        |        |   |   |       |      
|Deferred tax expense (benefit):    |         |                  |       |                  |  |                  |        |        |   |   |       |      
|                                   | Federal |                  |       | 526              |  |                  |        | 1,673  |   |   |       | 256   | 
|                                   | State   |                  |       | 131              |  |                  |        | 417    |   |   |       | 63    | 
|                                   |         |                  |       |                  |  |                  |        |        |   |   |       |      
|                                   |         |                  | 657   |                  |  |                  | 2,090  |        |   |   | 319   |      
|                                   |         |                  |       |                  |  |                  |        |        |   |   |       |      
|Total income tax expense (benefit) |         | $                | 4,968 |                  |  | $                | (5,836 | )      |   | $ | 7,675 |      
|                                   |         |                  |       |                  |  |                  |        |        |   |   |       |      

The difference in income tax provided and the
amounts determined by applying the statutory rate to income
before income taxes result from the following:

|                                          |  |                  |      |                  |  |                  |       |    |  |  |      |  
|----------------------------------------- |  | ---------------- | ---- | ---------------- |  | ---------------- | ----- | -- |  |  | ---- | -
|                                          |  | 13 Weeks Ended   |      | 53 Weeks Ended   |  | 52 Weeks Ended  
|                                          |  | January 29, 2000 |      | February 3, 2001 |  | February 2, 2002
|                                          |  |                  |      |                  |  |                 
|Federal statutory tax rate                |  |                  | 35.0 | %                |  |                  | (35.0 | )% |  |  | 35.0 | %
|State income taxes, net of federal effect |  |                  | 5.3  |                  |  |                  | (4.3  | )  |  |  | 6.8  |  
|Non-deductible Goodwill amortization      |  |                  | 0.5  |                  |  |                  | 6.2   |    |  |  | 10.5 |  
|Other (including permanent differences)   |  |                  |     |                  |  |                  | 0.3   |    |  |  | 0.1  |  
|                                          |  |                  |      |                  |  |                  |       |    |  |  |      |  
|                                          |  |                  | 40.8 | %                |  |                  | (32.8 | )% |  |  | 52.4 | %
|                                          |  |                  |      |                  |  |                  |       |    |  |  |      |  

Differences between financial accounting
principles and tax laws cause differences between the bases of
certain assets and liabilities for financial reporting purposes
and tax purposes. The tax effects of these differences, to the
extent they are temporary, are recorded as deferred tax assets
and liabilities under SFAS 109. Deferred tax assets
primarily relate to inventory capitalization temporary
differences and deferred tax liabilities primarily relate to
temporary differences in connection with tax-deductible goodwill.

8.     Stock Option
Plan

Effective August 2001, Barnes & Noble
approved the 2001 Incentive Plan of GameStop Corp. The 2001
Incentive Plan will assume (by the issuance of replacement
options) all stock options outstanding as of the effective date
under the 2000 Incentive Plan of GameStop, Inc. under the same
terms.

F-14



---



##### 



GAMESTOP CORP.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Effective September 13, 2000,
Barnes & Noble approved the 2000 Incentive Plan of
GameStop, Inc. (the Option Plan). The Option Plan
provides a maximum aggregate amount of 15,000 shares of common
stock with respect to which options may be granted and provides
for the granting of incentive stock options, non-qualified stock
options, and restricted stock, which may include, without
limitation, restrictions on the right to vote such shares and
restrictions on the right to receive dividends on such shares.
The options to purchase common shares generally are issued at
fair market value on the date of grant. Generally, the options
vest and become exercisable ratably over a three-year period,
commencing one year after the grant date, and expire ten years
from issuance.

On December 5, 2000, the Company granted
4,488 options to its employees based upon the fair value of the
shares at the date of grant ($3.53 per share) as determined by
an independent appraisal. On June 13, 2001 (unaudited),
options to acquire 4,500 shares were granted with immediate
vesting at an exercise price of $4.51 per share to Leonard
Riggio based on the fair value at the date of grant as
determined by an independent appraisal. During the 52 weeks
ended February 2, 2002, 178 options were forfeited. At
February 2, 2002, the Company had 8,810 options outstanding.

During the 13 weeks ended January 29,
2000, options to acquire approximately 350 shares of Barnes
& Noble were issued to GameStop employees pursuant to the
Barnes & Noble stock option plan. Such grants were made at
the fair market value of Barnes & Noble common stock at the
date of grant.

The Company applies APB Opinion No. 25 and
related interpretations in accounting for its stock options and,
accordingly, no compensation cost has been recognized for stock
options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for
its stock options, including options in Barnes & Noble
common stock granted to GameStop employees, consistent with the
method set forth under SFAS No. 123, the Companys pro
forma net loss and loss per share for the 13 weeks ended
January 29, 2000, the 53 weeks ended February 3,
2001 and for the 52 weeks ended February 2, 2002 would
have been as follows:

|                                                    |             |                                       |      |             |  |             |       |         |   |   |      |       | 
|--------------------------------------------------- | ----------- | ------------------------------------- | ---- | ----------- |  | ----------- | ----- | ------- | - | - | ---- | ----- | 
|                                                    |             |                                      
|                                                    |             | Successor Company                    
|                                                    |             |                                      
|                                                    |             | 13 Weeks                              |      | 53 Weeks    |  | 52 Weeks   
|                                                    |             | Ended                                 |      | Ended       |  | Ended      
|                                                    |             | January 29,                           |      | February 3, |  | February 2,
|                                                    |             | 2000                                  |      | 2001        |  | 2002       
|                                                    |             |                                       |      |             |  |            
|                                                    |             |                                      
|                                                    |             | (In thousands, except per share data)
|Net earnings (loss):                                |             |                                       |      |             |  |             |       |         |   |   |      |      
|                                                    | As reported |                                       | $    | 7,217       |  |             | $     | (11,961 | ) |   | $    | 6,960 | 
|                                                    | Pro forma   |                                       | $    | 7,182       |  |             | $     | (12,556 | ) |   | $    | 6,764 | 
|Net earnings (loss) per share 
	assuming dilution: |             |                                       |      |             |  |             |       |         |   |   |      |      
|As reported                                         |             | $                                     | 0.20 |             |  | $           | (0.33 | )       |   | $ | 0.18 |      
|Pro forma                                           |             | $                                     | 0.20 |             |  | $           | (0.35 | )       |   | $ | 0.17 |      

The weighted-average fair value of the options
granted during the 13 weeks ended January 29, 2000,
the 53 weeks ended February 3, 2001, and the
52 weeks ended February 2, 2002 were estimated at
$10.26, $1.60 and $2.75, respectively, using the Black-Scholes
option pricing model with the following assumptions:

|                        |  |                   |      |             |  |             |      |   |  |  |      |  
|----------------------- |  | ----------------- | ---- | ----------- |  | ----------- | ---- | - |  |  | ---- | -
|                        |  |                  
|                        |  | Successor Company
|                        |  |                  
|                        |  | 13 Weeks          |      | 53 Weeks    |  | 52 Weeks   
|                        |  | Ended             |      | Ended       |  | Ended      
|                        |  | January 29,       |      | February 3, |  | February 2,
|                        |  | 2000              |      | 2001        |  | 2002       
|                        |  |                   |      |             |  |            
|Volatility              |  |                   | 61.1 | %           |  |             | 61.1 | % |  |  | 61.1 | %
|Risk-free interest rate |  |                   | 6.54 | %           |  |             | 5.56 | % |  |  | 4.97 | %
|Expected life (years)   |  |                   | 6.0  |             |  |             | 6.0  |   |  |  | 6.0  |  

F-15



---



##### 



GAMESTOP CORP.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


9.     Employees
Defined Contribution Plan

The Company sponsors a defined contribution plan
(the Savings Plan) for the benefit of substantially all of its
employees who meet certain eligibility requirements, primarily
age and length of service. The Savings Plan allows employees to
invest up to 15% of their current gross cash compensation
invested on a pre-tax basis, at their option. The Companys
optional contributions to the Savings Plan are generally in
amounts based upon a certain percentage of the employees
contributions. The Companys contributions to the Savings
Plan during the 39 weeks ended October 30, 1999, the
13 weeks ended January 29, 2000, the 53 weeks
ended February 3, 2001 and the 52 weeks ended
February 2, 2002, were $249, $115, $481 and $660,
respectively.

10.     Certain
Relationships and Related Transactions

The Company operates departments within
bookstores operated by Barnes & Noble, an affiliate of
the Company. The Company pays a license fee to Barnes &
Noble in amounts equal to 7.0% of the gross sales of such
departments. Management deems the license fee to be reasonable
and based upon terms equivalent to those that would prevail in
an arms length transaction. During the 39 weeks ended
October 30, 1999, the 13 weeks ended January 29,
2000, the 53 weeks ended February 3, 2001 and the
52 weeks ended February 2, 2002 these charges amounted
to $641, $322, $886 and $1,098, respectively.

The Company participates in Barnes &
Nobles workers compensation, property and general
liability insurance programs. The costs incurred by
Barnes & Noble under these programs are allocated to
the Company based upon the Companys total payroll expense,
property and equipment, and insurance claim history. Management
deems the allocation methodology to be reasonable. During the
39 weeks ended October 30, 1999, the 13 weeks
ended January 29, 2000, the 53 weeks ended
February 3, 2001 and the 52 weeks ended
February 2, 2002 these allocated charges amounted to $347,
$116, $632 and $1,291, respectively.

On May 1, 2001, the Company entered into an
agreement with barnesandnoble.com llc, a company in which Barnes
& Noble owns an approximately 36% interest, pursuant to
which the Company sells video game products and PC entertainment
software through barnesandnoble.coms web site. The Company
pays barnesandnoble.com llc a referral fee on its net sales from
purchases made through barnesandnoble.com llcs web site.
For the 52 weeks ended February 2, 2002, these
referral fees amounted to $80.

The Company utilizes the management and strategic
advisory services of Leonard Riggio during the normal course of
its operations. The annual compensation paid by
Barnes & Noble to Leonard Riggio is allocated to the
Company based upon the amount of time Mr. Riggio devotes to
the Company as well as his duties and responsibilities.
Management deems the allocation methodology to be reasonable.
During the 13 weeks ended January 29, 2000, the
53 weeks ended February 3, 2001 and the 52 weeks
ended February 2, 2002, this allocated compensation
amounted to $124, $400 and $325, respectively.

F-16



---



##### 



GAMESTOP CORP.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


11.     Supplemental
Cash Flow Information

|                                 |                                                                  |                |   |                   |  |             |         |             |   |   |         |         |   |   |   |        |  
|-------------------------------- | ---------------------------------------------------------------- | -------------- | - | ----------------- |  | ----------- | ------- | ----------- | - | - | ------- | ------- | - | - | - | ------ | -
|                                 |                                                                  | Predecessor    |   |                  
|                                 |                                                                  | Company        |   | Successor Company
|                                 |                                                                  |                |   |                  
|                                 |                                                                  | 39 Weeks       |   | 13 Weeks          |  | 53 Weeks    |         | 52 Weeks   
|                                 |                                                                  | Ended          |   | Ended             |  | Ended       |         | Ended      
|                                 |                                                                  | October 30,    |   | January 29,       |  | February 3, |         | February 2,
|                                 |                                                                  | 1999           |   | 2000              |  | 2001        |         | 2002       
|                                 |                                                                  |                |   |                   |  |             |         |            
|                                 |                                                                  |               
|                                 |                                                                  | (In thousands)
|Cash paid during the period for: |                                                                  |                |   |                   |  |             |         |             |   |   |         |         |   |   |   |       
|                                 | Interest                                                         |                | $ | 862               |  |             | $       |            |   |   | $       |        |   |   | $ |       |  
|                                 |                                                                  |                |   |                   |  |             |         |             |   |   |         |         |   |   |   |       
|                                 | Income taxes                                                     |                |   |                  |  |             |         | 100         |   |   |         |        |   |   |   |       |  
|                                 |                                                                  |                |   |                   |  |             |         |             |   |   |         |         |   |   |   |       
|Subsidiaries acquired:           |                                                                  |                |   |                   |  |             |         |             |   |   |         |         |   |   |   |       
|                                 | Goodwill                                                         |                | $ |                  |  |             | $       | 198,967     |   |   | $       | 131,360 |   |   | $ | 9,665  |  
|                                 | Accrual of additional acquisition payments due to
	former owners |                |   |                  |  |             |         |            |   |   |         |        |   |   |   | (9,665 | )
|                                 | Cash received in acquisition                                     |                |   |                  |  |             |         | (10,760     | ) |   |         | (10,651 | ) |   |   |       |  
|                                 | Accrued acquisition costs                                        |                |   |                  |  |             |         |            |   |   |         | (145    | ) |   |   |       |  
|                                 | Net assets acquired (or liabilities assumed)                     |                |   |                  |  |             |         | (12,447     | ) |   |         | 36,200  |   |   |   |       |  
|                                 |                                                                  |                |   |                   |  |             |         |             |   |   |         |         |   |   |   |       
|Cash paid                        |                                                                  | $              |  |                   |  | $           | 175,760 |             |   | $ | 156,764 |         |   | $ |  |       
|                                 |                                                                  |                |   |                   |  |             |         |             |   |   |         |         |   |   |   |       

12.     Subsequent
Events

In February 2002, the Company completed a public
offering of 20,764 shares of Class A common stock at
$18.00 per share (the Offering). The net
proceeds of the Offering, after deducting applicable issuance
costs and expenses, were $348,006. The net proceeds were used to
repay $250,000 of intercompany debt owed to Barnes &
Noble. Additionally, upon the effective date of the initial
public offering, Barnes & Noble made a capital
contribution of $150,000 for the remaining balance of the
intercompany debt. The accompanying consolidated balance sheet
includes a pro forma column to reflect this contribution as if
it had taken place at February 2, 2002.

Concurrent with the Offering, the Company entered
into a $75,000 senior secured revolving credit facility which
expires in February 2005. The revolving credit facility is
governed by an eligible inventory borrowing base agreement,
defined as 50% of non-defective inventory. Loans incurred under
the credit facility will be maintained from time to time, at the
Companys option, as (1) base rate loans which bear
interest at the base rate (defined in the credit facility as the
higher of (a) the administrative agents announced
base rate or (b)  1/2 of 1% in excess of the federal
funds effective rate, each as in effect from time to time) and
(2) LIBOR loans bearing interest at the LIBOR rate for the
applicable interest period, in each case plus an applicable
interest margin. The applicable interest margin will initially
be 0.25% for base rate loans and 1.75% for LIBOR rate loans, and
in each case will thereafter vary depending on the
Companys fixed charge coverage ratio. In addition, the
Company is required to pay a commitment fee of 0.375% for any
unused amounts of the revolving credit facility. Any borrowings
under the revolving credit facility are secured by the assets of
the Company. The revolving credit facility generally restricts
our ability to pay dividends. There have been no borrowings
under the revolving credit facility.

F-17



---



##### 



GAMESTOP CORP.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


13.     Unaudited
Quarterly Financial Information

The following table sets forth certain unaudited
quarterly consolidated statement of operations information for
fiscal 2000 and 2001. The unaudited quarterly information
includes all normal recurring adjustments that management
considers necessary for a fair presentation of the information
shown.

|                                                |  |                |         |             |  |         |         |         |  |         |         |         |  |         |         |         |  |   |         |   |  |   |         |   |  |   |         |  |  |   |         | 
|----------------------------------------------- |  | -------------- | ------- | ----------- |  | ------- | ------- | ------- |  | ------- | ------- | ------- |  | ------- | ------- | ------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- |  |  | - | ------- | 
|                                                |  |                |         |            
|                                                |  | Fiscal 2000    |         | Fiscal 2001
|                                                |  |                |         |            
|                                                |  | 1st            |         | 2nd         |  | 3rd     |         | 4th     |  | 1st     |         | 2nd     |  | 3rd     |         | 4th    
|                                                |  | Quarter        |         | Quarter     |  | Quarter |         | Quarter |  | Quarter |         | Quarter |  | Quarter |         | Quarter
|                                                |  |                |         |             |  |         |         |         |  |         |         |         |  |         |         |        
|                                                |  |               
|                                                |  | (In thousands)
|Sales                                           |  | $              | 120,003 |             |  | $       | 127,154 |         |  | $       | 182,486 |         |  | $       | 327,054 |         |  | $ | 201,355 |   |  | $ | 206,806 |   |  | $ | 198,766 |  |  | $ | 514,211 | 
|Gross profit                                    |  |                | 30,007  |             |  |         | 33,619  |         |  |         | 47,383  |         |  |         | 74,693  |         |  |   | 48,008  |   |  |   | 53,711  |   |  |   | 54,578  |  |  |   | 110,806 | 
|Operating earnings (loss)                       |  |                | 597     |             |  |         | (7,580  | )       |  |         | (1,552  | )       |  |         | 14,149  |         |  |   | (5,422  | ) |  |   | (2,243  | ) |  |   | 5,609   |  |  |   | 36,143  | 
|Net earnings (loss)                             |  |                | (1,749  | )           |  |         | (8,000  | )       |  |         | (5,719  | )       |  |         | 3,507   |         |  |   | (7,230  | ) |  |   | (4,849  | ) |  |   | 253     |  |  |   | 18,786  | 
|Net earnings (loss) per common share 
	basic   |  |                | (0.05   | )           |  |         | (0.22   | )       |  |         | (0.16   | )       |  |         | 0.10    |         |  |   | (0.20   | ) |  |   | (0.14   | ) |  |   | 0.01    |  |  |   | 0.52    | 
|Net earnings (loss) per common share 
	diluted |  |                | (0.05   | )           |  |         | (0.22   | )       |  |         | (0.16   | )       |  |         | 0.10    |         |  |   | (0.20   | ) |  |   | (0.14   | ) |  |   | 0.01    |  |  |   | 0.47    | 

F-18



---



##### 



Independent Auditors Report

Board of Directors and Shareholders

Funco, Inc.


We have audited the accompanying consolidated
balance sheets of Funco, Inc. as of April 2, 2000 and
March 28, 1999, and the related consolidated statements of
income, shareholders equity and cash flows for each of the
three years in the period ended April 2, 2000. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.

We conducted our audits in accordance with
auditing standards generally accepted in the 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 Funco, Inc. at April 2,
2000 and March 28, 1999, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended April 2, 2000, in conformity with
accounting principles generally accepted in the United States.



| |                  
| | -----------------
| | ERNST & YOUNG LLP

Minneapolis, Minnesota

May 8, 2000


F-19



---



##### 



FUNCO, INC.

CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                                                   |                |        |           |  |   |        |        | 
|------------------------------------------ | ----------------------------------------------------------------------------------------------------------------- | -------------- | ------ | --------- |  | - | ------ | ------ | 
|                                           |                                                                                                                   | April 2,       |        | March 28,
|                                           |                                                                                                                   | 2000           |        | 1999     
|                                           |                                                                                                                   |                |        |          
|                                           |                                                                                                                   |               
|                                           |                                                                                                                   | (In thousands)
|ASSETS                                    
|Current assets:                            |                                                                                                                   |                |        |           |  |   |        |       
|                                           | Cash and cash equivalents                                                                                         |                | $      | 14,701    |  |   | $      | 8,550  | 
|                                           | Short-term investments                                                                                            |                |        | 410       |  |   |        |       | 
|                                           | Accounts receivable                                                                                               |                |        | 1,195     |  |   |        | 2,020  | 
|                                           | Inventories                                                                                                       |                |        | 30,280    |  |   |        | 28,485 | 
|                                           | Prepaid expenses                                                                                                  |                |        | 3,996     |  |   |        | 2,948  | 
|                                           | Current deferred tax asset                                                                                        |                |        | 676       |  |   |        | 640    | 
|                                           |                                                                                                                   |                |        |           |  |   |        |       
|Total current assets                       |                                                                                                                   |                | 51,258 |           |  |   | 42,643 |       
|Net property and equipment                 |                                                                                                                   |                | 15,696 |           |  |   | 11,334 |       
|Long-term deferred tax asset               |                                                                                                                   |                | 982    |           |  |   | 1,064  |       
|Other assets                               |                                                                                                                   |                | 63     |           |  |   | 99     |       
|                                           |                                                                                                                   |                |        |           |  |   |        |       
|Total assets                               |                                                                                                                   | $              | 67,999 |           |  | $ | 55,140 |       
|                                           |                                                                                                                   |                |        |           |  |   |        |       
|LIABILITIES AND SHAREHOLDERS
	EQUITY     
|Current liabilities:                       |                                                                                                                   |                |        |           |  |   |        |       
|                                           | Accounts payable                                                                                                  |                | $      | 15,187    |  |   | $      | 9,831  | 
|                                           | Accrued liabilities                                                                                               |                |        | 4,789     |  |   |        | 5,266  | 
|                                           | Deferred revenue                                                                                                  |                |        | 948       |  |   |        | 994    | 
|                                           |                                                                                                                   |                |        |           |  |   |        |       
|Total current liabilities                  |                                                                                                                   |                | 20,924 |           |  |   | 16,091 |       
|Accrued rent                               |                                                                                                                   |                | 324    |           |  |   | 213    |       
|Shareholders equity:                      |                                                                                                                   |                |        |           |  |   |        |       
|                                           | Common stock, $0.01 par value (issued and
	outstanding for 2000 and 1999, respectively: 6,014,403 and
	5,894,760) |                |        | 60        |  |   |        | 59     | 
|                                           | Additional paid-in-capital                                                                                        |                |        | 16,427    |  |   |        | 15,238 | 
|                                           | Retained earnings                                                                                                 |                |        | 30,264    |  |   |        | 23,539 | 
|                                           |                                                                                                                   |                |        |           |  |   |        |       
|Total shareholders equity                 |                                                                                                                   |                | 46,751 |           |  |   | 38,836 |       
|                                           |                                                                                                                   |                |        |           |  |   |        |       
|Total liabilities and shareholders equity |                                                                                                                   | $              | 67,999 |           |  | $ | 55,140 |       
|                                           |                                                                                                                   |                |        |           |  |   |        |       

See accompanying notes.

F-20



---



##### 



FUNCO, INC.

CONSOLIDATED STATEMENTS OF INCOME

|                                                                |                              |                                                 |           |           |  |           |           |      |  |   |           |      | 
|--------------------------------------------------------------- | ---------------------------- | ----------------------------------------------- | --------- | --------- |  | --------- | --------- | ---- |  | - | --------- | ---- | 
|                                                                |                              |                                                
|                                                                |                              | Year Ended                                     
|                                                                |                              |                                                
|                                                                |                              | April 2,                                        |           | March 28, |  | March 29,
|                                                                |                              | 2000                                            |           | 1999      |  | 1998     
|                                                                |                              |                                                 |           |           |  |          
|                                                                |                              |                                                
|                                                                |                              | (In thousands, except share and per share data)
|Net sales                                                       |                              | $                                               | 252,653   |           |  | $         | 206,673   |      |  | $ | 163,316   |     
|Cost of sales                                                   |                              |                                                 | 173,543   |           |  |           | 138,693   |      |  |   | 106,628   |     
|                                                                |                              |                                                 |           |           |  |           |           |      |  |   |           |     
|Gross profit                                                    |                              |                                                 | 79,110    |           |  |           | 67,980    |      |  |   | 56,688    |     
|Operating expenses                                              |                              |                                                 | 54,901    |           |  |           | 41,792    |      |  |   | 33,746    |     
|General and administrative expenses                             |                              |                                                 | 13,427    |           |  |           | 10,587    |      |  |   | 9,512     |     
|                                                                |                              |                                                 |           |           |  |           |           |      |  |   |           |     
|Operating income                                                |                              |                                                 | 10,782    |           |  |           | 15,601    |      |  |   | 13,430    |     
|Interest expense                                                |                              |                                                 | (36       | )         |  |           | (12       | )    |  |   | (20       | )   
|Interest income                                                 |                              |                                                 | 334       |           |  |           | 417       |      |  |   | 295       |     
|                                                                |                              |                                                 |           |           |  |           |           |      |  |   |           |     
|Net income before income taxes                                  |                              |                                                 | 11,080    |           |  |           | 16,006    |      |  |   | 13,705    |     
|Income tax provision                                            |                              |                                                 | 4,355     |           |  |           | 6,296     |      |  |   | 5,435     |     
|                                                                |                              |                                                 |           |           |  |           |           |      |  |   |           |     
|Net income                                                      |                              | $                                               | 6,725     |           |  | $         | 9,710     |      |  | $ | 8,270     |     
|                                                                |                              |                                                 |           |           |  |           |           |      |  |   |           |     
|Basic net income per share:                                     |                              |                                                 |           |           |  |           |           |      |  |   |           |     
|                                                                | Basic net income per share   |                                                 | $         | 1.13      |  |           | $         | 1.60 |  |   | $         | 1.35 | 
|Weighted average number of common shares                        |                              |                                                 | 5,970,987 |           |  |           | 6,077,986 |      |  |   | 6,137,161 |     
|Diluted net income per share:                                   |                              |                                                 |           |           |  |           |           |      |  |   |           |     
|                                                                | Diluted net income per share |                                                 | $         | 1.08      |  |           | $         | 1.53 |  |   | $         | 1.26 | 
|Weighted average number of common and common
	equivalent shares |                              |                                                 | 6,246,558 |           |  |           | 6,353,311 |      |  |   | 6,572,365 |     

See accompanying notes.

F-21



---



##### 



FUNCO, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS
EQUITY

|                          |                                   |                                          |       |            |   |          |    |               |   |        |        |        |   |   |        |       |  |   |        |        |  
|------------------------- | --------------------------------- | ---------------------------------------- | ----- | ---------- | - | -------- | -- | ------------- | - | ------ | ------ | ------ | - | - | ------ | ----- |  | - | ------ | ------ | -
|                          |                                   |                                          |       |            |   |          |    |              
|                          |                                   | Common Stock                             |       | Additional |   |          |    | Total        
|                          |                                   |                                          |       | Paid-In    |   | Retained |    | Shareholders
|                          |                                   | Shares                                   |       | Amount     |   | Capital  |    | Earnings      |   | Equity
|                          |                                   |                                          |       |            |   |          |    |               |   |       
|                          |                                   |                                         
|                          |                                   | (In thousands, except per share amounts)
|Balance at March 30, 1997 |                                   |                                          | 6,057 |            |   | $        | 61 |               |   | $      | 18,698 |        |   | $ | 5,559  |       |  | $ | 24,318 |       
|                          | Common stock issued, net of costs |                                          |       | 127        |   |          |    | 1             |   |        |        | 634    |   |   |        |      |  |   |        | 635    |  
|                          | Tax benefits of stock options     |                                          |       |           |   |          |    |              |   |        |        | 302    |   |   |        |      |  |   |        | 302    |  
|                          | Net income                        |                                          |       |           |   |          |    |              |   |        |        |       |   |   |        | 8,270 |  |   |        | 8,270  |  
|                          |                                   |                                          |       |            |   |          |    |               |   |        |        |        |   |   |        |       |  |   |        |       
|Balance at March 29, 1998 |                                   |                                          | 6,184 |            |   |          | 62 |               |   |        | 19,634 |        |   |   | 13,829 |       |  |   | 33,525 |       
|                          | Common stock issued, net of costs |                                          |       | 125        |   |          |    | 1             |   |        |        | 560    |   |   |        |      |  |   |        | 561    |  
|                          | Tax benefits of stock options     |                                          |       |           |   |          |    |              |   |        |        | 260    |   |   |        |      |  |   |        | 260    |  
|                          | Repurchase of common stock        |                                          |       | (414       | ) |          |    | (4            | ) |        |        | (5,216 | ) |   |        |      |  |   |        | (5,220 | )
|                          | Net income                        |                                          |       |           |   |          |    |              |   |        |        |       |   |   |        | 9,710 |  |   |        | 9,710  |  
|                          |                                   |                                          |       |            |   |          |    |               |   |        |        |        |   |   |        |       |  |   |        |       
|Balance at March 28, 1999 |                                   |                                          | 5,895 |            |   |          | 59 |               |   |        | 15,238 |        |   |   | 23,539 |       |  |   | 38,836 |       
|                          | Common stock issued, net of costs |                                          |       | 119        |   |          |    | 1             |   |        |        | 872    |   |   |        |      |  |   |        | 873    |  
|                          | Tax benefits of stock options     |                                          |       |           |   |          |    |              |   |        |        | 317    |   |   |        |      |  |   |        | 317    |  
|                          | Net income                        |                                          |       |           |   |          |    |              |   |        |        |       |   |   |        | 6,725 |  |   |        | 6,725  |  
|                          |                                   |                                          |       |            |   |          |    |               |   |        |        |        |   |   |        |       |  |   |        |       
|Balance at April 2, 2000  |                                   |                                          | 6,014 |            |   | $        | 60 |               |   | $      | 16,427 |        |   | $ | 30,264 |       |  | $ | 46,751 |       
|                          |                                   |                                          |       |            |   |          |    |               |   |        |        |        |   |   |        |       |  |   |        |       

See accompanying notes.

F-22



---



##### 



FUNCO, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                   |                                                |                     |        |           |        |           |        |       |        |   |        |       |        |  
|---------------------------------------------------------------------------------- | ---------------------------------------------- | ------------------- | ------ | --------- | ------ | --------- | ------ | ----- | ------ | - | ------ | ----- | ------ | -
|                                                                                   |                                                |                    
|                                                                                   |                                                | Year Ended         
|                                                                                   |                                                |                    
|                                                                                   |                                                | April 2,            |        | March 28, |        | March 29,
|                                                                                   |                                                | 2000                |        | 1999      |        | 1998     
|                                                                                   |                                                |                     |        |           |        |          
|                                                                                   |                                                |                    
|                                                                                   |                                                | (In thousands)     
|Operating activities                                                               |                                                |                     |        |           |        |           |        |       |        |   |        |      
|Net income                                                                         |                                                | $                   | 6,725  |           |        | $         | 9,710  |       |        | $ | 8,270  |      
|Adjustments to reconcile net income to net cash
	provided by operating activities: |                                                |                     |        |           |        |           |        |       |        |   |        |      
|                                                                                   | Depreciation and amortization                  |                     |        | 4,941     |        |           |        | 3,650 |        |   |        | 3,126 |       
|                                                                                   | Deferred tax (benefit)                         |                     |        | 46        |        |           |        | 21    |        |   |        | (209  | )     
|                                                                                   | Net loss on disposal of property and equipment |                     |        | 119       |        |           |        | 123   |        |   |        | 105   |       
|                                                                                   | Changes in operating assets and liabilities:   |                     |        |           |        |           |        |       |        |   |        |       |       
|                                                                                   |                                                | Accounts receivable |        |           | 825    |           |        |       | 107    |   |        |       | (1,033 | )
|                                                                                   |                                                | Inventories         |        |           | (1,795 | )         |        |       | (6,998 | ) |        |       | (7,656 | )
|                                                                                   |                                                | Prepaid expenses    |        |           | (1,048 | )         |        |       | (1,773 | ) |        |       | (393   | )
|                                                                                   |                                                | Accounts payable    |        |           | 5,356  |           |        |       | 4,997  |   |        |       | 3,447  |  
|                                                                                   |                                                | Accrued liabilities |        |           | (366   | )         |        |       | (896   | ) |        |       | 1,102  |  
|                                                                                   |                                                | Deferred revenue    |        |           | (46    | )         |        |       | 102    |   |        |       | 145    |  
|                                                                                   |                                                |                     |        |           |        |           |        |       |        |   |        |      
|Net cash provided by operating activities                                          |                                                |                     | 14,757 |           |        |           | 9,043  |       |        |   | 6,904  |      
|Investing activities                                                               |                                                |                     |        |           |        |           |        |       |        |   |        |      
|Additions of property and equipment                                                |                                                |                     | (9,378 | )         |        |           | (6,838 | )     |        |   | (5,380 | )    
|Increase in other assets                                                           |                                                |                     | (8     | )         |        |           | (11    | )     |        |   | (110   | )    
|Purchases of short-term investments                                                |                                                |                     | (410   | )         |        |           | (3,075 | )     |        |   | (1,460 | )    
|Sales of short-term investments                                                    |                                                |                     |       |           |        |           | 4,535  |       |        |   |       |      
|Proceeds from sales of property and equipment                                      |                                                |                     |       |           |        |           |       |       |        |   | 16     |      
|                                                                                   |                                                |                     |        |           |        |           |        |       |        |   |        |      
|Net cash used in investing activities                                              |                                                |                     | (9,796 | )         |        |           | (5,389 | )     |        |   | (6,934 | )    
|Financing activities                                                               |                                                |                     |        |           |        |           |        |       |        |   |        |      
|Payments of obligations under capital leases                                       |                                                |                     |       |           |        |           |       |       |        |   | (20    | )    
|Payments for repurchase of common stock                                            |                                                |                     |       |           |        |           | (5,220 | )     |        |   |       |      
|Net proceeds from issuance of common stock                                         |                                                |                     | 1,190  |           |        |           | 821    |       |        |   | 937    |      
|                                                                                   |                                                |                     |        |           |        |           |        |       |        |   |        |      
|Net cash provided by (used in) financing
	activities                               |                                                |                     | 1,190  |           |        |           | (4,399 | )     |        |   | 917    |      
|                                                                                   |                                                |                     |        |           |        |           |        |       |        |   |        |      
|Increase (decrease) in cash and cash equivalents                                   |                                                |                     | 6,151  |           |        |           | (745   | )     |        |   | 887    |      
|Cash and cash equivalents at beginning of year                                     |                                                |                     | 8,550  |           |        |           | 9,295  |       |        |   | 8,408  |      
|                                                                                   |                                                |                     |        |           |        |           |        |       |        |   |        |      
|Cash and cash equivalents at end of year                                           |                                                | $                   | 14,701 |           |        | $         | 8,550  |       |        | $ | 9,295  |      
|                                                                                   |                                                |                     |        |           |        |           |        |       |        |   |        |      

See accompanying notes.

F-23



---



##### 



FUNCO, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

April 2, 2000


1.     Significant
Accounting Policies



| |                   
| | ------------------
| | Nature of Business

Funco, Inc. operates a single business segment,
providing interactive home entertainment primarily through the
purchase and resale of new and previously played video games,
related hardware and accessory items through its
FuncoLand stores, mail order operation and FuncoLand
SuperstoreWeb site. Accordingly, additional disclosures
under Statement of Financial Accounting Standards No. 131
(SFAS No. 131), Disclosures About Segments of an
Enterprise and Related Information, are not required.
Funco, Inc. also publishes a video game magazine, Game
Informer.The Company was incorporated in Minnesota in March
1988.



| |                            
| | ---------------------------
| | Principles of Consolidation

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



| |                    
| | -------------------
| | Revenue Recognition

Revenue from retail sales of the Companys
products is recognized at the time of sale. Deferred revenue
represents amounts received for subscriptions to a specified
number of future video game magazine issues. Subscription
revenue is recognized on a straight-line basis as magazine
issues are delivered.



| |                  
| | -----------------
| | Advertising Costs

Advertising costs, included in operating
expenses, are expensed as incurred and were $3,933,000,
$2,769,000 and $2,309,000 for the years 2000, 1999 and 1998,
respectively.



| |            
| | -----------
| | Fiscal Year

The Companys fiscal year ends on a Sunday
on or near March 31. The fiscal year ended April 2,
2000 consisted of 53 weeks and fiscal years ended
March 28, 1999 and March 29, 1998 consisted of
52 weeks each. Unless otherwise stated, references to years
in this report relate to fiscal years rather than calendar years.



| |                 
| | ----------------
| | Cash Equivalents

Cash equivalents represent investments with a
maturity of three months or less at the time of purchase. Cash
equivalents are recorded at cost, which approximates market.



| |                       
| | ----------------------
| | Short-Term Investments

Short-term investments represent investments with
a maturity of greater than three months at the time of purchase.
Realized gains and losses and declines in value judged to be
other-than-temporary on short-term investments are included in
interest income. Short-term investments are recorded at cost,
which approximates market.



| |            
| | -----------
| | Inventories

Inventories consist of new and previously played
video games, hardware and accessories and are valued at the
lower of cost, determined using the first-in, first-out
(FIFO) method, or market.

F-24



---



##### 



FUNCO, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are recorded at cost. The
Company uses the straight-line method of computing depreciation
based on the assets estimated useful lives, which range
from three to five years.



| |                                 
| | --------------------------------
| | Impairment of Long-Lived
	Assets

The Company records impairment losses of
long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets
carrying amounts.



| |                      
| | ---------------------
| | Internal-Use Software

During fiscal 1999, the Company adopted Statement
of Position No. 98-1 (SOP No. 98-1), Internal
Use Software. Under SOP No. 98-1, companies are
required to capitalize certain development costs related to
internal-use software. The Company is amortizing these costs
over five years. Total capitalized costs for fiscal 2000 and
1999 were $322,000 and $279,000, respectively. The Company
historically expensed these costs.



| |                  
| | -----------------
| | Pre-Opening Costs

The Company adopted Statement of Position
No. 98-5 (SOP No. 98-5) Reporting on the Cost of
Start-Up Activities, in fiscal 1999. SOP No. 98-5
requires the costs of start-up activities, including store
opening costs, to be expensed in the period incurred. The
Company historically amortized these costs over 12 months.
Annual results were not materially impacted by the adoption.



| |              
| | -------------
| | Stock Options

The Company has elected to recognize compensation
cost for its stock-based compensation plans in accordance with
Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees.
Accordingly, no compensation expense is recognized for stock
options with exercise prices equal to, or in excess of, the
market value of the underlying shares of stock at the date of
grant. The Company follows the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 (SFAS
No. 123), Accounting for Stock-Based
Compensation.



| |                     
| | --------------------
| | Net Income Per Share

Basic net income per share is computed based on
the weighted average number of common shares outstanding during
each period. Diluted net income per share includes the
incremental shares assumed issued on the exercise of stock
options. Unless otherwise stated, all references to income per
share are calculated using the diluted method.



| |                 
| | ----------------
| | Use of Estimates

Preparing financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect reporting amounts in
the financial statements and accompanying notes. Actual results
could differ from these estimates.

2.     Financing
Arrangements

The Company has a $5,000,000 unsecured revolving
credit facility with a commercial bank, seasonally increasing to
$20,000,000. The interest rate on outstanding borrowings under
the facility (8.04% for the month ended April 2, 2000) is
based upon LIBOR plus 200 basis points. The facility
requires the Company to

F-25



---



##### 



FUNCO, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

maintain certain financial ratios and achieve
certain operating results. The Company has no borrowings under
the facility at April 2, 2000 or March 28, 1999.

3.     Leases

The Company has rental commitments for office
space, retail space, office equipment and vehicles under
non-cancelable operating leases. Most of these leases contain
provisions for renewal options and require the Company to pay
other lease-related costs.

Future minimum lease payments under
non-cancelable operating leases consist of the following:

|      |  |                |        | 
|----- |  | -------------- | ------ | 
|      |  | (In thousands)
|2001  |  | $              | 11,133 | 
|2002  |  |                | 8,185  | 
|2003  |  |                | 5,194  | 
|2004  |  |                | 1,969  | 
|2005  |  |                | 974    | 
|      |  |                |        | 
|Total |  | $              | 27,455 | 
|      |  |                |        | 

Rent expense was $10,172,000, $7,904,000 and
$6,254,000, for the years 2000, 1999 and 1998, respectively.

4.     Property and
Equipment

Net property and equipment consist of the
following:

|                              |  |                |         |      |  |   |         |  
|----------------------------- |  | -------------- | ------- | ---- |  | - | ------- | -
|                              |  | 2000           |         | 1999
|                              |  |                |         |     
|                              |  |               
|                              |  | (In thousands)
|Furniture and fixtures        |  | $              | 10,021  |      |  | $ | 7,474   |  
|Equipment                     |  |                | 13,937  |      |  |   | 10,528  |  
|Leasehold improvements        |  |                | 12,030  |      |  |   | 9,497   |  
|Other                         |  |                | 65      |      |  |   | 64      |  
|                              |  |                |         |      |  |   |         |  
|Gross property and equipment  |  |                | 36,053  |      |  |   | 27,563  |  
|Less accumulated depreciation |  |                | (20,357 | )    |  |   | (16,229 | )
|                              |  |                |         |      |  |   |         |  
|Net property and equipment    |  | $              | 15,696  |      |  | $ | 11,334  |  
|                              |  |                |         |      |  |   |         |  

5.     Accrued
Liabilities

Accrued liabilities consist of the following:

|                                        |  |                |       |      |  |   |       | 
|--------------------------------------- |  | -------------- | ----- | ---- |  | - | ----- | 
|                                        |  | 2000           |       | 1999
|                                        |  |                |       |     
|                                        |  |               
|                                        |  | (In thousands)
|Purchase credit memos payable           |  | $              | 2,162 |      |  | $ | 1,848 | 
|Employee compensation and related taxes |  |                | 955   |      |  |   | 1,338 | 
|Sales tax payable                       |  |                | 943   |      |  |   | 940   | 
|Income tax payable                      |  |                |      |      |  |   | 664   | 
|Other accrued liabilities               |  |                | 729   |      |  |   | 476   | 
|                                        |  |                |       |      |  |   |       | 
|Total accrued liabilities               |  | $              | 4,789 |      |  | $ | 5,266 | 
|                                        |  |                |       |      |  |   |       | 

F-26



---



##### 



FUNCO, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

6.     Stock
Options

Under the terms of the Companys various
stock option plans, a maximum of 1,450,000 shares of common
stock has been reserved for issuance to directors, officers and
employees, upon the exercise of stock options. Annually, on
May 1, the Company reserves an additional 1% of the total
number of Common Stock shares outstanding at fiscal year-end.
Subsequent to April 2, 2000, the Company has reserved an
additional 59,897 shares for use in its stock option plan. The
stock options are exercisable over periods up to ten years from
date of grant and include incentive stock options and
nonqualified stock options.

At April 2, 2000, there were 890,029 options
outstanding. Options exercisable at the end of years 2000, 1999
and 1998 were 890,029, 544,056 and 442,961, respectively. A
summary of stock option transactions is as follows:

|                           |           |        |           |                  |   |   |       |       | 
|-------------------------- | --------- | ------ | --------- | ---------------- | - | - | ----- | ----- | 
|                           |           |        |           | Weighted Average
|                           |           |        |           | Exercise Price  
|                           |           | Shares |           | Per Share       
|                           |           |        |           |                 
|Outstanding March 30, 1997 |           |        | 799,633   |                  |   | $ | 7.16  |      
|                           | Granted   |        |           | 286,936          |   |   |       | 15.37 | 
|                           | Exercised |        |           | (124,771         | ) |   |       | 5.11  | 
|                           | Canceled  |        |           | (22,905          | ) |   |       | 10.90 | 
|                           |           |        |           |                  |   |   |       |      
|Outstanding March 29, 1998 |           |        | 938,893   |                  |   |   | 9.85  |      
|                           | Granted   |        |           | 270,434          |   |   |       | 13.34 | 
|                           | Exercised |        |           | (124,583         | ) |   |       | 4.57  | 
|                           | Canceled  |        |           | (46,599          | ) |   |       | 13.40 | 
|                           |           |        |           |                  |   |   |       |      
|Outstanding March 28, 1999 |           |        | 1,038,145 |                  |   |   | 11.24 |      
|                           | Granted   |        |           | 7,700            |   |   |       | 17.40 | 
|                           | Exercised |        |           | (119,643         | ) |   |       | 7.98  | 
|                           | Canceled  |        |           | (36,173          | ) |   |       | 14.13 | 
|                           |           |        |           |                  |   |   |       |      
|Outstanding April 2, 2000  |           |        | 890,029   |                  |   | $ | 11.61 |      
|                           |           |        |           |                  |   |   |       |      

The following table summarizes information
concerning outstanding and exercisable options:

|                |  |             |         |                  |  |                  |      |             |  |                  |       |  |  |  |         |  |  |   |       | 
|--------------- |  | ----------- | ------- | ---------------- |  | ---------------- | ---- | ----------- |  | ---------------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|                |  |             |         | Weighted Average |  |                  |      |             |  |                 
|                |  |             |         | Remaining        |  |                  |      |             |  |                 
|Range of        |  | Number      |         | Contractual Life |  | Weighted Average |      | Number      |  | Weighted Average
|Exercise Prices |  | Outstanding |         | (Years)          |  | Exercise Price   |      | Exercisable |  | Exercise Price  
|                |  |             |         |                  |  |                  |      |             |  |                 
|$ 0 - $ 4       |  |             | 11,001  |                  |  |                  | 5.36 |             |  | $                | 3.21  |  |  |  | 11,001  |  |  | $ | 3.21  | 
|$ 4 - $ 8       |  |             | 160,733 |                  |  |                  | 3.91 |             |  |                  | 5.85  |  |  |  | 160,733 |  |  |   | 5.85  | 
|$ 8 - $12       |  |             | 193,499 |                  |  |                  | 4.74 |             |  |                  | 9.37  |  |  |  | 193,499 |  |  |   | 9.37  | 
|$12 - $16       |  |             | 482,596 |                  |  |                  | 6.76 |             |  |                  | 14.11 |  |  |  | 482,596 |  |  |   | 14.11 | 
|$16 - $20       |  |             | 42,200  |                  |  |                  | 3.29 |             |  |                  | 17.35 |  |  |  | 42,200  |  |  |   | 17.35 | 
|                |  |             |         |                  |  |                  |      |             |  |                  |       |  |  |  |         |  |  |   |       | 
|$ 0 - $20       |  |             | 890,029 |                  |  |                  | 5.62 |             |  | $                | 11.61 |  |  |  | 890,029 |  |  | $ | 11.61 | 
|                |  |             |         |                  |  |                  |      |             |  |                  |       |  |  |  |         |  |  |   |       | 

In fiscal 2000, the Company issued 119,643 shares
of stock through the exercise of stock options at prices ranging
from $3.40 to $15.27 per share, generating net proceeds,
including tax benefits, of $1,190,000.

In fiscal 1999, the Companys Board of
Directors authorized the repurchase of up to 700,000 shares of
the Companys common stock. During fiscal 1999, Company
repurchased 414,800 shares of common stock at an aggregate price
of $5,220,000.

F-27



---



##### 



FUNCO, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company follows the disclosure-only
provisions of Statement of Financial Accounting Standards
No. 123 (SFAS No. 123), Accounting for
Stock-Based Compensation. The Company has elected to
continue to account for stock-based compensation plans in
accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, making the
pro forma disclosures of net earnings and earnings per share as
if the fair value-based method had been applied. Accordingly, no
compensation expense is recognized for stock options with
exercise prices equal to, or in excess of, the market value of
the underlying shares of stock at the date of grant. Had
compensation expense been recognized based on the fair value at
the date of grant following provisions of SFAS No. 123, the
Companys pro forma net income and net income per share
would have been as follows:

|                                   |             |                       |   |       |  |      |   |       |  |  |   |       | 
|---------------------------------- | ----------- | --------------------- | - | ----- |  | ---- | - | ----- |  |  | - | ----- | 
|                                   |             | 2000                  |   | 1999  |  | 1998
|                                   |             |                       |   |       |  |     
|                                   |             |                      
|                                   |             | (In thousands, except
|                                   |             | per share data)      
|Net income                         |             |                       |   |       |  |      |   |       |  |  |   |      
|                                   | As reported |                       | $ | 6,725 |  |      | $ | 9,710 |  |  | $ | 8,270 | 
|                                   | Pro forma   |                       |   | 4,641 |  |      |   | 8,794 |  |  |   | 7,594 | 
|Income per common share  basic:   |             |                       |   |       |  |      |   |       |  |  |   |      
|                                   | As reported |                       | $ | 1.13  |  |      | $ | 1.60  |  |  | $ | 1.35  | 
|                                   | Pro forma   |                       |   | .78   |  |      |   | 1.48  |  |  |   | 1.26  | 
|Income per common share  diluted: |             |                       |   |       |  |      |   |       |  |  |   |      
|                                   | As reported |                       | $ | 1.08  |  |      | $ | 1.53  |  |  | $ | 1.26  | 
|                                   | Pro forma   |                       |   | .74   |  |      |   | 1.42  |  |  |   | 1.17  | 

The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:

|                         |  |      |         |      |  |      |         |   |  |  |         |  
|------------------------ |  | ---- | ------- | ---- |  | ---- | ------- | - |  |  | ------- | -
|                         |  | 2000 |         | 1999 |  | 1998
|                         |  |      |         |      |  |     
|Expected volatility      |  |      | 66.0    | %    |  |      | 80.5    | % |  |  | 70.1    | %
|Risk-free interest rate  |  |      | 6.0     | %    |  |      | 5.7     | % |  |  | 6.0     | %
|Expected dividend yield  |  |      | 0.0     | %    |  |      | 0.0     | % |  |  | 0.0     | %
|Expected life of options |  |      | 3 Years |      |  |      | 3 Years |   |  |  | 3 Years |  

The pro forma effect on net income and net income
per share does not take into consideration pro forma
compensation expense related to grants made prior to fiscal 1996.

The weighted average fair value for options with
an exercise price equal to market price granted during years
2000, 1999 and 1998 is $8.57, $6.70 and $7.65 per share,
respectively. The weighted average fair value for options with
an exercise price greater than market price granted during
fiscal 1998 is $7.03. No options with an exercise price greater
than market price were granted in fiscal years 2000 or 1999.

F-28



---



##### 



FUNCO, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

7.     Net Income Per
Share

In accordance with Statement of Financial
Accounting Standards No. 128 Earnings Per
Share, the following table presents a reconciliation of
the numerators and denominators of basic and diluted net income
per common share for the years 2000, 1999 and 1998:

|                                                                                 |                                                                       |                                 |           |           |  |      |           |           |  |   |           |           | 
|-------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ------------------------------- | --------- | --------- |  | ---- | --------- | --------- |  | - | --------- | --------- | 
|                                                                                 |                                                                       | 2000                            |           | 1999      |  | 1998
|                                                                                 |                                                                       |                                 |           |           |  |     
|                                                                                 |                                                                       |                                
|                                                                                 |                                                                       | (In thousands, except share and
|                                                                                 |                                                                       | per share data)                
|Numerator:                                                                       |                                                                       |                                 |           |           |  |      |           |           |  |   |           |          
|                                                                                 | Net income                                                            |                                 | $         | 6,725     |  |      | $         | 9,710     |  |   | $         | 8,270     | 
|                                                                                 |                                                                       |                                 |           |           |  |      |           |           |  |   |           |          
|Denominator:                                                                     |                                                                       |                                 |           |           |  |      |           |           |  |   |           |          
|                                                                                 | Denominator for basic net income per
	share  weighted average shares |                                 |           | 5,970,987 |  |      |           | 6,077,986 |  |   |           | 6,137,161 | 
|Dilutive securities:                                                             |                                                                       |                                 |           |           |  |      |           |           |  |   |           |          
|                                                                                 | Employee stock options                                                |                                 |           | 275,571   |  |      |           | 275,325   |  |   |           | 435,204   | 
|                                                                                 |                                                                       |                                 |           |           |  |      |           |           |  |   |           |          
|Denominator for diluted net income per
	share  adjusted weighted average shares |                                                                       |                                 | 6,246,558 |           |  |      | 6,353,311 |           |  |   | 6,572,365 |          
|                                                                                 |                                                                       |                                 |           |           |  |      |           |           |  |   |           |          
|Basic net income per share                                                       |                                                                       | $                               | 1.13      |           |  | $    | 1.60      |           |  | $ | 1.35      |          
|                                                                                 |                                                                       |                                 |           |           |  |      |           |           |  |   |           |          
|Diluted net income per share                                                     |                                                                       | $                               | 1.08      |           |  | $    | 1.53      |           |  | $ | 1.26      |          
|                                                                                 |                                                                       |                                 |           |           |  |      |           |           |  |   |           |          

8.     Income
Taxes

Significant components of the provision for
income taxes for the years 2000, 1999 and 1998 are as follows:

|                               |         |                |       |       |  |      |       |       |  |   |       |       |  
|------------------------------ | ------- | -------------- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- | -
|                               |         | 2000           |       | 1999  |  | 1998
|                               |         |                |       |       |  |     
|                               |         |               
|                               |         | (In thousands)
|Current:                       |         |                |       |       |  |      |       |       |  |   |       |      
|                               | Federal |                | $     | 3,404 |  |      | $     | 4,957 |  |   | $     | 4,346 |  
|                               | State   |                |       | 905   |  |      |       | 1,318 |  |   |       | 1,298 |  
|                               |         |                |       |       |  |      |       |       |  |   |       |      
|Current tax expense            |         |                | 4,309 |       |  |      | 6,275 |       |  |   | 5,644 |      
|Deferred:                      |         |                |       |       |  |      |       |       |  |   |       |      
|                               | Federal |                |       | 37    |  |      |       | 17    |  |   |       | (159  | )
|                               | State   |                |       | 9     |  |      |       | 4     |  |   |       | (50   | )
|                               |         |                |       |       |  |      |       |       |  |   |       |      
|Deferred tax expense (benefit) |         |                | 46    |       |  |      | 21    |       |  |   | (209  | )    
|                               |         |                |       |       |  |      |       |       |  |   |       |      
|Net income tax provision       |         | $              | 4,355 |       |  | $    | 6,296 |       |  | $ | 5,435 |      
|                               |         |                |       |       |  |      |       |       |  |   |       |      

F-29



---



##### 



FUNCO, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Deferred income taxes are due to temporary
differences between carrying values of certain assets and
liabilities for financial reporting and income tax purposes.
Significant components of deferred taxes at April 2, 2000
and March 28, 1999, are as follows:

|                       |  |                |       |      |  |   |       |  
|---------------------- |  | -------------- | ----- | ---- |  | - | ----- | -
|                       |  | 2000           |       | 1999
|                       |  |                |       |     
|                       |  |               
|                       |  | (In thousands)
|Accrued rent           |  | $              | 211   |      |  | $ | 222   |  
|Inventories            |  |                | 254   |      |  |   | 474   |  
|Depreciation           |  |                | 1,222 |      |  |   | 1,212 |  
|Other                  |  |                | (29   | )    |  |   | (204  | )
|                       |  |                |       |      |  |   |       |  
|Net deferred tax asset |  | $              | 1,658 |      |  | $ | 1,704 |  
|                       |  |                |       |      |  |   |       |  

Income taxes of $5,338,000, $7,017,000 and
$4,518,000 were paid in the years 2000, 1999 and 1998,
respectively.

Reconciliation of the Companys tax rate is
as follows:

|                                         |  |                                 |       |      |  |      |       |   |  |   |       |  
|---------------------------------------- |  | ------------------------------- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                         |  | 2000                            |       | 1999 |  | 1998
|                                         |  |                                 |       |      |  |     
|                                         |  |                                
|                                         |  | (In thousands, except tax rate)
|Expected tax expense                     |  | $                               | 3,767 |      |  | $    | 5,442 |   |  | $ | 4,701 |  
|State income tax, net of federal benefit |  |                                 | 658   |      |  |      | 870   |   |  |   | 820   |  
|Other                                    |  |                                 | (70   | )    |  |      | (16   | ) |  |   | (86   | )
|                                         |  |                                 |       |      |  |      |       |   |  |   |       |  
|Net income tax provision                 |  | $                               | 4,355 |      |  | $    | 6,296 |   |  | $ | 5,435 |  
|                                         |  |                                 |       |      |  |      |       |   |  |   |       |  
|Effective tax rate                       |  |                                 | 39    | %    |  |      | 39    | % |  |   | 40    | %
|                                         |  |                                 |       |      |  |      |       |   |  |   |       |  

9.     Subsequent
Event

The Company entered into an Agreement and Plan of
Merger with Barnes & Noble, Inc. and
B&N Acquisition Corporation, pursuant to which B&N
Acquisition Corporation, an indirect wholly-owned subsidiary of
Barnes & Noble, Inc., will offer to purchase all of the
Companys issued and outstanding common stock for $24.75
per share, or an aggregate purchase price of approximately
$161.5 million. The transaction is expected to close in
June 2000. In connection with the Agreement, Barnes & Noble
is obligated to indemnify the Company for payment of a
termination fee of $3,500,000 plus expenses to Electronics
Boutique Holdings Corp.

F-30



---



##### 



EXHIBIT INDEX

|        |       |             |  |                                                                                                                                                                                      
|------- | ----- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 3.1   |             |  | Form of Amended and Restated Certificate of
	Incorporation.**                                                                                                                        
|        | 3.2   |             |  | Bylaws.**                                                                                                                                                                            
|        | 10.1  |             |  | Separation Agreement, between Barnes & Noble
	and GameStop Corp.***                                                                                                                  
|        | 10.2  |             |  | Tax Disaffiliation Agreement, between Barnes
	& Noble and GameStop Corp.**                                                                                                           
|        | 10.3  |             |  | Insurance Agreement, between Barnes & Noble
	and GameStop Corp.**                                                                                                                    
|        | 10.4  |             |  | Operating Agreement, between Barnes & Noble
	and GameStop Corp.**                                                                                                                    
|        | 10.5  |             |  | 2001 Incentive Plan.***                                                                                                                                                              
|        | 10.6  |             |  | Lease, dated as of March 6, 1997, between
	RREEF Mid-Cities Industrial L.P. and Babbages Etc. LLC.**                                                                                
|        | 10.7  |             |  | First Amendment to Lease, dated as of
	December 30, 1999, between RREEF Mid-Cities Industrial L.P.
	and Babbages Etc. LLC.**                                                        
|        | 10.8  |             |  | Registration Rights Agreement, between Barnes
	& Noble and GameStop Corp.**                                                                                                          
|        | 10.9  |             |  | Form of Revolving Credit Agreement, among
	GameStop Corp., Fleet National Bank, as Administrative Agent,
	the Banks party thereto and Fleet Securities, Inc., as
	Arranger.**        
|        | 10.10 |             |  | Form of Security Agreement by GameStop Corp. in
	favor of Fleet National Bank, as secured party and as
	Administrative Agent.**                                                      
|        | 10.11 |             |  | Form of Subsidiary Guaranty by and among
	GameStop, Inc., Babbages Etc. LLC, Sunrise Publications,
	Inc. and GameStop.com, Inc. and Fleet National Bank, as
	Administrative Agent.**
|        | 10.12 |             |  | Form of Securities Collateral Pledge Agreement
	between Gamestop Corp. and Fleet National Bank, as
	Administrative Agent.**                                                          
|        | 10.13 |             |  | Form of Patent and Trademark Securities Agreement
	between GameStop Corp. and Fleet National Bank, as secured party
	and as Administrative Agent.**                                  
|        | 11.1  |             |  | Statement re: Calculation of Net Earnings (Loss)
	Per Common Share.                                                                                                                  
|        | 21.1  |             |  | Subsidiaries.*                                                                                                                                                                       
|        | 23.1  |             |  | Consent of BDO Seidman, LLP.                                                                                                                                                         
|        | 23.2  |             |  | Consent of Ernst & Young LLP.                                                                                                                                                        



---



| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | Incorporated by reference to the
	Registrants Amendment No. 1 to Form S-1 filed
	with the Securities and Exchange Commission on October 15,
	2001 (No. 333-68294).



| |    |                                                                                                                                                                    
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ** | Incorporated by reference to the
	Registrants Amendment No. 3 to Form S-1 filed
	with the Securities and Exchange Commission on January 24,
	2002 (No. 333-68294).



|    |                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*** | Incorporated by reference to the
	Registrants Amendment No. 4 to Form S-1 filed
	with the Securities and Exchange Commission on February 5,
	2002 (No. 333-68294).

E-1