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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON,
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

      /X/         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                  THE SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended January 29, 2000

                                       OR

      / /        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                 THE SECURITIES EXCHANGE ACT OF 1934
                 For the transition period from __________ to__________

                        

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

For the fiscal year ended February 1, 2003

or

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 Number: 000-24603
ELECTRONICS BOUTIQUE HOLDINGS CORP.
                       -----------------------------------
             (Exact
(Exact Name of Registrant as Specified in its Charter)

                Delaware                                 51-0379406
                ---------------------------------------------------
          (State of Incorporation) (IRS Employer Identification Number)

            931 South Matlack Street
           West Chester, Pennsylvania                            19382
           -----------------------------------------------------------
          (Address of principal executive offices)             (Zip
Delaware51-0379406
(State of Incorporation)(IRS Employer Identification Number)

931 South Matlack Street
West Chester, Pennsylvania

19382
(Address of principal executive offices)(Zip Code)
        Registrant's telephone number, including area code:610/430-8100
        Securities registered pursuant to Section 12(b) of the Act: None
Title of Each Class
Name of Each Exchange on
Which Registered
N/AN/A
        Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $.01 par value
                                (Title
Common Stock, $.01 par value
(Title of Class)
        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act OFof 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES /X/ý    NO / /

Theo
        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 the Form 10-K. o
        Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES ý    NO o
        As of August 3, 2002, the aggregate market value of Common Stockcommon stock held by non-affiliates of the registrant, based upon the closing sale price as reported on the NASDAQ National Market on April 6,
2000,of $24.01 per share, was approximately $438,940,077.$342,239,813. Shares of the registrant's common stock owned by its executive officers and directors were excluded from this calculation; however, such exclusion does not represent a conclusion by the registrant that the executive officers or directors are affiliates of the registrant.
        At April 6, 2000,24, 2003, there were 22,224,81425,891,158 shares of common stock outstanding.
Documents Incorporated by Reference
        Portions of the definitive Proxy Statement for the 20002003 Annual Meeting of ShareholdersStockholders are incorporated by reference in Part III hereof.

FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 29, 2000
                                      FEBRUARY 1, 2003

INDEX


Page
PART I                                                                                                Page
                                                                                                      ----

Item 1—Business1 -           Business                                                                              1

Item 1A -          1A—Executive Officers of the Company15
Item 2 -           2—Properties16
Item 3 -           3—Legal Proceedings16
Item 4 -           4—Submission of Matters to a Vote of Security Holders                                  16

17

PART II


Item 5 -           5—Market for the Registrant's Common Equity and Related Stockholder Matters17
Item 6 -           6—Selected Financial Data                                                              18
17
Item 7 -           7—Management's Discussion and Analysis of Financial Condition and Results of Operations20
Item 7A -          7A—Quantitative and Qualitative Disclosures About Market Risk                           24
33
Item 8 -           8—Consolidated Financial Statements 26
and Financial Statement Schedule34
Item 9 -           9—Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                                                                 42

59

PART III


Item 10-           10—Directors and Executive Officers of the Company                                      42
59
Item 11-           11—Executive Compensation                                                               42
59
Item 12-           12—Security Ownership of Certain Beneficial Owners and Management                       42
59
Item 13-           13—Certain Relationships and Related Transactions                                       42

59

PART IV


Item 14 -          14—Controls and Procedures59
Item 15—Exhibits Financial Statement Schedules and Reports on Form 8-K
                                                                                                        42

59
SIGNATURES                                                                                              45
61

PART I

PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

    WHEN USED IN THIS ANNUAL REPORT ON FORM
Preliminary Note Regarding Forward-Looking Statements
        When used in this Annual Report on Form 10-K, THE WORDS "EXPECT,the words "expect," "ESTIMATE,"estimate," "ANTICIPATE,"anticipate," "INTEND,"intend," "PREDICT,"predict," "BELIEVE,"believe," AND SIMILAR
EXPRESSIONS AND VARIATIONS THEREOF ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF AND SUBJECT TO THE SAFE HARBOR CREATED BY THE
PRIVATE SECURITIES LITIGATION REFORM ACT OFand similar expressions and variations thereof are intended to identify forward-looking statements within the meaning of and subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. FORWARD-LOOKING STATEMENTS
APPEAR IN A NUMBER OF PLACES IN THIS ANNUAL REPORT ON FORMForward-looking statements appear in a number of places in this Annual Report on Form 10-K AND INCLUDE
STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF ELECTRONICS
BOUTIQUE, ITS DIRECTORS OR ITS OFFICERS WITH RESPECT TO, AMONG OTHER THINGS: (I)
TRENDS AFFECTING ELECTRONICS BOUTIQUE'S FINANCIAL CONDITION OR RESULTS OF
OPERATIONS; AND (II) ELECTRONICS BOUTIQUE'S BUSINESS AND GROWTH STRATEGIES.
READERS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND THAT
ACTUAL RESULTS OR OUTCOMES MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE SET
FORTH IN ITEM 1. "BUSINESS - RISK FACTORS".

ITEM 1.   BUSINESS

GENERALand include statements regarding the intent, belief or current expectations of Electronics Boutique, Holdings Corp. ("its directors or its officers with respect to, among other things: (i) trends affecting Electronics Boutique") believes it isBoutique's financial condition or results of operations; and (ii) Electronics Boutique's business and growth strategies. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results or outcomes may differ materially from those projected in the forward-looking statements as a result of various factors, including those set forth in Item 1. "Business—Risk Factors".

Item 1. Business
General
        We believe we are among the world's largest specialty retailers of electronic games. We sell video gamesgame hardware and software, PC entertainment software supported by the sale of video game
hardware, PC productivity software, PCand related accessories and related products. We
offer our products through our large and growing store base, which, asAs of January 29, 2000, included 619February 1, 2003, we operated 1,145 stores, located in 46 states, Puerto Rico, Canada,
Australia and South Korea, operating primarily under the names Electronics Boutique and Stop 'N Save SoftwareEB Games, in Australia, Canada, Denmark, Germany, Italy, New Zealand, Norway, Puerto Rico, South Korea, Sweden and the United States. We also operate a commercial website under the URL addresswww.ebgames.com. Our compound annual growth rates for sales and pre-tax net income from fiscal 1999 through our web site at WWW.EBWORLD.COM.
In additionfiscal 2003 were 21.7% and 16.9%, respectively (after giving effect to our retailing activities, we provide management services for
Electronics Boutique, plc ("EB-UK"), a leading specialty retailerthe adoption of electronic
gamesEITF 02-16 as of the beginning of fiscal 2003).
        The interactive entertainment industry is an approximately $11.7 billion market in the United Kingdom, SwedenStates that has grown at a compound annual growth rate of 21.2% over the last two years. The introductions of Sony's PlayStation 2 in late 2000, Nintendo's Game Boy Advance in June 2001, and Ireland,Nintendo's GameCube and Microsoft's Xbox in November 2001, represent the most significant video game hardware introductions since 1996. According to International Development Group, a leading market research firm in our industry, calendar 2003 is expected to be the peak year for Waldensoftware stores
on behalfhardware unit sales in the United States, with console and handheld sales expected to reach almost 24 million units. With the growing hardware installed base, we expect to see significant growth in software sales over the next two years. We believe our position, as the destination of Borders Group, Inc. Our stores are primarily located in high
traffic areas in regional shopping malls and average 1,200 square feet in size.

    Our core customer ischoice for the electronic game enthusiastavid gamer, will enable us to benefit from this rapid industry growth.
        We serve the avid gamer who demands immediate access to new title releasesrelease titles and who generally purchases more video game titles and PC entertainment software than the average electronic game consumer.gamer. As a result, our tie ratio of software units sold to hardware units sold is consistently above the industry average. We believe that we attract both the core game enthusiastavid and casual gamer due to our:

    - 
    •
    specialty store focus on the electronic game category,
    - in malls and strip centers;

    •
    ability to stock sought-after new releases,
    - releases;

    •
    wide variety of pre-owned titles;

    •
    breadth of product selection,selection; and
    - 

    •
    knowledgeable sales associates.

    Our "FIRST TO MARKET" strategy establishes our stores and web site as the
destination of choice for electronic game enthusiasts.
        We believe that our vendors recognize the importance of our core game enthusiast customer base and, consequently, often rewardgrant us with disproportionately large allocations of newly-releasednew release titles and products. We plansupport our
1

stores through a highly effective centralized inventory management system. This system enables us to growexecute our revenues"first-to-market" new release strategy and operating income by:

    - expanding our domesticefficiently manage overall inventory levels in order to maximize the sale of new store base,
    - focusing on online retailing,
    - increasing store productivity,products during peak periods and - pursuing international opportunities.avoid markdowns as titles mature.
        We believe we were oneincorporated under the laws of the first video gameState of Delaware in March 1998 as a holding company for our operating activities. Our predecessor was incorporated in the Commonwealth of Pennsylvania in 1977.
        We maintain an informational website under the URL addresswww.ebholdings.com. The reports we file pursuant to the Exchange Act (Form 10-K, Form 10-Q, Form 8-K) may be accessed through this website following our filings with the Securities and PC entertainment software
specialty retailersExchange Commission.
Risk Factors
Risks Related to offer a web site with product reviewsthe Interactive Entertainment Industry
Manufacturers may fail to introduce or delay the introduction of new products, which could hurt our ability to attract and online
purchasing. Our core customer tends to be Internet savvy, making e-commerce a
necessary and natural progression of our retailing platform. We believe our
success in store-based retailing, our strong market identity and existing
infrastructure differentiates EBWORLD.COM from other online retailers.



                                      1



RISK FACTORS

    DEPENDENCE ON NEW PRODUCT INTRODUCTIONS.retain customers.
        We are highly dependent on the introduction of new and enhanced video game and PC hardware and software and PC entertainment software by manufacturers for our success. If manufacturers fail to introduce or delay the introduction of new games and systems,products, we would have difficulty attracting and retaining customers to buy the products we sell. Any
failure to attract and retain customerssell, which could adversely affect our business. Many of the factors that impact our ability to offersell new products and to
attract and retain customers, are largely beyond our control. These factors
include:

    -control, including:
    •
    our dependence upon manufacturers to introduce new or enhanced video game systems,
    -systems;

    •
    our reliance upon continued technological development and the continued use of
      PCs,
    -development;

    •
    our dependence upon software publishers to develop popular game and entertainment titles for future generation game systems or PCs,PCs; and
    - 

    •
    the availability and timeliness of new product releases atreleases.
The interactive entertainment industry is cyclical, which could cause significant fluctuations in our stores.

    VIDEO GAME SYSTEMS AND SOFTWARE PRODUCT CYCLES.earnings.
        Demand for video game systems and software fluctuates in relation to the introduction of next-generation hardware and related software titles. Following the introduction
of next-generation products, sales of the new products increase steadily, while
sales of the prior-generation products steadily decrease. Manufacturers have historically introduced next-generation systems every four to five years. Peak
salesSales volumes of prior-generation hardware tend to occurnew video game systems and related software titles are generally higher in the yearinitial stages of the products' life cycles. As a product reaches the end of its life cycle, demand for the product will generally decline as our customers anticipate the introduction of next-generation systems, while peak sales of prior-generation software titles
tend to occur in the year following the peak of prior-generation hardware.products. If leading video game systemssystem manufacturers fail to continue to introduce next-generation systems, or fail to make significant enhancements toenhance existing systems on a periodic basis, our sales of hardware systems and related software titles will decrease, which decrease could have a materialan adverse effect on our results of operations and financial condition.
See "Business-Products."

    TECHNOLOGICAL OBSOLESCENCE.
If our vendors fail to provide marketing and merchandising support at historical levels, our sales and earnings could be negatively impacted.
        The manufacturers of video game hardware and software and PC industries areentertainment software have typically provided retailers with significant marketing and merchandising support for their products. As part of this support, we receive cooperative advertising and market development payments from these vendors. These cooperative advertising and market development payments enable us to actively promote and merchandise the products we sell and drive sales at our stores and on our website. We
2

cannot assure you that vendors will continue to provide this support at historical levels. If they fail to do so, our sales and earnings could be negatively impacted.
If we fail to keep pace with rapidly changing industry technology, we will be at a competitive disadvantage.
        The interactive entertainment industry is characterized by swiftly changing technology, evolving industry standards, frequent new and enhanced product introductions and rapid product obsolescence. These characteristics require us to respond quickly to technological changes and to understand their impact on our customers' preferences. If we fail to keep pace with these changes, our business may suffer. In particular, many video
games and other entertainment software are readily available onaddition, some of these technological changes, such as the Internet.
The ability to download electronicvideo games onto PCs or video game console systemsplay games over the Internet through consoles could make the retail sale of video games and PC entertainment software obsolete. If thisadvances in technology continuescontinue to expand our customers' ability to access software through other sources, our revenuessales and earnings could decline.

    NEW STORE OPENINGS.be negatively impacted.
Risks Related to Our Business
If we fail to manage new store openings or renew existing locations as they expire, our operational and financial results could be negatively impacted.
        Our growth will dependdepends on our ability to open and operate new stores profitably. We currently intend to open approximately 100 to
125275 new stores in the current fiscal year.2004. Our ability to open new stores in a timely and profitablyprofitable manner depends upon severalnumerous contingencies, many of which are beyond our
control. The contingencies include:

     -including our ability to locate and lease suitable store sites, negotiate acceptable lease
       terms, and build out or refurbishthese sites on a timely and cost-effective basis, - our ability to hire and train and retain skillednew associates, and - our ability to integrate newthese stores into itsour existing operations.

     In addition, our services agreement with EB-UK significantly restricts our
ability to open stores in Europe. See "Business - Management Services." We cannot assure you that we will be able to achieve our planned expansion or that our new stores will achieve sales and profitability levels comparable to our existing stores. See "Business - Retail Operations."

     COMPETITION. The electronic game
        As of February 1, 2003, approximately 10% of our stores were operated under leases with terms that expire in less than one year. We cannot assure you that we will be able to maintain these existing store locations as leases expire or that we will be able to locate suitable alternative sites on acceptable terms.
If we do not compete effectively, we will lose customers and our earnings will decline.
        We face intense competition in the interactive entertainment industry is intensely competitive and subjectthis could lead to rapid changes in consumer preferencesreduced sales and frequent new product
introductions.profit margins. We compete with:

     - 
    •
    video game and PC software specialty stores located in malls and other
       locations,
     - stores;

    •
    mass merchants,
     - merchants;

    •
    toy retail chains,
     - chains;

    •
    online retailers,
     - mail-order businesses,



                                       2



     - catalogs,
     - retailers;

    •
    direct-to-consumer software publishers, and
     - publishers;

    •
    office supply, computer product and consumer electronics superstores.

    Increased competition may lead to reduced profit margins on video gamessuperstores; and
PC entertainment software. In addition, customers can rent video games from many
video stores and cable television providers. Further, it is likely that other
methods

    •
    emerging alternative channels of distribution will emerge in the future, which would result in
increased competition. Manydistribution.
        Some of ourthese competitors have longer operating histories and significantly greater financial, managerial, creative, sales and marketing and other resources than we have. We also compete with other forms of entertainment activities, including movies, television, theater, sporting events and family entertainment centers.
3

If we dofail to successfully complete and integrate future acquisitions, our business could be negatively impacted.
        As part of our efforts to grow and compete, we may engage in acquisitions. Our plans to pursue future acquisitions are subject to our ability to negotiate favorable terms for these acquisitions. Accordingly, we cannot assure you that future acquisitions will be completed. In addition, to facilitate future acquisitions, we may take actions that could dilute the equity interests of our stockholders, increase our debt or cause us to assume contingent liabilities, all of which may have a detrimental effect on the price of our common stock. Finally, if any acquisitions are not compete effectively,successfully integrated with our revenues
and earnings maybusiness, our ongoing operations could be adversely affected. See "Business - Competition."

    SEASONALITY AND QUARTERLY RESULTS.
Our services agreement with The Game Group Plc restricts our ability to expand our business in Europe and litigation with Game Group could adversely affect our business and earnings.
        Our services agreement with Game Group (formerly The Electronics Boutique Plc) prohibits us from competing with Game Group in the United Kingdom until January 2007. The services agreement also requires that, until January 2006, we report to Game Group any opportunity relating to the interactive entertainment retailing business that we become aware of in Europe (excluding Scandinavia) which could be made available to Game Group and that we use reasonable endeavors to procure that each and every such opportunity is first offered to Game Group, on the same terms, including as to cost. As a result, Game Group could impede our expansion in Europe by pursuing opportunities in Europe which we report to it, and entering into agreements with our intended business partners. Game Group has publicly stated that it intends to expand its business into continental Europe. Our compliance with the services agreement will delay and could prevent, limit, or increase the cost of, any acquisitions in continental Europe. We have in the past had disagreements with Game Group in connection with the services agreement. These disagreements have resulted in litigation and could result in additional litigation.
        Under the services agreement, Game Group is responsible for the payment of fees equal to 1.0% of Game Group's adjusted sales, plus a bonus calculated on the basis of net income in excess of a pre-established target set by Game Group. In fiscal 2003, we received approximately $7.4 million in management fees from Game Group.
Our operating results fluctuate from period to period, which could result in a lower price for our common stock.
        Our business is affected by seasonal patterns. We historically generate our highest net sales, management fees and net income during the fourth quarter, which includes the holiday selling season. During the year ended January 29, 2000 ("fiscal 2000"),2003, we generated approximately 43%40.5% of our net sales and approximately 68%86.0% of our operating income were generated during the fourth quarter. Accordingly, any adverse trend in net sales during the holiday selling season could hurtadversely affect our results of operations for the fourth quarter as
well as forand the entire year. In addition to our dependence on fourth quarter sales, our results of operations may fluctuate from quarter to quarter depending upon a variety of factors, most of which we cannotcan not control. These factors include:

     - 
    •
    the timing of new product introductions andintroductions;

    •
    the timing of new store openings,
     - net sales contributed by new stores,
     - increases or decreases in comparable store sales,
     - adverse weather conditions,
     - openings;

    •
    general economic conditions;

    •
    weather;

    •
    shifts in the timing of certain holidays or promotions,promotions; and
     - 

    •
    changes in our merchandise mix.

    Any one or more of these factors could affect our business, financial
condition and results of operations, and this makes
4
            These fluctuations make the prediction of our financial results of
operations on a quarterly basis difficult. Also, it is possible that
    If we fail to obtain products from our quarterly results of operations maydomestic and overseas suppliers, our sales and gross profit will be below the expectations of public market
analysts and investors. This could adversely affect the price of our common
stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Seasonality and Quarterly Results."

    DEPENDENCE ON SUPPLIERS.affected.
            We rely heavily upon our suppliers to provide us with new products as quickly as possible. We purchase a significant amount of products from Nintendo of America ("Nintendo")Sony Computer Entertainment, Inc., Electronic Arts, Inc.
("Electronic Arts"), SegaMicrosoft Corp. and Nintendo of America, Inc. ("Sega"), and Sony Computer
Entertainment ("Sony") and often receive shipments of new release products which are disproportionately large relative to our share of the overall consumer video game market. During fiscal 2000, we purchased products2003, our purchases from Sony, Electronic Arts, Microsoft and Nintendo Segarepresented 14.8%, 12.3%, 11.5% and Sony, which represented 10.5%, 10.4%, 8.7% and 7.1%9.3%, respectively, of our netgross purchases. We believe that the loss of any of these suppliers could reduce our product offerings, which could cause us to be at a competitive disadvantage. In addition, our financial performance largely depends upon the business terms we obtain from our suppliers, including competitive prices, unsold product return policies, advertising and market development allowances, freight charges and payment terms. Our failure to maintain favorable business terms with our suppliers could adversely affect our ability to offer products to consumers at competitive prices.
            During fiscal 2000,2003, approximately one-third of our product purchases were from domestic distributors of products manufactured overseas,outside of the United States, primarily in Asia. To the extent that our distributors rely on overseas sources for a large portion
of their products, any event causing a disruption of imports, including the imposition of import restrictions, could hurtadversely affect our business. In addition, in the
recent past, many Asian currencies were devalued significantly in relation to
the U.S. dollar, and financial markets in Asia experienced significant turmoil.
We cannot assure you that these events will not occur again in the future, and
if these events do occur, our business could be harmed. Trade restrictions in the form of tariffs or quotas, or both, applicable to the products we sell could also affect the importation of thosethese products generally and could increase the cost and reduce the supply of products available to us.



                                       3



    GROWTH OF INTERNET AS MEANS OF E-COMMERCE. 
    If the e-commerce market does not
growour management information systems fail to perform or grows more slowly than we expect, our business may not grow as quickly
as we anticipate. A number of factors could prevent the acceptance and growth of
e-commerce, including the following:

    - e-commerce is at an early stage and buyers may be unwilling to shift their
      traditional purchasing to online purchasing,
    - increased government regulation or taxation may adversely affect the
      viability of e-commerce, and
    - adverse publicity and consumer concern about the reliability, cost, ease
      of access, quality of services, capacity, performance and security of
      e-commerce transactions could discourage its acceptance and growth.

    E-COMMERCE STRATEGY. Our e-commerce strategy depends in part onare inadequate, our ability to significantly increasemanage our business could be disrupted.
            We rely on a warehouse management system used in our domestic distribution centers and an inventory replenishment system to track sales of our products over the Internet. We are
pursuing opportunities to sell our products over the Internet through our web
site EBWORLD.COM as well as through Internet marketing partnerships with America
Online, MSN, and Snowball.com. This is a relatively new business and marketing
strategy for us and involves risks and uncertainties. We may not succeed in
marketing our products over the Internet. In addition, our Internet strategy
will requireinventory. Our systems allow us to significantly increaseexecute our advertising"first-to-market" new release strategy, to keep our stores in stock at optimum levels and marketing
expenditures.to move inventory efficiently. If our management information systems fail to adequately perform these expenditures do not result in significant sales,functions, our results of operations willbusiness could be adversely affected. See "Business - Online
Retailing."

    RISK OF INTERNATIONAL OPERATIONS.
    Our international operations expose us to numerous risks.
            We have international retail operations in various
foreign countries, includingAustralia, Canada, Denmark, Germany, Italy, New Zealand, Norway, South Korea and Australia, and we intend to
pursue opportunities that may arise in these and other countries.Sweden. Net sales in these foreign countries represented 12.2%approximately 19% of our net sales in fiscal 2000.2003. Because release schedules for hardware and software introduction in these countries often differ from release schedules in the United States, the timing of increases and decreases in foreign sales may differ from the timing of increases or decreases in domestic sales. We are also subject to the risks inherent in conducting business across national
boundaries, any onea number of other factors which could negatively impact our business. These risks
include:

    - economic downturns,
    - currency exchange rate fluctuations,
    - changes in governmental policy,
    - international incidents,
    - military outbreaks,
    - government instability,
    - nationalization of foreign assets, and
    - government protectionism.

    We cannot assure you that one or more of these factors will notmay impair our current or future international operationsopportunities. These include:
      •
      economic downturns;

      •
      currency exchange rate fluctuations;

      •
      international incidents; and as a result, harm

      •
      government instability.
    5
      We depend upon our overall
business.

    LEASE EXPIRATIONS AND TERMINATIONS. As of January 29, 2000, 84 of our stores
(13.6% of all stores) were operated under leases with terms that expire in less
than one year. We cannot assure you that we willkey personnel and they would be abledifficult to maintain our
existing store locations as leases expire, that we will be able to locate
suitable alternative sites on acceptable terms or find additional sites for new
store expansion. If we fail to maintain existing store locations, locate to
alternative sites or find additional sites for new store expansion, our revenues
and earnings may decline. See "Business Properties."

    DEPENDENCE ON KEY PERSONNEL.replace.
              Our success depends upon our ability to attract, motivate and retain key management associates for our stores and skilled merchandising, marketing and administrative personnel at our headquarters. In the past,While we have been successful in maintaining the continuity of our management team, including our executive officers, Joseph J. Firestone,
our President and Chief Executive Officer, Jeffrey W. Griffiths, our Senior Vice
President of Merchandising and Distribution and President of EBKids, Seth P.
Levy, our Senior Vice President and Chief Information Officer and the President
of EBWORLD.COM and John R. Panichello, our Senior Vice President and Chief
Financial Officer and President of BC Sports Collectibles. However, we cannot assure you that we will continue to be successful in attracting and retaining such personnel. CONTROL BY MAJORITY SHAREHOLDER.If we fail to retain qualified personnel, our business could suffer.
      Other Risks
      The Kim family has significant control of our company and can make decisions that could adversely affect our stock price and prevent a change of control.
              EB Nevada Inc. ("EB Nevada"), a company indirectly controlled by James Kim, his wife and certain trusts for the benefit of his children, beneficially ownowns approximately 61.5%44.7% of the 4
outstanding shares of our common stock. Accordingly, the Kim family effectively controls our company and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This control Electronics Boutique.may have the effect of delaying, preventing or deterring a change in control of our company and could deprive our stockholders of an opportunity to receive a premium for their common stock as part of any sale or acquisition. Under a credit facility we have with Fleet Capital Corporation, if the Kim family is obligated todoes not own, directly or indirectly not
less thanthrough EB Nevada, at least 25% of the issued andour outstanding capital stock, we may be declared in default under the credit facility.
      Our status as a holding company and our credit facility restrict our ability to pay dividends on our common stock.
              We are a holding company and do not have any material assets other than our ownership interests in our subsidiaries. Our common stock will be junior in right of Electronics
Boutique. See "Management's Discussionpayment to all of our existing and Analysisfuture liabilities and obligations and, by virtue of Financial Conditionthe fact that we are a holding company, our common stock will be structurally junior in right of payment to all existing and Resultsfuture liabilities and obligations of Operations - Liquidityeach of our subsidiaries. We have not declared or paid dividends on our common stock since our initial public offering in July 1998. In addition, our credit facility with Fleet Capital Corporation restricts our ability to declare or pay dividends on our common stock.
      Our income taxes could increase in the future.
              Our corporate structure includes the use of Delaware holding companies and Capital Resources."

INDUSTRY OVERVIEWsubsidiaries that hold our intellectual property and facilitate financing for our operations. Certain state taxing authorities have begun to review their positions with respect to income tax deductions taken as a result of these structures. If some or all of the income tax deductions resulting from our corporate structure are disallowed in the future, the income taxes we pay could increase, which will negatively impact our earnings.
      Our certificate of incorporation and bylaws contain anti-takeover protections, which may discourage or prevent a takeover of our company, even if an acquisition would be beneficial to our stockholders.
              Certain provisions of our certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if a takeover would benefit our stockholders.
      6

      Industry Overview
              The electronic gameinteractive entertainment industry is segmented intocomprised of two primary product platforms:categories, video games and PC entertainment software.

    VIDEO GAMES.
              Video game play requires two components, video game consoles,
known as hardware, andgames.    Domestic retail sales of video game titles known as software. Video game consolesand hardware systems were approximately $9.1 billion in 2002. According to International Development Group, domestic software sales are connectedexpected to a free-standing monitor or, typically, a television set. Video
game titlesgrow approximately 10.7% in 2003 while hardware unit sales are small cartridges or CD-Roms that are inserted into a video game
console. From 1996expected to September 1999, the video game market was dominated by two
manufacturers, Nintendo and Sony, each of which manufactures proprietary
hardware in the form of console systems and publishes game titles that run on
their console systems but cannot run on their competitors' systems. In September
1999, the Sega Dreamcast console system was introduced in the U.S. Third-party
publishers also produce a wide range of game titles for each of these major
hardware systems.peak with 1.9% growth over 2002. Growth in the industry has been driven by the continued improvements in systems technology, the substantial growth in the number of titles available across game categories and the emergence of well-capitalized software publishers with significant advertising budgets to support new releases. Total domestic retail sales of video game titles, hardware and accessories
were approximately $7.2 billion in 1999, which represents an increase of 14%
over 1998. This increase was primarily the result of the introduction of the
Sega Dreamcast console and related software titles and the continuing
penetration of the 32/64 bit, fourth generation of video game hardware
technology, originally introduced in 1995 and 1996 under the Sony PlayStation
and Nintendo 64 brands. As with each prior generation, the introduction of a new
hardware technology has led to an increase in the installed base of game console
systems. Enhanced technological features of new hardware platforms expand gaming capabilities, encourage existing players to upgrade their hardware platforms and simultaneously attract new video game players to purchase their first systems.

    We believe that Sega Dreamcast, which was introduced
              From 1996 to the U.S. and
Canadian markets in September 1999, representsNintendo and Sony, each of which manufactures proprietary hardware, dominated the firstvideo game market. Sony introduced the PlayStation in 1995 and Nintendo introduced the Nintendo 64 in 1996. In September 1999, Sega introduced the Sega Dreamcast. In October 2000, Sony introduced the PlayStation 2, which represented a significant improvement in graphics, performance, processing power and audio quality over the current
32/64 bit systems. Sony,systems in use at the time. Nintendo and Microsoft have also announced plansintroduced the Game Boy Advance, the successor to introduce their next-generation consoles. Sony's PlayStation 2, expected to bethe highly successful Game Boy, in June 2001. Nintendo's GameCube, introduced in 2000, will feature significant performance improvements and
importantly, backward compatibility with current-generation PlayStation
software, which may reduce obsolescence of current-generation software titles.
Nintendo's console, expected to be introduced inNovember 2001, code named Dolphin, will
also featurefeatures significant performance enhancements over the current N64Nintendo 64 system and will beis based on DVDCD technology as compared to the currentprior cartridge-based technology. Microsoft's X-Box,Xbox, also expected to belaunched in November 2001, provides advanced graphics and Internet connectivity. In March 2003, Nintendo introduced in 2001, is
expected to provide significant graphical improvement over current generation
systems as well as internet connectivity. Historically, just prior toa significantly enhanced design of the introduction of next-generation hardware and software products, sales of
prior-generation hardware products peak and the sales of prior-generation
software titles peak in the following year.Game Boy Advance, Game Boy Advance SP. We believe that the current
transition to next-generation platforms may result in less cyclical sales for
current-generation systemsinteractive entertainment industry is experiencing an expansion cycle, which started with the introduction of Game Boy Advance, PlayStation 2, GameCube and software. This is due to:

     -Xbox.
              At year-end 2002, the continuing strong pace of introductions by software publishers of
       new releases for the current 32/64 bit and next generation systems,
     - significant mass media advertising and promotional activity to support
       new titles,
     - consumer anticipation that the next-generation Sony game console
       system will be backward compatible with current-generation games.

     At year end 1999, the current installed base of video game hardware systems in the United States totaled 21.8approximately 15.9 million Sony PlayStation 2 units, 13.24.6 million Nintendo 64Xbox units, 3.6 million GameCube units and 1.311.7 million Sega DreamcastGame Boy Advance units. Hardware manufacturers and third-party publishers produce a wide range of game titles for each of these major hardware systems. In addition, according to NPD Group, Inc., a market research firm, sales of video game systems accessories were estimated to be approximately $1.3 billion in 2002.
      PC ENTERTAINMENT SOFTWARE.entertainment software.    Domestic retail sales of PC entertainment software were approximately $1.4 billion in 2002, down slightly from the prior year. According to International Development Group, PC entertainment software sales are expected to decline 1% to 2% annually over the next several 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. The 5



market for PC entertainment software has experienced steady growth in recent
years, due primarily to the growth in the installed base of multimedia PCs. The
domestic installed base of multimedia PCs has increased from approximately 1414.0 million units in 1995 to approximately 4263.8 million units in 1999. Domestic unit
sales of PC entertainment software have increased from approximately 23 million
units in 1995 to approximately 60 million units in 1999. Domestic retail sales
of PC entertainment software totaled approximately $1.4 billion in 1999, an
increase of approximately 7.5% over 1998. We believe that multimedia PCs priced
well below $1,000 will contribute to growth in PC unit sales and broaden the
appeal of home PCs as an alternative source of in-home entertainment. Worldwide,
the installed base of multimedia PCs and sales of PC entertainment software has
grown at a rate comparable to the rate of growth in the United States.

    CUSTOMERS.2002.
              Customers.    We believe the typical electronic game consumergamer is male, single, between the ages of 14 and 34, and lives in a household with an annual income in excess of $50,000. We also believe that our customers are often opinion leaders in the interactive entertainment industry, influencing the buying decisions of friends and family. According to a study conducted by Ziff Davis Media Game Group, our core customer, the Millennium Gamer Study, owners ofavid gamer, owns multiple video game hardware systems purchaseand purchases an average of 3.212 game titles per year. We believe thatyear, significantly more than the average gamer. In addition, many electronicvideo game players purchase video game titlesPC entertainment software as well as PC entertainment
software. Electronic games are principally sold through retail channels,
including specialty retailers like Electronics Boutique, as well as mass
merchants, toy retail chains, electronics retailers, computer retailers,
wholesale clubs, the Internet and mail order.

BUSINESS STRATEGYvideo game titles.
      7
      Competitive Strengths
              We seek to enhance our position as one of the world's largest specialty retailers of video game titles and PC entertainment software.

    BREADTH OF TITLE SELECTION.software by focusing on the following:
              Breadth of title selection.    We offer our customers an extensive selection of video game titles and PC entertainment software at competitive prices. Our typical store offers approximately 1,350over 1,400 titles (excluding pre-owned games) at any given time from over 9060 video game and PC entertainment software vendors. Most of theseThese titles are also available on our web site.website. We continuously update our title selection in each store to reflect the tastes and buying patterns of the store's local market. We carry game titles which are compatible with all major video game hardware systems and PCs. In addition to video game titles and PC entertainment software, we offer a complementary line of productivity and educational software and PC and video game accessories and peripheral products, including graphics
accelerators,controllers, joysticks, memory cards, DVD remotes, books and magazines. By offering all major video game hardware systems and providing a broad but focused assortment of electronicvideo game software and accessories and PC entertainment software, we seek to establish our stores and web sitewebsite as the destination of choice for electronic game enthusiasts.

    IMMEDIATE AVAILABILITY OF NEW RELEASES.avid gamers.
              Immediate availability of new releases.    We strive to be the first in our markets to offer new video game and PC entertainment software titles upon their release. New-releaseWe believe that vendors recognize the importance of our video game enthusiast customer base and, consequently, often grant us disproportionately large allocations of new release products. Our inventory management systems then rapidly move the products from our distribution centers to our stores. New release titles are often preceded by substantial publicity in the form of print advertisements and reviews in publications and, increasingly, are promoted through television advertisements.advertisements by the game and software publishers. This publicity tends to create high levels of demand for new releases among electronicvideo game enthusiasts, often well in advance of release dates. This demand has afforded us an important marketing opportunity to create excitement surroundingdrive traffic to our stores and our web site.website.
              To assure our customers immediate access to new releases, we offer our customers the opportunity to purchase"EB Pre-Sell Program" through which they can reserve video games and PC entertainment software prior to theirfor delivery upon our receipt and release throughof the "EB Pre-Sell Program," which guarantees customers a copy of a new
release immediately after its launch. We also have established the "EB Reserve
List," which entitles participants on this list to be notified when a game has
arrived in our stores.product. On average, we introduce 2029 new game titles in our stores and on our web sitewebsite each week.

    HIGHLY EFFECTIVE INVENTORY MANAGEMENT SYSTEM.
              Highly effective inventory management system.    We emphasize strict inventory
policies in order to manage over 2,000 SKUs, including video game titles, PC
entertainment software, video game consoles, accessories and related products.
Ourhave a highly effective inventory management system that enables us to maximize sales of new-releasenew release titles and avoid markdowns as titles mature. We minimizeThe system forecasts our inventory risk by:

    - conducting extensive researchrequirements on new-release titles to forecast
      anticipatedan individual store basis, aggregates our total requirements and manages the daily sell-through,
    - utilizing POS polling technology to provide daily sales, margin and
      inventory reportsreplenishment function from our automated distribution centers to our merchandising staff,
    - managing inventorystores. This results in improved in-stock levels in our stores.
              Knowledgeable sales associates.    We believe that our knowledgeable sales associates, many of whom are avid gamers, and our higher level of customer service provide us with an important advantage over competitors such as mass merchants, toy retail chains, and office supply, computer product and consumer electronics superstores. We provide all of our sales associates with training and information on video game and PC entertainment products, system requirements and selling techniques through vendor-sponsored "EB University" seminars, held for store managers and field managers, and through regularly scheduled in-store seminars for our sales associates. We also encourage our sales associates to learn about customers' game preferences. With this knowledge, sales associates introduce customers to a store-by-store basis to address local customer
      merchandiseselection of games and accessories that may suit their preferences and - replenishing store-level inventories daily fromadvise them of new releases suited to their interests, thereby enhancing our fully-automated
      distribution centers.



                                       6



We introduce an average of 10 new SKUs in our stores and on our web site each
day. As a result of these inventory management initiatives, we have achieved
desired in-stock positions and our inventory turns in fiscal 2000 were 5.4x. In
addition, our fiscal 2000 inventory shortage was less than 0.6% as a percentage
of sales.

    DISCIPLINED STORE OPERATIONS.customers' overall gaming experience.
              Disciplined store operations.    Our management team exercises significant control over all aspects of our store operations, fromincluding product research, purchasing, and distribution, to real estatesite selection, store development, POS financial reporting and sales training. We believe that this commitment to operational control enables us to:

    - operate substantially all of our stores on a profitable basis,
    -to identify opportunities to improve store productivity quickly and - to
      8

      react quickly to shifts in product pricing and consumer purchasing trends. KNOWLEDGEABLE SALES ASSOCIATES. We believe that our knowledgeable sales
associates provide us with an important competitive advantage over mass
merchants, toy retail chains and office supply, computer product and consumer
electronics superstores, all of which compete with us, but generally offer much
lower levels of customer service in the electronic game category than we do. We
provide all of our sales associates extensive training on video game and PC
entertainment software products, system requirements and selling techniques.
Many of our sales associates are also electronic game enthusiasts. We facilitate
training through vendor-sponsored EB University seminars, held semi-annually for
store managers and field management associates, and through regularly scheduled
in-store seminars conducted by our District Managers. In addition, we encourage
sales associates to learn about their customers' game preferences. With this
knowledge, sales associates can introduce customers to a selection of electronic
games and accessories that may suit their preferences or enhance customers'
overall game experience. In addition, our sales associates advise customers of
pending new releases suited to the customer's expressed interests.

    VALUE PRICING AND AFFINITY PROGRAMS. In an effort to offer maximum value to
our customers and discourage comparison shopping, we maintain an everyday low
pricing policy and support this policy with our EB Pre-Sell and EB Reserve List
affinity programs, as well as a price matching policy. Our price matching
program is known as the EB Code of Honor Program. An extensive selection of
merchandise and a high level of customer service complement our "everyday low
price" policy.

GROWTH STRATEGY

    DOMESTIC NEW STORE EXPANSION. We plan to expand our domestic retail
operations by opening about 85 stores in both existing and new markets in the
year ending February 3, 2001 ("fiscal 2001"). In fiscal 2000, we opened 62
domestic stores. Our real estate team applies standardized site-selection
criteria to secure the best location for our stores when entering a new
market or expanding within an existing market. We believe our store formats
can operate profitably in high traffic/high rent malls as well as in lower
traffic/lower rent malls, central business districts and strip shopping
centers. This flexibility provides us with an extensive selection of
locations for future store openings.

    EXPANSION OF ONLINE RETAILING. We believe our core customer base is Internet
savvy, making e-commerce a necessary and natural progression of our retailing
platform. Our web site benefits from a strong market identity and brand name,
which we believe contributes to confident e-commerce purchasing decisions. We
believe that our merchandise is ideally suited for sale on the Internet because
it is easy and cost-efficient to ship, gift-oriented, and it benefits from
vendor-sponsored promotion. Additionally, user-friendly information is readily
available on our web site for the products we sell. Our e-commerce web site also
enables us to gain access to customers who do not live near any of our stores,
especially with respect to foreign sales. As foreign demand warrants, we intend
to open international distribution centers to increase fulfillment efficiency.
We also intend to expand aggressively our customer base through national media
campaigns, advertising through Internet properties, such as America Online, MSN
and Snowball.com and continued pursuit of strategic alliances with directories,
search engines and content providers.

    STORE PRODUCTIVITY. We constantly strive to increase the productivity of our stores by focusing on the following areas:

    - Inventory Management and Controls. We useactively managing our POS and inventory management
systems, including our fully automated distribution centers, to improve our
merchandise mix and in-stock positions, increase inventory turns and



                                       7



drive down shrinkage which, at less than 0.6% as a percentage of sales in fiscal
2000, we believe is among the lowest of mall-based retailers.

    - Managing Store Payroll. We seek to optimize store payroll expense by
utilizingand operating our POS reporting systemsstores as efficiently as possible. In order to assure the best possible matchdisplay most of sales
associate floor coverage to customer traffic.our products on our stores' shelves, we maintain selling space which averages approximately 90% of our stores' total square footage in each of our store formats. In an effort to enhance our store
payroll strategy,sales conversion rates, in many of our stores we continue to implementutilize a system, known as Shoppertrak,ShopperTrak, that electronically measures store customer traffic throughout the day and provides us with an analysis of sales conversion rates by store and by sales associate. This system allows usWe also utilize our POS reporting systems to continueassure the best possible match of sales associate floor coverage to improve our sales conversion rates.

    - Pre-owned Electronic Games. As a result of the proliferation of new titles
and the tendency of electronic game playerscustomer traffic.
              Value pricing.    In an effort to seek new game challenges after
mastering a particular title, a growing market for pre-owned video game titles
has evolved in recent years. We offer maximum value to our customers and discourage comparison shopping, we maintain an "everyday low price" policy on advertised merchandise. We complement this policy with an extensive selection of merchandise and a storehigh level of customer service. We also offer a pre-owned program which allows customers to save additional money by trading in their used games for credit for their
pre-owned video game titles. Sales of pre-owned video game titles generate
higher margins than new titles and their availabilitytoward any product sold in our stores tendsstores. The trade-ins are then resold to attractother customers at lower prices than our core game enthusiast customer. We believe thatnew products to offer a significant
opportunity continues to exist to increase salesbroader range of pre-owned game titlesproducts and we
have implemented a number of marketing and merchandising programs, coupled with
incentives toprice choices for our sales associates, to increase our participationcustomers.
              Leadership in the growing
market for pre-owned titles.

    INTERNATIONAL OPPORTUNITIES. As of January 29, 2000, we operated 43 stores
in Australia, 54 stores in Canada and five stores in South Korea. In fiscal
2000, we opened 14 stores in Australia and 15 stores in Canada. We intend to
open approximately 15 stores in Australia, five stores in New Zealand, and 20
stores in Canada during fiscal 2001. We also provide management services to
EB-UK which, as of January 29, 2000, operated 280 stores and 18 department
store-based concessions in the United Kingdom, Ireland and Sweden.e-business.    We believe that our currentcustomers are generally more familiar with the Internet and with online retailing than the average consumer. Our website offers over 5,000 new and pre-owned stock keeping units, known as SKUs, that are available for immediate shipping to our customers. In addition, we have designed our website to serve our customers by providing product reviews, access to new releases, user-friendly online purchasing and the ability to pre-order video games and PC entertainment software.
      Growth Strategy
              New store expansion.    We believe that there are domestic and international presence will enable usopportunities for significant new store growth. Over the last four fiscal years, we have more than doubled our store base. We plan to leverageopen approximately 275 new stores in fiscal 2004.
              Domestic opportunity.    We plan to open approximately 200 new stores in fiscal 2004 in the United States. We plan to continue to open stores in selected malls. In addition, we plan to accelerate growth in urban areas, central business districts and strip and power shopping centers. We expect our existing
distributionstores in these locations to require lower initial investments, generate higher gross margins on lower revenue and management infrastructure for further expansion.

RETAIL OPERATIONShave a lower operating cost structure than our mall-based stores. These stores, which typically carry a wider assortment of pre-owned video games than our mall-based stores, target the more value conscious gamer.
              International opportunity.    In fiscal 2002, we began a store expansion program in continental Europe which includes both the opening of new stores and the acquisition of regional chains. As of January 29, 2000,February 1, 2003, we operated a total of 619290 stores in 46 states,Australia, Canada, Denmark, Germany, Italy, New Zealand, Norway, South Korea, and Sweden. We plan to open approximately 75 new stores in fiscal 2004 in these markets.
              The interactive entertainment market in continental Europe is approximately $7.0 billion in size and has consumer demand characteristics similar to the U.S. market. We believe retail competition in the interactive entertainment industry is weaker throughout continental Europe than in the United States. There are very few specialty interactive entertainment retail chains in continental Europe and the existing specialty chains are small and undercapitalized, with little or no investment in distribution and information systems. Most video games are sold in Europe through general merchandise stores that offer less service and a smaller product selection than our stores. We believe that our store model, merchandising expertise and strong vendor relationships should enable us to gain significant market share in our targeted continental European markets over the next several years.
      9

              Expansion of online retailing.    We believe that our core customer tends to be an Internet user, and we strive to meet their needs through our website,www.ebgames.com., which provides product reviews, access to new release titles, user friendly online purchasing and the ability to pre-order video games and PC entertainment software.
      Retail Operations
              As of February 1, 2003, we operated a total of 1,145 stores in the United States, Australia, Canada, Denmark, Germany, Italy, New Zealand, Norway, Puerto Rico, Canada, AustraliaSouth Korea and South Korea,Sweden, primarily under the names Electronics Boutique and Stop 'N Save Software.

    STORE FORMATS. Electronics BoutiqueEB Games.
              Store formats.    Many of our stores are specialty retail stores that
offer video game hardware and game titles, PC entertainment, educational and
productivity software, and video game and PC accessories. Electronics Boutique
and EBX stores are located primarily in high traffic areas in regional shopping mallsmalls. As of February 1, 2003, we operated 768 stores with this format in the United States and generally stock over 2,000 SKUs. The typical mall-based Electronics
Boutique store isCanada. These stores average approximately 1,200 square feet, but stores range in size from
450 square feet to 2,700 square feet, with retail selling space averaging
approximately 90% of total square footage.feet. We believe that our mall-based stores generate sales per square foot that are among the highest of any mall-based retailer.

    Stop 'N Save Software
              In addition to our mall-based stores, are generally larger-formatwe also operate many stores located in urban areas, central business districts, and strip and power shopping centers. We openedThese stores are generally larger than our first Stop 'N Save Software store in 1995. Our merchandising
strategy at our Stop 'N Save Softwaremall-based stores, resembles our merchandising
strategy at our Electronics Boutique stores. Stop 'N Save Software stores range
in size from 1,250 to 5,000 square feet, with retail selling space averaging approximately 90%1,700 square feet. We began our expansion into these other locations in fiscal 2001, and as of total square footage.

    In addition,February 1, 2003, we operate 15operated 213 stores with this format. We believe that these stores do not compete directly with mall-based stores due to their locations and their focus on pre-owned games. The balance of our stores that sellwere open as of February 1, 2003 were located outside of the United States and Canada and are comprised of mall-based stores as well as multiple other formats.
              We typically locate our stores in malls and strip and power shopping centers and we believe that there are many suitable locations available for future sites. We use standardized site selection criteria for each of our formats to choose sites.
              As of the first quarter of fiscal 2003, we operated 22 stores that sold sports collectibles and memorabilia under the name BC Sports Collectibles. We believe the customer base
of BC Sports Collectibles shares many of the same demographic characteristics as
the customer base of our Electronics Boutique stores. We believe BC Sports
Collectiblesand 29 stores generate higher sales volumes if they are located in
metropolitan areas which are in close proximity to cities with several
professional sports franchises. We locate our BC Sports Collectibles stores in
malls and strip and power shopping centers. The stores generally range in size
from 1,000 to 5,000 square feet.

    We opened our first EBKids store in September 1999. EBKids is a new concept
we are testing in which we will offer an assortment ofthat sold interactive and developmental toys and family-friendly, non-violent software thatunder the EBKids brand. In February 2002, we believe
will appealannounced our decision to a younger customer, ages 4-12 years old. This new store formatsell the BC Sports Collectibles chain and product offering is designed to 8



give parentsclose the EBKids chain. We made this strategic decision to enable us to focus all of our resources—management, capital, and young children a shopping destination which is family-friendly,
free of game titles that include mature content and which capitalizes systems—on the Electronics Boutique brand name.

    SITE SELECTION. We visit numerous mall and strip and power shopping center
sites throughout the year in the United States and in several foreign countries
in search of suitable store locations. Our standardized site selection criteria
include:

    - lease terms,
    - population demographics,
    - psychographics,
    - traffic count,
    - store-front visibility and presence,
    - adjacencies,
    - competition, and
    - accessible parking.

    We believe our store formats can operate profitably in high traffic/high
rent malls as well as lower traffic/lower rent malls and shopping centers.
Accordingly, we believe that there are a large selection of locations available
for future sites. We view lease terms as the most critical elementgrowth opportunities in our site
selection process. We have used our knowledgecore interactive entertainment market. The closing of the EBKids stores was completed in May 2002 and the sale of our market areas to negotiate
favorable lease terms at many of our22 store locations, which has resultedBC Sports Collectibles business closed in lower occupancy costs. We regularly review the profitability and prospects of
each of our stores and evaluate whether any underperforming stores should be
closed or relocated to more desirable locations. We negotiate with landlords to
convert desirable Waldensoftware locations into Electronics Boutique stores when
their leases terminate. See "Management Services".

    STORE ECONOMICS. We believe that our store concepts offer attractive unitNovember 2002.
              Store economics. We estimate that the average Electronics Boutique store had net sales
of approximately $1.3 million in fiscal 2000.    The average cost, to open an
Electronics Boutiquenet of payables, of opening a new mall-based store in fiscal 2000 (exclusive of inventory costs)2003 was approximately $163,000. These costs include$164,000. This included approximately $148,000 for furniture, fixtures, equipment and leasehold improvementsimprovements. Pre-opening expenses are minimal and equipment. Our stores have anare included in the store's expenses for the first month of operation.
              The average cost, net of payables, of opening inventorya new strip center store in fiscal 2003 was approximately $77,000. This includes approximately $62,000 for furniture, fixtures, equipment and leasehold improvements. Pre-opening expenses are minimal and are included in the store's expenses for the first month of $95,000.operation.
              The cost to open an international store is approximately the same in U.S. dollars as the cost to open a domestic store. Typically, our new stores have generated a positive store operating contribution within the first 12 months of operations. STORE OPERATIONS.We regularly review the profitability and prospects of each of our stores and evaluate whether any under performing stores should be closed or relocated to more desirable locations.
      10

              Following the opening of a store, we utilize inventory management and controls and manage store payroll in an effort to maximize profitability. Our POS and inventory management systems allow us to analyze merchandise mix and in-stock positions and reduce shrinkage. We also utilize various payroll management and efficiency systems to improve sales conversions and store profitability.
              Store operations.    We divide our North American store base (in the U.S., Canada,(United States and Puerto Rico) is equally dividedCanada) into two11 geographic regions, East and West.
These regionswhich are supervised by two Fieldour President of Stores—North America and Canada, our Vice President of Store Operations Vice Presidents, 11(Canada), Regional Vice Presidents/Directors and 46 District Managers. EachOur Senior Vice President of International Operations, who is based in France, supervises our international operations other than in Canada. Managing Directors, District Managers and Area Managers supervise our stores in Denmark, Germany, Italy, Norway and Sweden. A General Manager, is responsible for approximately 12 stores. OurRegional Director, District Managers and Area Managers supervise our stores in Australia, New Zealand and South Korea are supervised by a Managing Director.Korea.
              Each of our stores typically has a full-time manager and a full-time assistant manager in addition to hourly sales associates, most of whom work part-time. The number of hourly sales associates in each store fluctuates depending on our seasonal needs. Our domestic stores are open seven days per week and generally ten hours each day. We operate our international stores in a manner substantially similar to our domestic stores.

ONLINE RETAILING

    In April 1999, we established EBWORLD.COM as a separate
      Online Retailing
              We launched our e-commerce subsidiary to accelerate the growthwebsite,ebworld.com, in August 1997. As part of our Internet business. Inrebranding initiative, we changed the name of the website toebgames.com earlier this year. Online orders have increased year over year and our e-commerce operating subsidiary has been profitable since fiscal 2000, we
recorded 19.6 million visits to our web site compared to 10.2 million in fiscal
1999. In addition, revenues from our web site in fiscal 2000 were $14.1 million
compared to revenues of $4.3 million in fiscal 1999.2002.
              The Internet represents a logical extension ofcomplementary channel to our traditional store-based retail business. We believeOur own surveys indicate that our customers are generally more familiar with
the Internet and with online retailing than are most consumers. In addition, we
believe that our web site'swebsite's detailed product reviews, game previews, new release schedules, product notification services, industry news and advanced search capabilities will appeal to a worldwide audience of game enthusiasts. Our
experience in store-based retailing provides us with a significant advantage
over online only competitors. We believe that the breadthportion of our store-based
operations and the strength of the Electronics Boutique brand name will
differentiate EBWORLD.COM from other online competition. EBWORLD.COMgamer audience.Ebgames.com utilizes our merchandising 9
expertise to leverage ourand strong vendor relationships andto provide online customers with an extensive selection of titles.over 5,000 new and pre-owned SKUs that are available for immediate shipping. Further, EBWORLD.COMebgames.com leverages our distribution and order fulfillment capabilities which have supportedto provide delivery of new release titles to online consumers on the same day they are available in our direct-to-consumer catalog operations for more than 10 years.

    Our marketing strategy for EBWORLD.COM has primarily consisted of alliances
with directories, search engines, content providers, targeted advertising and
related web sites which feature electronic games. As an example, EBWORLD.COM is
the exclusive commerce provider of games for the IGN.com, network of web sites
and IGN.com provides EBWORLD.COM with electronic game-related content. IGN.com,
a part of Snowball.com, is a leading online provider of entertainment content.
EBWORLD.COM launched a new marketing campaign during the third and fourth
quarters of fiscal 2000 which was designed to increase customer awareness of
EBWORLD.COM among game enthusiasts. The marketing campaign featured an
assortment of current, popular products, and was targeted to attract the mass
market as well as the avid gaming community. It was supported through national
print, radio and television advertising.stores.
              We also believe that this advertising
campaign drove sales at our stores through association withInternet broadband technology will play an important role in the Electronics
Boutique brand name, as the stores have traditionally depended on mall traffic,
and not company-sponsored advertising,future of online retailing. We continue to draw customers.

    We have implemented many initiatives designedexplore different ways to maintain the competitive
position of EBWORLD.COM and to ensure thatassume a leadership role in the online store can support
significant further growth in customer traffic, salesdistribution of games. Adoption of this new technology by consumers has been limited. However, as adoption of this technology grows and earnings. These
initiatives include:

    IMPROVED CUSTOMER SERVICE. We have expanded our customer service
capabilities by opening a customer contact center located in Las Vegas, Nevada,
during the second quarter of fiscal 2000. The customer contact center is open
seven days a week, 16 hours a day and upother game delivery technologies emerge, we expect to 24 hours a day during the peak
selling season, and is staffed by trained customer sales representatives who
respond to EBWORLD.COM customer inquiries via telephone, e-mail or instant
messaging. The center is designed to provide a high level of customer service
comparable to that available within our stores.

    ENHANCED ORDER FULFILLMENT AND DISTRIBUTION. To enhance our order
fulfillment capabilities, we began shipping from our Louisville, Kentucky
distribution center in the third quarter of fiscal 2000. We have also expanded
our capacity for processing orders by upgrading our order fulfillment software
and increasing staffing and equipment dedicated to online order fulfillment.

    UPGRADED WEB SITE. We have upgraded our web site to increase performance and
customer usability. The new web site design provides customers with a faster and
more convenient shopping experience through more efficient use of graphics and
straightforward navigation. To best accommodate our increased Internet traffic,
we have moved our web site to an external hosting data center, which allows us
to add hardware and increase bandwidth as necessary to maintain peak
performance.

MANAGEMENT SERVICES

     As of January 29, 2000, we provided management services to 311 specialty
electronic game stores in the United States, the United Kingdom, Ireland and
Sweden.

    EB-UK STORES. As of January 29, 2000, we provided management services for
280 stores and 18 department store-based concessions in the United Kingdom,
Ireland and Sweden under a contract with EB-UK, a corporation organized under
the laws of the United Kingdom.

    EB-UKactively pursue these opportunities.
      Game Group Services Agreement
              Game Group is one of the leading specialty retailers of electronic gamesinteractive entertainment in the United Kingdom, Ireland, France, Spain and Ireland. EB-UK'sSweden, operating over 400 stores. Game Group's business strategy is substantially similar to our business strategy. EB-UK strives to offer its customers an extensive
selection of video games and PC entertainment software, immediate availability
of new releases, knowledgeable sales associates, value pricing and other
customer incentive programs. EB-UK also has a highly effective inventory
management system and distribution center. EB-UK stores are generally located in
malls and "high street" shopping districts.

    Under the terms of a services agreement, at the UK Services Agreement,request of Game Group, we are required to provide management services,
to EB-UK, including assistance with ordering and purchasing inventory, store design and acquisition, advertising, promotion, publicity and 10
information systems. In exchange, EB-UKWe also license the use of the name Electronics Boutique to Game Group. Game Group is responsible for the payment of fees, payable, at our option, in cash or EB-UKGame Group stock, equal to 1.0% of netGame Group's adjusted sales, plus a bonus calculated on the basis of net income in excess of a pre-established target set by EB-UK.Game Group. In May 1999, EB-UK acquired a competitorfiscal 2003, we received approximately $7.4 million in the United
Kingdom, which should serve to increase EB-UK's net sales in the future.management fees from Game Group. The UK
Services Agreement provides for EB-UK to have a right of first refusal on any
business opportunity of which we become aware in Europe (excluding Scandinavia)
relating to electronic game retailing. The UK Services Agreementservices agreement prohibits us from competing with EB-UKGame Group in the United Kingdom or Ireland during the term of
the UK Services Agreement, and foruntil one year after its termination.the termination of the
      11

      services agreement, currently scheduled for January 2006. The UK
Services Agreement has an initial term expiring onservices agreement also requires that, until January 31, 2006. EB-UK's
right2006, we report to Game Group any opportunity relating to the interactive entertainment retailing business which we become aware of in Europe (excluding Scandinavia) which could be made available to Game Group and use the Electronics Boutique name terminates six months after the UK
Services Agreement expires on January 31, 2006.

    WALDENSOFTWARE STORES. We manage 13 Waldensoftware stores under a management
contract with Bordersreasonable endeavors to procure that each and every such opportunity is first offered to Game Group, Inc. The Waldensoftware stores are domestic,
mall-based stores that offer similar product lines as our Electronics Boutique
stores. We provide management services to Waldensoftware in exchange for a fixed
fee per store plus a bonus calculated on the basis of net income in excess of
the fixed management fee. We manage the stores in a manner substantially similarsame terms, including as to our Electronics Boutique stores. We negotiate with landlords to convert
desirable Waldensoftware locations into Electronics Boutique stores when their
leases terminate.

PRODUCTScost.
      Products
              Our product line consists of video game titles, PC entertainment software titles, video game hardware systems, related products and toys, trading cards and accessory products. We also market selected PC productivity and educational
software titles.accessories. Our in-store inventory at any given time consistsaverages over 2,400 SKUs.
              Video game titles and PC entertainment software.    We carry an average of over 2,000
SKUs.

    VIDEO GAME TITLES AND1,400 video game and PC ENTERTAINMENT SOFTWARE. We carry over 650 video
gameentertainment software titles (excluding pre-owned games) and over 1,000 active PC entertainment
software SKUs at any given time. We purchase video game titles directly from the leading console manufacturers, which include Nintendo, SegaSony, Microsoft and Sony,Nintendo, as well as a variety of third-party gamesoftware publishers, such as Electronic Arts, Acclaim
Entertainment,Take-Two Interactive Software, Inc., Activision, Inc., Sega Corporation, and Midway Home Entertainment,THQ Inc. We rank asare one of the largerlargest domestic customers of video game products fromsold by these publishers. We currently purchase titles from approximately 90 vendors. We market electronic
gamesover 60 vendors across a variety of genres, including Action, Strategy, Adventure/Role Playing, Simulation, Sports, Children's Entertainment and Family Entertainment. We maintain a broad selection of popular new-releasenew release titles, which we define as titles that have been available for no moreless than six weeks from the date of their release.

    VIDEO GAME HARDWARE.
              Pre-owned video games and PC entertainment software.    As a result of the proliferation of new titles and the tendency of gamers to seek new game challenges after mastering a particular title, a growing market for pre-owned game titles has evolved. We carry over 1,300 pre-owned SKUs in our typical store. We allow customers to trade in pre-owned games in our stores. We believe that the opportunity to trade-in games and the availability of pre-owned titles in our stores is attractive to the value conscious gamer and differentiates us from most of our competition, which do not generally accept trade-ins or offer pre-owned games. In return for a trade-in the customers receive a store credit, which can be applied towards the purchase of new or pre-owned products. At our in-house product reclamation center, these trade-ins can be tested, cleaned, relabeled, repackaged, repriced and redistributed back to the stores. These trade-ins are then resold in our stores at a discount to the price of new releases. Sales of pre-owned games generate significantly higher margins than new titles. We believe that availability of pre-owned games in our stores attracts our core game enthusiast customer and drives traffic into our stores.
              Video game hardware.    We sell the video game hardware systems of all major manufacturers, including the SonySony's PlayStation Nintendo 64, Nintendo2, Nintendo's GameCube and Game Boy Advance and Microsoft's Xbox. While we offer the Sega Dreamcast. In supportnewest technology in video game systems, we also offer a wide range of the older video game systems through our strategypre-owned program. Our pre-owned program affords customers the opportunity to be the destination of
choice for electronic game enthusiasts, we aggressively promote the sale oftrade-in older video game hardware systems. We believe that this policy increases store traffic
and promotes customer loyalty, leading to increased salesfor credit towards the purchase of video game titles,
which typically have higher gross margins than video game hardwareone of the latest systems. We also offer extended service agreements and extensions of manufacturer warranties offor the video game systems.

    RELATED PRODUCTS AND TRADING CARDS. We offer an assortment of trading cards,
such as Pokemon and Star Wars products, that appeal to the same core customer
group as our video game customer. We also offer action figures that are related
to video game characters. We experienced an increase in the sale of related
products in fiscal 2000, driven particularly by sales of Pokemon products.

    PC EDUCATION AND PRODUCTIVITY SOFTWARE. In addition to our category dominant
assortment of video game and PC entertainment software titles, we offer a
complementary selection of educational, personal productivity and finance
software titles. We believe that these titles also appeal to our core customer
base.

    ACCESSORIES.
              Accessories.    In recent years, the growing popularity of electronicvideo games has led to an increase in sales of accessory products, which generally have higher gross margins than hardware and software products. Accessory products enhance
the total gaming experience. Presently, weWe currently offer approximately 500600 accessory product SKUs, including 3-D graphics accelerators,controllers and memory cards and joysticks.cards. We also market instructional books and strategy guides on the most popular electronicvideo game titles.



                                       11



INVENTORY MANAGEMENT AND DISTRIBUTION

    INVENTORY MANAGEMENT.
              Related products and trading cards.    We offer an assortment of trading cards, such as Yu-Gi-Oh and Magic The Gathering products, that appeal to our core customers. We also offer collectable action figures and gaming magazines.

      Inventory Management and Distribution
              Inventory management.    We do extensive research prior to the release of new products and titles and carefully manage our inventory to minimize the risk associated with introducing new products.products and titles. Our centralized merchandising staff evaluates potential products by testing many pre-release samples received from publishers,
reading game reviews, interviewing customers and store associates, and studying
vendor marketing plans. Our centralized merchandising staff also analyzes the EB Pre-Sell Program and EB Reserve List information and other data to estimate initial demand and the projected life cycle for a new release. We then use our new product analyses to plan our initial purchases and allocations among our stores and web site of the total
initial purchase of a newly-released title.

    We use our management information system to measure, on a daily basis, SKU
level sales, gross margins and inventory balances. After sales histories for a
particular product are compiled, appropriate stock levels are designed for that
specific product. Sales levels are continuously monitored by our merchandising
staff, which receives sales and inventory reports by SKU on a daily basis
through POS polling technology as well as recommended order quantities and
product discontinuations from each store. Replenishment allocations among stores
are then made based on this data. We focus on inventory turnover by operating
our allocation, traffic, buying, distribution and third party functions on a
"just in time" replenishment basis. This focus allows us to minimizewebsite. Through our inventory riskreplenishment system, we forecast and we believe provides us with a competitive advantage.

    DISTRIBUTION. Our primaryactively manage our ongoing inventory requirements on an individual store and aggregate basis.
              Distribution.    We currently operate three distribution center occupies approximately 93,000
square feetcenters in the United States, each of which focuses on separate components of our business. Our 97,500 square foot facility located in West Chester, Pennsylvania. We opened an
additionalPennsylvania handles staple products and online fulfillment. Our 80,000 square foot distribution facility at ourcenter in West Chester, Pennsylvania site in November 1999. In addition, in April 1999, we leased a
52,000handles returns and reclamation. Our 200,000 square foot distribution center in Louisville, Kentucky to support flow
throughsupports flow-through operations on new release andreleases, top selling products.products and online fulfillment. We also have a 120,000 square foot facility in Canada, a 70,000 square foot facility in Australia and four smaller European facilities in Denmark, Germany, Italy and Sweden.
              These distribution facilities allow us to replenish our stores on a daily basis thereby reducing inventory
levels and increasing inventory turns, while supporting our "FIRST TO MARKET""first-to-market" new-release strategy. Our rapid processing capability in our distribution centercenters is facilitated by several advanced inventory management technologies, including paperless picking and radio frequency support. Our ability to rapidly process
incoming shipments of new-release titles quickly and distribute them to all ofWe also use a warehouse management system in our stores eitherdomestic distribution centers that same day or by the next morning enables us to meet peak
demand. We also believe that ourbetter manage labor and freight costs. Our distribution network provides a competitive
advantage for EBWORLD.COM since our distribution and inventory management
systems enableenables us to provide immediate delivery service to our online customers.

    During peak sales periods, we may enter into short-term arrangements for
additional retail distribution centers to ensure timely restocking of all
      Marketing
              In-store promotions.    Many of our stores. We have also developed a flexible third-party network to provide
additional regional distribution support for new product releases.

MARKETING

    IN-STORE PROMOTIONS. Our Electronics Boutique stores are primarily located in high traffic, high visibility areas in regional shopping malls. Accordingly, our marketing efforts at these stores are designed to draw mall patrons into our stores through the use of window displays and other attractions visible to shoppers in the mall concourse. We actively publicize our other stores through a variety of media, including print, radio and selected local television advertising. Inside theall of our stores, we feature selected products through the use of vendor displays, signs, fliers, point of purchase materials and end-cap displays. We receive cooperativeA majority of these promotions are funded through advertising allowances and market development funds from manufacturers, distributors, software publishers and accessory suppliers to
promote their respective products.

    THE EB PRE-SELL PROGRAM AND THE EB RESERVE LIST. The EB Pre-Sell Program
offers our customers the opportunity to purchase video games and PC software
prior to their release, and the EB Reserve List entitles participants to be
notified whensuppliers.
              In January 2003, as a game has arrivedcombined effort with Ziff Davis Media, GMR magazine was launched in our stores. GMR magazine is a monthly publication providing news and reviews on the latest products for PC and video gamers. Customers who participate in the
EB Pre-Sell Program pay forthat purchase a game priorten-month subscription to its release and may receive a
promotional gift in connection with the purchase (such as a t-shirt). The EB
Pre-Sell Program and the EB Reserve List enable our customersGMR are eligible to receive a new
productdiscount on the first day it is availablepurchase of pre-owned products in our stores and on our web site, and
are designed to enhance our reputation as the destination of choice for
electronic game enthusiasts.

    CATALOGS.stores.
              Catalogs.    We publish sixeight or more full color catalogs each year which rangeranging in size from 4852 to 100 pages and feature a broad array of products. Thepages. Our vendors fund the cost of these catalogs is funded by our software, hardware and accessories vendors.catalogs. The catalogs are available in our stores and are mailed to several hundred thousand households from our proprietary customer lists. The catalogs are also inserted in leading industry magazines.



                                       12



    EBWORLD.COM. We have continued to pursue strategic on-line alliances with
directories, search engines, content providers and web sites in order to grow
our customer base. As an example, EBWORLD.COM is the exclusive commerce provider
of games for the IGN.com network of web sites and IGN.com provides EBWORLD.COM
with electronic game-related content. IGN.com is a leading online provider of
entertainment content. We advertise on other networks including America Online,
Ziff-Davis Inc. and CNET. Additionally, EBWORLD.COM is a Gold Tenant in the
Electronic Gaming category of America Online's shop@home site. We also have a
similar e-commerce agreement with CNET related to their shopper.com site. In the
third quarter of fiscal 2000, we launched a new marketing initiative that was
designed to increase market penetration among game enthusiasts and broaden
overall market awareness. This campaign included national print, radio and
television advertising.

    PRE-OWNED GAMES. Video game software has a useful life of thousands of
plays. As a result of the proliferation of new titles and the tendency of
electronic game players to seek new game challenges after mastering a
particular title, a growing market for pre-owned video game titles has
evolved in recent years. We offer our customers a store credit for their
pre-owned video game titles, which can be applied towards the purchase of new
or pre-owned products. We then resell the pre-owned video game titles at
discount prices, but with gross profit margins higher than those for new
video game titles.
              Ebgames.com.    We believe our wide assortmentonline presence and marketing initiatives play a key role in strengthening our brand identity. Our online marketing initiatives focus on partnering with companies that operate other websites, such as CNET. These initiatives enable us to access the broad reach of pre-owned videothe Internet at a low cost. We also advertise in game titles distinguishes us from our competitors.

    OTHER MARKETING PROGRAMS. We provide our customersfocused magazines and online with a liberal return
policy. Our customers can return opened software products for a full credit
within ten days after purchase. We maintain an "everyday low pricing" policy.

TRAINING AND DEVELOPMENT

    We place an emphasis on trainingportals such as AOL and developing our sales associates and
store managers. We believe that our training and developmental programs make our
sales associates and store managers more knowledgeable and enthusiastic about
our product offerings, providing us with an important competitive advantage over
mass merchants, toy retail chains and electronics and computer superstores. In
addition, we believe by providing extensive associate training we have a higher
employee retention rate than most mall-based specialty retailers. We provide
training and development at the store level, through regularly scheduled
seminars conducted by our District Managers, and through EB University. EB
University is a semi-annual, vendor-sponsored, multiday seminar encompassing
sales training, extensive product demonstrations and a variety of team building
exercises. In September 1999, we hosted our EB University seminar in Orlando,
Florida, where substantially all of our store and field managers were present.
This event was attended by 123 vendors, displaying and demonstrating their
latest product offerings.

MANAGEMENT INFORMATION SYSTEMSMSN.
      13

      Management Information Systems
              Our primary management information system is a customized version of the AS400-based JDA Merchandise Management System. We have made proprietary enhancements to this program, which enable us to analyze total, comparative and new store sales and inventory data at the company, region, district and store levels.

    Additional revisions to the program have enhanced analysis of top selling
items, new-release sales and gross margin item rankings. We operate our own proprietary store POS and back office systems and believe this provides a strategic advantage by allowing us to make fast enhancements to meet business opportunities.opportunities quickly. We have integrated the ShoppertrakShopperTrak customer counting technology into our POS and our AS400 system. This combination of technology provides centralized access to store traffic and sales conversion information by store and hour.hour at our store locations.
      Vendors
              We have completed the rollout of this technology to all stores. In
fiscal 2000, we continued to invest in our management information system by,
among other things, upgrading our global financial reporting and analytical
capabilities through the implementation of the Lawson Associates, Inc. financial
software products. We intend to enhance our management information systems
further with client server and data warehousing applications to improve sales
analysis and targeted consumer marketing. We spent $2.5 million for information
system improvements, including "Year 2000" expenditures, in fiscal 2000. We have
budgeted $3.7 million for fiscal 2001 for additional improvements.



                                       13



    We have completed the upgrade of all software programs and hardware to be
"Year 2000" compliant. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations - Year 2000 Readiness."

VENDORS

    With the exception of certain personal productivity software titles and
accessories, we purchase substantially all of our products directly from manufacturers and software publishers. Our top 25 vendors accounted for approximately 79%88% of our purchases in fiscal 2000.2003. Our largest vendors in fiscal 20002003 were Sony, Electronics Arts, Nintendo, Sega,Microsoft and SonyNintendo, which accounted for 10.5%14.8%, 10.4%12.3%, 8.7%11.5% and 7.1%9.3%, respectively, of our netgross purchases. No other vendor accounted for more than 5.0% of our software or accessory purchases during fiscal 2000.2003. We believe that maintaining and strengthening our long-termwe have good relationships with our vendorsvendors. Maintaining and strengthening these relationships is essential to our operations and continued expansion.
              We have no contractsparticipate in marketing programs with each of our key product vendors, including Sony, Electronic Arts, Microsoft and Nintendo. Under these programs, we are eligible to receive marketing allowances from product vendors provided we perform certain specified marketing and merchandising events and activities pursuant to the terms of written agreements we negotiate with our vendors for each event or activity. Typical events or activities are print advertising, television advertising, product catalog advertising, in-store display promotions, Internet advertising, and product training and promotion at our national trade vendors and conduct business on an
order-by-order basis, a practice that is typical throughout the industry. We
believe that we have very good relations with the vendor community.

COMPETITIONshow.
      Competition
              The electronic gameinteractive entertainment industry is intensely competitive and subject to rapid changes in consumer preferences and frequent new product introductions. We believe that key competitive factors are:

    - ability to procure high-demand product,
    - knowledgeable service,
    - price,
    - reputation, and
    - shopping environment.

    We compete with other specialty retailers of video gamegames and PC software, stores located in malls, as well as with mass merchants, toy retail chains, mail-order businesses, catalogs, direct sales by software publishers, online retailers, and office supply, computer product and consumer electronics superstores. In addition, video games are available for rental from many video stores. Further, other methods of retail distribution may emerge in the future, which would resultresulting in increased competition. Some
      Environmental Matters
              Under various federal, state and local and foreign environmental laws and regulations, a current or previous owner or occupant of our competitorsreal property may become liable for fines as well as the costs of removal or remediation of hazardous substances present or generated at the premises, at times without regard to fault. Although we have longer operating historiesnot been notified of, and significantly greater financial, managerial, creative, sales and marketing and
other resources than us. We also compete with other formsare not aware of, entertainment
activities, including movies, television, theater, sporting events and family
entertainment centers. Our ability to retain our existing customers and attract
new customers depends on numerous factors, some of which are beyond our control.
These factors includeany current environmental liability, claim or non-compliance, it is possible that we may incur fines or remediation costs in the continued introduction of new and enhanced video game
and PC hardware and software, and the availability and timeliness of new product
releases at our stores.

TRADEMARKS/REGISTRATIONSfuture.
      Trademarks/Registrations
              We possess registered trademarks for Electronics Boutique-TM-Boutique® (and design), EBX-TM-EBX® and Stop 'N Save Software-TM-. We also possess trademarks for BC Sports
Collectibles-TM- and EBWORLD.COM-TM-ebworld.com® as well as other registered trademarks and service marks, both in the United States and in certain foreign jurisdictions. We also have anumerous trademark application for EBKids pending.applications pending in the United States and in certain foreign jurisdictions, including EB Games andebgames.com.
      14

              We believe our trademarks are valid and valuable and intend to maintain our trademarks and their related registrations. We do not know of any pending claims of infringement or other challenges to our right to use our marks in the United States or elsewhere. We have no patents, licenses, franchises or other concessions whichthat are considered material to our operations.

ASSOCIATES
      Associates
              As of January 29, 2000,February 1, 2003, we had approximately 4,6007,660 non-seasonal associates,
of which approximately 2,600associates. Approximately 3,650 were employed on a part-time basis, and 700 were employed on a temporary basis. In addition, during the calendar 19992002 peak holiday shopping season, we hired approximately 9301,300 temporary associates. We believe that our relationship with our associates is good. None of our associates is represented by a labor union or is a member of a collective bargaining unit.



                                      14



ITEM

      Item 1A. EXECUTIVE OFFICERS OF ELECTRONICS BOUTIQUE

    The following table setsExecutive Officers of Electronics Boutique
              Set forth certainbelow is information regarding the executive officers of Electronics Boutique:
      Name
      		Age
      		Position
         ----              ---              --------


Joseph J. Firestone         68              
      Jeffrey W. Griffiths52President, Chief Executive Officer and Director

Jeffrey W. Griffiths        49              Senior Vice President of Merchandising and
                                                Distribution; President, EB Kids



      John R. Panichello          38              Senior

      41

      Executive Vice President and Chief Operating Officer

      James A. Smith

      47

      Senior Vice President, Chief Financial Officer; President, BC Sports Collectibles

Officer and Secretary

      Seth P. Levy                42              

      45

      Senior Vice President, Logistics and Chief Information Officer; President, EBWorld.com
EB Games Online, Inc.

      Steven R. Morgan

      51

      Senior Vice President, President of Stores—North America and President of Canadian Operations
      

     Joseph J. Firestone.
              Mr. FirestoneGriffiths, age 52, has served as the President, Chief
Executive Officer and a Class III Director of Electronics Boutique since March
1998. Mr.Firestone served as the President of Electronics Boutique's
predecessor, EB, since February 1984, and the President and Chief Executive Officer of EBElectronics Boutique and a Class I Director since February 1995. Mr. FirestoneJune 2001. Prior thereto, he served as a director of EB-UK
from May 1995 until November 1999. Mr. Firestone also serves on the Executive
Advisory Board of the Center for Retailing Education and Research of the
University of Florida and as a Director of the National Retail Federation.

     Jeffrey W. Griffiths. Mr. Griffiths has served as Electronics Boutique's Senior Vice President of Merchandising and Distribution sincefrom March 1998.1998 to June 2001. Mr. Griffiths served as the Senior Vice President of Merchandising and Distribution of EB, sinceour predecessor, from March 1996.1996 to March 1998. From March 1987 to February 1996, Mr. Griffiths served as EB's Vice President of Merchandising of EB, and from April 1984 to February 1987 he served as the Merchandise Manager of EB. Mr. Griffiths serves as the Chairman
of the Interactive Entertainment Merchants Association.

     John R. Panichello.Manager.
              Mr. Panichello, age 41, has served as the SeniorExecutive Vice President and Chief FinancialOperating Officer since April 2002. Prior thereto, Mr. Panichello served as Senior Vice President, Chief Operating Officer, President of EB GameWorld and BC Sports Collectibles (a former division of Electronics Boutique) and Secretary of Electronics Boutique sincefrom June 2001 to April 2002. Mr. Panichello served as Senior Vice President, Chief Financial Officer, President of EB GameWorld and BC Sports Collectibles and Secretary of Electronics Boutique from June 2000 to June 2001. Mr. Panichello served as Senior Vice President, Chief Financial Officer, President of BC Sports Collectibles and Secretary of Electronics Boutique from March 1998.1998 to June 2000. Mr. Panichello served as the Senior Vice President of Finance of EB and the President of EB'sthe BC Sports Collectibles division sincefrom March 1997. From March 19961997 to February 1997,1998. Mr. Panichello served as EB's Senior Vice President of Finance and Treasurer from June 1994 to February 1996, he served as the Vice President and
Treasurer of EB. Mr. Panichello served as the President and Chief Executive
Officer of Panichello & Company, a certified public accounting firm, from May
1990 to May 1994.1997. Mr. Panichello served as a director of EB-UKGame Group from May 1995 untilto November 1999. Seth P. Levy. Mr. LevyPanichello is a Certified Public Accountant. Mr. Panichello is the husband of Susan Y. Kim and the son-in-law of James J. Kim. Mr. Panichello serves on the Board of Directors of the Interactive Entertainment Merchants Association.
              Mr. Smith, age 47, has served as Senior Vice President, Chief Financial Officer and Secretary since June 2001. Prior thereto, Mr. Smith served as Senior Vice President of Finance of Electronics Boutique from August 2000 to June 2001. Mr. Smith served as Electronics Boutique's Vice President-Finance
      15
      from May 1998 to August 2000. From 1996 to 1998, Mr. Smith served as Vice President and Controller of EB, our predecessor, and from 1993 to March 1996, he served as Controller of EB.
              Mr. Levy, age 45, has served as Senior Vice President, Logistics, Chief Information Officer of Electronics Boutique and the President of Electronics
Boutique's EBWorld.com subsidiaryEB Games Online, Inc. since June 2001. Prior thereto, he served as Senior Vice President, Chief Information Officer and the President of EB Games Online, Inc. from March 1999.1999 to June 2001. From February 1997 to March 1999, Mr. Levy served as Electronics Boutique'sthe Vice President and Chief Information Officer. From 1991 untilto February 1997, Mr. Levy served as the Director of System Development for the May Merchandising and May Department Stores International divisions of May Department Stores.



                                       15



ITEM
              Mr. Morgan, age 51, has served as Senior Vice President, President of Stores—North America and President of Canadian Operations since April 2002. Prior thereto, Mr. Morgan served as Senior Vice President of Stores of Electronics Boutique and Canadian Operations from June 2001 to April 2002. Mr. Morgan served as Senior Vice President of Stores of Electronics Boutique from January 2001 to June 2001. From May 1998 to January 2001, Mr. Morgan served as President and CEO of Millennium Futures, Inc., a commodity trading company. From July 1996 to May 1998, he served as Senior Vice President, Director of Stores at Filene's Department Stores. From May 1988 to July 1996, he served as Regional Vice President at Filene's Department Stores.

      Item 2. PROPERTIES

STORE LEASES.Properties
              Store leases.    All of Electronics Boutique'sour stores are leased. The table below
sets forth, asAs of January 29, 2000, the numberFebruary 1, 2003, we had 1,145 stores. In general, our mall-based leases have initial terms of our store leases that will
expire each year (assuming the lease is not terminated by either party priorseven to the expirationten years. Our strip and power center locations typically have initial terms of the term).


      

                                                              Number of Leases
                                                              ----------------
Fiscal Year In
which Leases Expire                                       Domestic      International
- -------------------                                       --------      -------------

2001...............................................         73                 11
2002...............................................         46                  4
2003...............................................         43                  9
2004...............................................         41                 14
2005...............................................         25                 29
2006...............................................         34                  8
2007...............................................         41                  -
2008...............................................         61                  1
2009...............................................         76                 12
2010...............................................         75                 14
2011 and thereafter................................          2                  -
                                                           ----              -----
                                                           517                102

      


    HEADQUARTERS. Electronics Boutique leases its headquartersthree to five years with at least one or more renewal options.
              Headquarters and its primary
distribution center, which are located in a singlecenters.    We own our 140,000 square foot building
on several acresheadquarters in West Chester, Pennsylvania. The lease expires on May 30,
2000 andThis building includes an option to purchase the property for $6.7 million

    DISTRIBUTION CENTERS.a 97,500 square foot distribution center. In addition, to our West Chester, Pennsylvaniawe own an adjacent 80,000 square foot distribution facility. We lease a 200,000 square foot distribution center in April 1999 we leasedLouisville, Kentucky. This lease expires in May 2005. We also lease a 52,000 square foot building in Louisville, KentuckyKentucky; however we subleased a portion of this building in January 2003. The lease for the building expires in March 2004. In Brampton, Ontario, Canada, we own a 120,000 square foot distribution and office facility. In Pinkenba, Queensland, Australia, we own a 70,000 square foot distribution and office facility. We also lease small distribution facilities in Denmark, Germany, Italy and Sweden.
              Customer service call center.    We lease a 17,900 square foot customer service telephone call center in Las Vegas, Nevada, from which supports flow through operations on new releases and
top-sellingwe respond to consumers' inquiries regarding our products. The lease expires in AprilJune 2004. Electronics Boutique also
leases a 41,000 square foot facility located in West Chester, Pennsylvania
primarily used for returns processing and bulk storage. This lease expires on
July 31, 2000.

      Item 3. Legal Proceedings
              We have also built an additional 80,000 square foot distribution
facility on several acres of land we acquired adjacent to our West Chester,
Pennsylvania site. It opened in November 1999.

ITEM 3.   LEGAL PROCEEDINGS

Electronics Boutique isare involved from time to time in legal proceedings arising in the ordinary course of our business. In February 2003, our affiliates, The Electronics Boutique, Inc. and EB Services Company, LLP, prevailed in the appeal of a major civil lawsuit brought against those companies by Game Group. Game Group filed the appeal in October 2002 after judgment was entered against it in the trial of the matter.
              Game Group filed suit in March 2002 in the Chancery Division of the High Court of Justice in the United Kingdom. It sought a ruling that, because of an alleged change of control of EB Services Company, it was entitled to terminate the services agreement between itself and EB Services Company that had been in effect since 1995 and that does not expire by its business.terms until at least 2006. Pursuant to the services agreement, EB Services Company receives significant fees from Game Group. The fees were approximately $7.4 million for the fiscal year ended February 1, 2003. In October 2002, the Chancery Division ruled that Game Group was not entitled to terminate the services agreement.

              In the opinion of management, no pending proceedings willcould have a material adverse effect on Electronics Boutique'sour results of operationsoperation or financial condition.

ITEM

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

None.



                                       16

Submission of Matters to a Vote of Security Holders
              None

      PART II

ITEM
      Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERSMarket for Registrant's Common Equity and Related Stockholder Matters
              The common stock of Electronics Boutique was first traded publicly on July 28, 1998. The stock is quoted on the NASDAQ National Market under the symbol ELBO. The table below represents the high and low bid prices of Electronics Boutique's common stock as reported by NASDAQ.
      

                                            Fiscal 1999                         Fiscal 2000
                                            -----------                         -----------
                                         Low            High                Low            High
                                         ---            ----                ---            ----


First fiscal quarter.....................                                 $12.13          $19.88
Second fiscal quarter....................  $13.25       $14.13             13.50           18.38
Third fiscal quarter......................   6.63        14.00             16.63           26.31
Fourth fiscal quarter.....................  11.75        25.75             14.00           25.38

       
      		 Fiscal 2002
      		 Fiscal 2003
       
      		 Low
      		 High
      		 Low
      		 High
      First fiscal quarter $17.00 $28.90 $28.03 $38.55
      Second fiscal quarter  27.75  36.10  21.30  32.24
      Third fiscal quarter  23.41  42.07  21.02  29.38
      Fourth fiscal quarter  31.66  44.51  13.10  31.81
              Such quotations reflect inter-dealer prices, without retail mark-ups, mark-downs or commissions and may not necessarily reflect actual transactions.
              As of April 6, 2000, the Company24, 2003, we had approximately 3935 shareholders of record (including Cede & Co., the nominee for Depository Trust Company, a registered clearing agency) of the 22,224,81425,891,158 outstanding shares of the Company's Common
Stock.Electronics Boutique's common stock. On April 6, 2000,24, 2003, the last reported sale price for the Company'sElectronics Boutique's common stock as quoted by NASDAQ was $19.75$18.58 per share.
              Electronics Boutique has not paid any dividends on its common stock to date
and does not anticipate paying any dividends on the common stock in the
forseeable future.



                                       17



ITEMdate.

      Item 6. SELECTED FINANCIAL DATASelected Financial Data
              The following table sets forth for the periods indicated selected financial and other data for Electronics Boutique for periods subsequent to its initial public offering on July 28, 1998. Prior periods reflect financial data of Electronics Boutique's predecessors, The Electronics Boutique, Inc. ("EB") and subsidiaries and EB Services Company LLP.LLP ("EB Services"). The selectedstatement of income statementdata and balance sheet itemsdata, which follow, have been derived from Electronics Boutique's consolidated financial statements. This information 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. The pro forma data, in the opinion of
      17

      management, include all adjustments necessary to present fairly the information set forth therein including the matters referred to in footnotes 3Notes 1 and 4 on page 19.


      

                                                (in thousands, except per share data and operating data)
                                                                     YEAR ENDED
                                           -----------------------------------------------------------------
                                           FEBRUARY 3,   FEBRUARY 1,  JANUARY 31,  JANUARY 30,   JANUARY 29,
                                               1996         1997          1998         1999         2000
                                           -----------   -----------  ----------   -----------   -----------

STATEMENT OF INCOME DATA:


Net sales                                     $ 268,956   $ 337,059    $ 449,180   $ 570,514    $ 723,801
Management fees                                   1,905       2,526        4,792       3,405        4,873
                                           ------------ ----------- ------------ ----------- ------------
Total revenues                                  270,861     339,585      453,972     573,919      728,674
Cost of goods sold                              199,226     252,813      338,498     431,744      546,451
                                           ------------ ----------- ------------ ----------- ------------
Gross profit                                     71,635      86,772      115,474     142,175      182,223
Operating expenses                               58,989      69,828       87,003      99,972      133,534
Depreciation and amortization                     6,047       6,615        7,997       9,775       12,278
                                           ------------ ----------- ------------ ----------- ------------
Income from operations                            6,599      10,329       20,474      32,428       36,411
Equity in earnings (loss) of affiliates          (1,319)       (573)       2,903        (161)           -
Interest (income) expense, net                    1,818       1,298        1,380         289       (1,427)
Preacquisition loss of subsidiaries (1)                                      913
                                           ------------ ----------- ------------ ----------- ------------
                                                      -           -                        -            -
Income before income tax expense                  3,462       8,458       22,910      31,978       37,838
Income tax expense(2)                               280         550          846      11,693       15,008
                                           ------------ ----------- ------------ ----------- ------------
Net income                                      $ 3,182     $ 7,908      $22,064     $20,285      $22,830
                                           ============ =========== ============ =========== ============


Net income per share - basic                                                                      $  1.11
                                                                                             ============
Weighted average shares outstanding - basic                                                        20,559
                                                                                             ============
Net income per share - diluted                                                                    $  1.10
                                                                                             ============
Weighted average shares outstanding - diluted                                                      20,762
                                                                                             ============
PRO FORMA INCOME DATA:

Income before income taxes (3)                              $ 8,458      $22,910     $31,978
Pro forma income taxes (3)                                    3,514        9,415      11,866
                                                        ----------- ------------ -----------
Pro forma net income (3)                                    $ 4,944      $13,495     $20,112
                                                        =========== ============ ===========
Pro forma net income per share - basic                       $ 0.31      $  0.85     $  1.12
                                                        =========== ============ ===========
Pro forma weighted average shares
outstanding - basic (4)                                      15,794       15,794      18,030
                                                        =========== ============ ===========
Pro forma net income per share - diluted                     $ 0.31      $  0.85     $  1.11
                                                        =========== ============ ===========
Pro forma weighted average shares
outstanding - diluted (4)                                    15,794       15,794      18,084
                                                        =========== ============ ===========
OPERATING DATA: (5)

Stores open at end of period                        341         360          452         528          619
Comparable store sales increase                    3.5%       20.8%        15.3%       14.1%        11.6%

      2 to the consolidated financial statements.
       
      		 Year Ended
      		 
       
      		 January 30,
      1999
      		 January 29,
      2000
      		 February 3,
      2001
      		 February 2,
      2002
      		 February 1,
      2003
      		 
       
      		 (Amounts in thousands, except per share data and operating data)

      		 
      Statement of Income Data:                
      Net sales $595,859 $758,120 $802,851 $1,059,338 $1,309,226 
      Management fees  3,405  4,873  4,425  5,889  7,553 
        
      		 
      		 
      		 
      		 
      		 
      Total revenues  599,264  762,993  807,276  1,065,227  1,316,779 
      Cost of goods sold  457,089  580,770  626,939  826,599  971,204 
        
      		 
      		 
      		 
      		 
      		 
      Gross profit  142,175  182,223  180,337  238,628  345,575 
      Selling, general and administrative expense  99,972  133,534  144,466  179,464  267,566 
      Restructuring and asset impairment charge (reversal)(1)  —  —  —  12,638  (2,611)
      Depreciation and amortization�� 9,775  12,278  15,855  19,750  22,524 
        
      		 
      		 
      		 
      		 
      		 
      Income from operations  32,428  36,411  20,016  26,776  58,096 
      Equity in earnings (loss) of affiliates  (161) —  —  —  — 
      Other income  —  —  1,550  —  — 
      Interest (income) expense, net  289  (1,427) (3,096) (1,884) (1,677)
        
      		 
      		 
      		 
      		 
      		 
      Income before income tax expense and cumulative effect of change in accounting principle  31,978  37,838  24,662  28,660  59,773 
      Income tax expense(2)  11,693  15,008  9,791  10,948  22,373 
        
      		 
      		 
      		 
      		 
      		 
      Income before cumulative effect of change in accounting principle  20,285  22,830  14,871  17,712  37,400 
        
      		 
      		 
      		 
      		 
      		 
      Cumulative effect of change in accounting principle, net of tax(3)  —  —  —  —  (4,773)
        
      		 
      		 
      		 
      		 
      		 
      Net income $20,285 $22,830 $14,871 $17,712 $32,627 
        
      		 
      		 
      		 
      		 
      		 

      Income per share before cumulative effect of change in accounting principle:
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
      Basic    $1.11 $0.67 $0.74 $1.44 
           
      		 
      		 
      		 
      		 
      Diluted    $1.10 $0.66 $0.73 $1.42 
           
      		 
      		 
      		 
      		 

      Per share cumulative effect of change in accounting principle:
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
      Basic             $(0.18)
                    
      		 
      Diluted             $(0.18)
                    
      		 

      Net income per share:
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       Basic    $1.11 $0.67 $0.74 $1.26 
           
      		 
      		 
      		 
      		 
       Diluted    $1.10 $0.66 $0.73 $1.24 
           
      		 
      		 
      		 
      		 

      Weighted average shares outstanding:
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       Basic     20,559  22,254  23,868  25,833 
           
      		 
      		 
      		 
      		 
       Diluted     20,762  22,466  24,230  26,247 
           
      		 
      		 
      		 
      		 
      18
      

                                                                      AS OF
                                           ---------------------------------------------------------------
                                           FEBRUARY 3,   FEBRUARY 1,  JANUARY 31,  JANUARY 30,   JANUARY 29,
                                               1996         1997          1998         1999         2000
                                           -----------   -----------  ----------   -----------   -----------
BALANCE SHEET DATA:


Working capital (deficit)                     $ (11,038)    $ 9,893    $ (17,728)    $(3,091)    $ 42,567
Total assets                                     95,515     139,244      142,791     172,047      275,513
Total liabilities                                78,066     118,887      114,392     123,205      159,026
Stockholders' equity                             17,449      20,357       28,399      48,842      116,487

      


- ----------------------


      Pro forma Income Data: (unaudited)
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
      Income before income taxes $31,978             
      Pro forma income taxes(4)  11,866             
        
      		             
      Pro forma net income(4) $20,112             
        
      		             
      Pro forma net income per share—basic $1.12             
        
      		             
      Pro forma weighted average shares outstanding—basic(5)  18,030             
        
      		             
      Pro forma net income per share—diluted $1.11             
        
      		             
      Pro forma weighted average shares outstanding—diluted(5)  18,084             
        
      		             
      Operating Data:(6)(unaudited)                
      Stores open at end of period  528  619  737  937  1,145 
      Comparable store sales increase(7)  14.1% 11.6% (4.5%) 20.8% 8.3%
       
      		 As of
       
      		 January 30,
      1999
      		 January 29,
      2000
      		 February 3,
      2001
      		 February 2,
      2002
      		 February 1,
      2003
      Balance Sheet Data:               
      Working capital (deficit) $(3,091)$42,567 $30,133 $121,446 $144,497
      Total assets  172,047  275,513  267,239  425,838  521,614
      Long-term debt  8  —  —  143  —
      Total liabilities  123,205  159,026  136,019  188,678  247,114
      Stockholders' equity  48,842  116,487  131,220  237,160  274,500
      (1) The results
      In fiscal 2002, the restructuring and asset impairment charge of $12.6 million resulted from our adoption of a plan to close the operations of two subsidiaries, Electronics Boutique
International, Inc.all 29 EB Kids stores and Electronics Boutique Canada, Inc. have been consolidated
sincesell the beginning22 store BC Sports Collectibles business. The charge represents a $3.5 million write down of store leasehold improvements, a $2.3 million write down of store furniture, fixtures and equipment and $6.7 million in lease termination costs. In fiscal 2003, the $2.6 million net reversal of the year ending January 31, 1998. Preacquisition lossrestructuring and asset impairment charge resulted primarily from store lease related accruals that were not necessary due to the terms of subsidiaries represents losses in Electronics Boutique International, Inc. and
Electronics Boutique Canada, Inc. prior to their acquisition by Electronics
Boutique.

the sale of the BC Sports Collectibles business.

      (2)
      Prior to our initial public offering, our predecessors were taxed as an S Corporation and a partnership. As a result, their taxable income was passed through to their partners and shareholdersstockholders for federal income tax purposes. Accordingly, for periods prior to the initial public offering on July 28, 1998, the financial statements do not include a provision for federal income taxes. Additionally, a predecessor to us elected to be treated as an S Corporation for some states, while remaining subject to corporate tax in other states and, as a result, the financial statements prior to July 28, 1998, provide for certain state income taxes. After the initial public offering, both federal and state taxes as a C corporation have been reflected.

      (3)
      We changed our accounting policy with respect to the recording of vendor advertising allowances effective retroactively as of the beginning of fiscal 2003. As a result, we recorded a non-cash charge of $4.8 million, net of income tax, in the first quarter of fiscal 2003 for the cumulative effect of the change in accounting principle on fiscal years prior to fiscal 2003. Prior to this change, we recognized all vendor advertising allowances as an offset to selling, general and administrative expenses. Vendor advertising allowances in excess of advertising expense of
      19
        $40.9 million, $35.8 million, $24.2 million and $27.4 million were reflected as an offset to selling, general and administrative expense in fiscal 2002, fiscal 2001, fiscal 2000 and fiscal 1999, respectively.
      (4)
      The pro forma net income gives effect to the application of the pro forma income tax expense that would have been reported had The Electronics Boutique,
Inc.EB and EB Services LLP been subject to federal and all state income taxes for fiscal years 1997, 1998 andyear 1999.

(4) 

      (5)
      Pro forma weighted average shares outstanding gives effect to the number of shares that would have been outstanding upon completion of the initial public offering and related transactions for periods prior to the initial public offering.

(5) 

      (6)
      Does not reflect stores operated by EB-UKGame Group and WaldenSoftware for which we currently provide or have provided management services. See "Business - "Business—Management Services."



                                       19




ITEM

      (7)
      Comparable store sales are based on stores in operation for over one year. Comparable store sales results for fiscal 2001 represents the 52 week period ending January 27, 2001.

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

OVERVIEWManagement's Discussion and Analysis of Financial Condition and Results of Operations
      Overview
              We believe that we are among the world's largest specialty retailers of electronic games. Our primary products are video gamesgame hardware and software, PC entertainment software supported by the sale of video game hardware, PC productivity software
and accessories.related accessories and products. As of January 29, 2000,February 1, 2003, we operated a total of 6191,145 stores in 46 states, Australia, Canada, Denmark, Germany, Italy, New Zealand, Norway, Puerto Rico, Canada, Australia and South Korea and Sweden—primarily under the names Electronics Boutique and Stop 'N Save Software.EB Games. In addition, we operated a commercial website under the URL address of EBWORLD.COM.ebgames.com. As of such date, we also provided management services for EB-UK,Game Group, which operated 280over 400 stores and 18 department store-based concessions in the United Kingdom, Spain, France, Sweden and Ireland. As
of January 29, 2000, we also managed 13 mall-based WaldenSoftware stores for
Borders Group, Inc. We are a holding company and do not have any significant assets or liabilities, other than all of the outstanding capital stock of our subsidiaries.

    The
              Our fiscal year of Electronics Boutique ends on the Saturday nearest January 31. Accordingly the financial statements for the years ended January 31, 1998February 2, 2002 ("fiscal 1998"2002"), January 30, 1999 and February 1, 2003 ("fiscal 1999") and January 29, 2000 ("fiscal
2000"2003") each include 52 weeks of operations and the year ending February 3, 2001 ("fiscal 2001") includes 53 weeks of operations.

RESULTS OF OPERATIONS
      Change in Accounting Principle
              In November 2002, the Emerging Issues Task Force ("EITF") reached consensus on Issue 02-16, Accounting by a Customer (Including a Reseller) for Cash Consideration Received from a Vendor. Issue 02-16 addresses the accounting for cash consideration received from a vendor by a reseller for various vendor funded allowances, including cooperative advertising support. Issue 02-16 is effective for new arrangements or modifications to existing arrangements entered into after December 31, 2002, although early adoption is permitted. We elected to adopt early, effective February 3, 2002, the provisions of Issue 02-16 in the preparation of this Annual Report on Form 10-K. Accordingly, in fiscal 2003, we recorded a cumulative effect of accounting change of $7.6 million, $4.8 million net of income tax, for the impact of this adoption on prior fiscal years. As of February 1, 2003, $10.0 million of our vendor advertising allowances has been recorded as a reduction of inventory and will be recognized in cost of goods sold as inventory is sold. This adoption has also resulted in the reclassification of $45.3 million of vendor advertising reimbursements earned in fiscal 2003 from selling, general, and administrative expense. The fiscal 2003 impact on income before cumulative effect of change in accounting principle was a charge of $1.5 million, or $0.06 per diluted share.
      20

              In accordance with the provisions of Issue 02-16, vendor advertising allowances which exceed specific, incremental and identifiable costs incurred in relation to the advertising and promotional events we conduct for our vendors are to be classified as a reduction in the purchase price of merchandise and recognized in income as the merchandise is sold. The amount of vendor allowances to be recorded as a reduction of inventory was determined by calculating the ratio of vendor allowances in excess of specific, incremental and identifiable advertising and promotional costs to merchandise purchases. We then applied this ratio to the value of inventory in determining the amount of the vendor reimbursements to be recorded as a reduction to inventory reflected on the balance sheet. This methodology resulted in a $7.6 million reduction in inventory as of February 3, 2002, the date of adoption of Issue 02-16. The $7.6 million, $4.8 million net of tax, is recorded as a cumulative effect of accounting change in fiscal year 2003. As of February 1, 2003, the methodology resulted in $10.0 million recorded as a reduction of inventory.
              The following table reflects the vendor allowances received and how they were classified in the financial statements (actual and pro forma for the change in accounting) for fiscal 2001, fiscal 2002 and fiscal 2003:
       
      		 Fiscal 2001
      		 Fiscal 2002
      		 Fiscal 2003
      		 
       
      		 (Amounts in thousands)

      		 
      Actual          
      Total vendor allowances $45,830 $49,102 $54,116 

      Gross profit
       
      $
      180,337
       
      $
      238,628
       
      $
      345,575
       
      Percent to total revenues  22.3% 22.4% 26.2%

      Amount classified as reduction in cost of goods sold
       
       
      —
       
       
      —
       
      $
      42,925
       
      Percent to total revenues  —  —  3.3%

      Amount classified as reduction in selling, general & administrative
       
      $
      45,830
       
      $
      49,102
       
      $
      8,829
       
      Percent to total revenues  5.7% 4.6% 0.7%

      Amount classified as a reduction in merchandise inventory
       
       
       
       
       
       
       
      $
      9,989
       

      Pro forma
       
       
       
       
       
       
       
       
       
       
      Gross profit $218,544 $280,722    
      Percent to total revenues  27.1% 26.4%   

      Amount classified as reduction in cost of goods sold
       
      $
      38,207
       
      $
      42,094
       
       
       
       
      Percent to total revenues  4.7% 3.9%   

      Amount classified as reduction in selling, general & administrative
       
      $
      6,729
       
      $
      6,192
       
       
       
       
      Percent to total revenues  0.8% 0.6%   

      Amount classified as a reduction in merchandise inventory
       
      $
      6,812
       
      $
      7,628
       
       
       
       
              Prior to adoption of Issue 02-16, all vendor advertising allowances were recognized as an offset to selling, general and administrative expenses. These allowances exceeded the specific, incremental costs of the advertising and promotional events conducted by us. The portion of the allowances in excess of the specific, incremental costs was recorded as an offset to other operating expenses within selling, general and administrative expenses. These other operating expenses, which were incurred to support advertising and promotional expenses, included such items as: marketing and merchandise department expenses to develop, promote and manage the events; direct store and store supervisory payroll expenses to implement, manage and monitor the events; distribution expenses associated with receiving and shipping of materials necessary for the events; and corporate expenses related to the design, production and maintenance of Internet advertising events.
      21

              The following pro forma financial information for fiscal 2001 and fiscal 2002 reflects the impact of Issue 02-16 as if it had been adopted prior to fiscal 2001:
      Consolidated Statements of Income
      (Amounts in thousands, except per share amounts)
       
      		 As reported
      Fiscal
      2001(1)
      		 Pro Forma
      Fiscal
      2001
      		 As reported
      Fiscal
      2002(1)
      		 Pro Forma
      Fiscal
      2002
      Net sales $802,851 $802,851 $1,059,338 $1,059,338
      Management fees  4,425  4,425  5,889  5,889
        
      		 
      		 
      		 
      Total revenues  807,276  807,276  1,065,227  1,065,227

      Cost of goods sold
       
       
      626,939
       
       
      588,732
       
       
      826,599
       
       
      784,505
        
      		 
      		 
      		 
      Gross profit  180,337  218,544  238,628  280,722

      Costs and expenses:
       
       
       
       
       
       
       
       
       
       
       
       
      Selling, general and administrative expenses  144,466  183,567  179,464  222,374
      Restructuring and asset impairment charge  —  —  12,638  12,638
      Depreciation and amortization  15,855  15,855  19,750  19,750
        
      		 
      		 
      		 
      Operating income  20,016  19,122  26,776  25,960
      Other income  1,550  1,550  —  —
      Interest income, net  3,096  3,096  1,884  1,884
        
      		 
      		 
      		 
      Income before income taxes  24,662  23,768  28,660  27,844
      Income tax expense  9,791  9,436�� 10,948  10,636
        
      		 
      		 
      		 
      Net income $14,871 $14,332 $17,712 $17,208
        
      		 
      		 
      		 
      Earnings per share:            
      Basic $0.67 $0.64 $0.74 $0.72
        
      		 
      		 
      		 
      Diluted $0.66 $0.64 $0.73 $0.71
        
      		 
      		 
      		 
      Weighted average shares outstanding:            
      Basic  22,254  22,254  23,868  23,868
        
      		 
      		 
      		 
      Diluted  22,466  22,466  24,230  24,230
        
      		 
      		 
      		 
      Selected Balance Sheet information:            
      Merchandise inventories  100,185  93,373  149,792  142,164
      Stockholders' equity  131,220  127,112  237,160  232,387
      (1)
      Effective in the second quarter of fiscal 2003, Electronics Boutique changed the income statement classification for pre-owned merchandise trade-in activity to be consistent with industry practice. Previously, we recorded a reduction to both revenue and cost of goods sold for the cost of the pre-owned merchandise accepted for trade. The reclassification of these transactions increased both revenues and cost of goods sold by $36.5 million and $50.1 million in fiscal years 2001 and 2002, respectively. There was no impact on operating income or net income for any period as a result of this reclassification.
      22
      Results of operations
              The following table sets forth certain income statement items as a percentage of total revenues for the periods indicated:
      
                                                               YEAR ENDED
                                               -----------------------------------------
                                               JANUARY 31,    JANUARY 30    JANUARY 29,
                                                   1998          1999          2000
                                                 ---------     ---------     ----------

Net sales                                            98.9%         99.4%         99.3%
Management fees                                       1.1           0.6           0.7
                                                 ---------     ---------     ----------
Total revenues                                      100.0         100.0         100.0
Cost of goods sold                                   74.6          75.2          75.0
Gross profit                                         25.4          24.8          25.0
Operating expenses                                   19.1          17.4          18.3
Depreciation and amortization                         1.8           1.7           1.7
                                                 ---------     ---------     ----------
Income from operations                                4.5           5.7           5.0
Equity in earnings of affiliates                      0.7            --            --
Interest expense (income), net                        0.3           0.1          (0.2)
Preacquisition loss of subsidiaries                   0.2            --            --
                                                 ---------     ---------     ----------
Income before income tax expense                      5.1           5.6           5.2
Income tax expense                                    0.2           2.0           2.1
                                                 ---------     ---------     ----------
Net income                                            4.9%          3.6%          3.1%
                                                 =========     =========     ==========

      


FISCAL 2000 COMPARED TO FISCAL 1999
       
      		 Year Ended
      		 
       
      		 February 3,
      2001
      		 February 2,
      2002
      		 February 1,
      2003
      		 
      Net sales 99.5%99.4%99.4%
      Management fees 0.5 0.6 0.6 
        
      		 
      		 
      		 
      Total revenues 100.0 100.0 100.0 
      Cost of goods sold 77.7 77.6 73.8 
        
      		 
      		 
      		 
      Gross profit 22.3 22.4 26.2 
      Selling, general and administrative expense 17.9 16.8 20.3 
      Restructuring and asset impairment charge (reversal) — 1.2 (.2)
      Depreciation and amortization 2.0 1.9 1.7 
        
      		 
      		 
      		 
      Income from operations 2.4 2.5 4.4 
      Other income 0.2 — — 
      Interest income, net 0.4 0.2 0.1 
        
      		 
      		 
      		 
      Income before income tax expense and cumulative effect of change in accounting principle 3.0 2.7 4.5 
      Income tax expense 1.2 1.0 1.7 
        
      		 
      		 
      		 
      Income before cumulative effect of change in accounting principle 1.8 1.7 2.8 
      Cumulative effect of change in accounting principle, net of tax — — (0.3)
        
      		 
      		 
      		 
      Net Income 1.8%1.7%2.5%
        
      		 
      		 
      		 
      Fiscal 2003 Compared to Fiscal 2002
              Net sales increased by 26.9%23.6% from $570.5$1,059.3 million in fiscal 19992002 to $723.8$1,309.2 million in fiscal 2000.2003. The increase in net sales was primarily attributable to an 11.6% increase in comparable store sales, which resulted in a $65.1 million
increase in net sales, and the additional sales volume attributable to 91 netfrom 270 new stores, approximately $102.0 million, opened during fiscal 2000. Comparable2003 and a comparable store sales were positively
impacted primarilyincrease of 8.3%, or $84.8 million. The increase was driven by the releasecontinuing strong sales of the Sega Dreamcast console system in the
third fiscal quarter, which was supported by a strong supply ofSony's PlayStation 2 software, titles
through the end of the fiscal year. In addition, throughout the year there was a
strong demand for Nintendo Game Boy software and hardware as well as toy
categories including software-related action figuresa full year of sales from Nintendo's GameCube and Pokemon trading cards.Microsoft's Xbox which were introduced in November 2001, and Nintendo's Game Boy Advance which was introduced in June 2001.
              Management fees increased 43.1%28.3% from $3.4$5.9 million in fiscal 19992002 to $4.9$7.6 million in fiscal 2000.2003. The increase was primarily attributable to additionalin management fees earned from Electronics Boutique plc. on the sales of a



                                       20


newly acquired competitor which occurred in May 1999 and to a $543,000
performance fee earned for fiscal 2000 and an additional $248,000 performance
fee earned for fiscal 1999 and recorded in fiscal 2000 under2003 was primarily due to an increase in Game Group's sales along with a more favorable currency exchange rate between the consulting
agreement with Border's Group, Inc.British pound and U.S. dollar in fiscal 2003. In addition we earned $150,000 in management fees from Sports Collectibles Acquisition Corporation ("SCAC") in fiscal 2003.
              Cost of goods sold increased by 26.6%17.5% from $431.7$826.6 million in fiscal 19992002 to $546.5$971.2 million in fiscal 2000.2003. As a percentage of net sales, cost of goods sold decreased from 75.7%78.0% in fiscal 19992002 to 75.5%74.2% in fiscal 2000. The2003. This decrease in cost of goods sold, as a percentage of net sales, was partially due to a reclassification of $42.9 million, or 3.3% of net sales, of fiscal 2003 vendor advertising allowances from selling, general and administrative expense in connection with our change in accounting policy. The balance of the decrease was primarily attributable to increasesthe shift in sales from low margin hardware to higher margin software of 0.7% and reduced freight costs of 0.3%. These improvements were partially offset by a decrease in sales of Nintendo Game Boy softwarehigher margin PC product accounting for 0.3%. Cost of goods sold does not include purchasing and hardware, Pokemon trading
cards toysdistribution center operating costs of approximately $15.3 million in fiscal
      23

      2003 and software-related action figures that carry higher overall margins
than$13.9 million in fiscal 2002, which are included in selling, general and administrative costs. Accordingly, our cost of goods sold may not be comparable to the console video game category.cost of goods sold of other retailers.
              Selling, general and administrative expense increased by 33.6%49.1% from $100.0$179.5 million in fiscal 19992002 to $133.5$267.6 million in fiscal 2000.2003. Of the $88.1 million increase, $45.3 million, or 3.4% of total revenues, was attributable to the reclassification of vendor advertising allowances in connection with our change in accounting policy. The remaining $42.8 million of the increase was due to the increase in our domestic and international stores base and the associated increases in store expenses of $35.5 million and headquarter expenses of $7.9 million, which was partially offset by an increase in net promotional and marketing reimbursements of $1.3 million prior to the reclassification. As a percentage of total revenues, selling, general and administrative expense increased from 17.4%16.8% in fiscal 19992002 to 18.3%20.3% in fiscal 2000. The $33.5 million increase was primarily
attributable to the increase in Electronics Boutique's domestic and
international store base and the associated increases in store, distribution,
and headquarter operating expenses, which was partially offset by an increase in
promotional and marketing reimbursements. In addition, $10.7 million was
incurred in connection with an advertising and promotional campaign that began
in the third quarter of fiscal 2000 primarily for Electronics Boutique's
e-commerce business. The increase in selling, general and administrative expense
as a percentage of total revenues was primarily attributable to the expenses
associated with the advertising and promotional campaign in addition to other
increases in operating expenses, partially offset by the increase in net sales.2003.
              Depreciation and amortization expense increased by 25.6%14.0%, from $9.8$19.8 million in fiscal 19992002 to $12.3$22.5 million in fiscal 2000. This2003. The increase was primarily attributable to capitalized expenditures for leasehold improvements and furniture and fixtures for new store openings, remodeling of existing stores, for leaseholdand capital improvements, and furniture and fixtures and computer software at corporate headquarters.
              In fiscal 2002, the restructuring and asset impairment charge of $12.6 million resulted from our adoption of a plan to close the operations of all 29 EB Kids stores and sell the 22 store BC Sports Collectibles business. The charge represents a $3.5 million write down of store leasehold improvements, a $2.3 million write down of store furniture, fixtures and equipment and $6.7 million in lease termination costs. In fiscal 2003, the $2.6 million net reversal of the restructuring and asset impairment charge resulted primarily from store lease related accruals that were not necessary due to the terms of the sale of the BC Sports Collectibles business.
              Operating income increased by 12.3%117.0%, from $32.4$26.8 million in fiscal 19992002 to $36.4$58.1 million in fiscal 2000.2003. As a percentage of total revenues, operating income decreasedincreased from 5.7%2.5% in fiscal 19992002 to 5.0%4.4% in fiscal 2000, as2003. Excluding the decrease in$2.3 million charge to cost of goods sold as a percentageand the $12.6 million restructuring and asset impairment charge in fiscal 2002, operating income would have been $41.7 million, or 3.9% of total revenues was more than
offset byin fiscal 2002. Excluding the increase$2.6 million reversal of the restructuring and asset impairment charge in selling, general and administrative expenses as a
percentagefiscal 2003, operating income would have been $55.5 million, or 4.2% of total revenues.revenues in fiscal 2003.
              Interest expense,income, net, improveddecreased by 11.0%, from an expense of $0.3$1.9 million in fiscal 19992002 to income of $1.4$1.7 million in fiscal 2000.2003. The changedecrease was primarily
attributabledue to lower interest income earned from investing excess cash in short term
investments from the secondary offering in November 1999 and to the repayment of
Electronics Boutique's debt with the proceeds of the initial public offering in
fiscal 1999.

    As a result of all the above factors, Electronics Boutique's income before
income taxes increased by 18.3% from $32.0 million in fiscal 1999 to $37.8
million in fiscal 2000.rates on short-term investments.
              Income tax expense increased by 104.4%, from $11.7$10.9 million in fiscal 19992002 to $15.0$22.4 million in fiscal 2000.2003. As a percentage of pre-tax income, income tax expense increaseddecreased from 36.6%38.2% in fiscal 19992002 to 39.7%37.4% in fiscal 2000. The increase2003. Our effective tax rate decreased from the prior year principally as a percentageresult of pre-taxan increase in operations in foreign jurisdictions that have a lower tax rate than the United States and an increase in tax-exempt interest income.
              We changed our accounting policy with respect to the recording of vendor advertising allowances effective retroactively as of the beginning of fiscal 2003. As a result, we recorded a non-cash charge of $4.8 million, net of income was due to Electronics Boutique being taxedtax, in the first quarter of fiscal 2000 as a "C" corporation, whereas income in2003 for the cumulative effect of the change on fiscal 1999years prior to the
initial public offering on July 28, 1998 was taxed as an S corporation.

FISCAL 1999 COMPARED TO FISCAL 1998fiscal 2003.
      Fiscal 2002 Compared to Fiscal 2001
              Net sales increased by 27.0%31.9%, from $449.2$802.9 million in fiscal 19982001 to $570.5$1,059.3 million in fiscal 1999.2002. Fiscal 2001 included 53 weeks of net sales compared to 52 weeks in fiscal 2002 partially offsetting the increase. The increase in net sales was primarily attributable to a 14.1% increase in comparable store sales, which resulted in a $61.9 million
increase in net sales, and the additional sales volume attributable to 76 netfrom 210 new stores, approximately $81.0 million, opened during fiscal 1999.2002 and a comparable store sales
      24

      increase of 20.8%, or $152.4 million. The increase in comparable storewas driven by continuing strong sales was
primarily attributable to increases in video gameof Sony's PlayStation 2 hardware and PC entertainmentrelated software,
sales as well as continued strong demand for PC accessory products.the introduction of Nintendo's Game Boy Advance in June 2001 and GameCube in November 2001, and Microsoft's Xbox in November 2001.
              Management fees decreased 28.9%increased 33.1% from $4.8$4.4 million in fiscal 19982001 to $3.4$5.9 million in fiscal 1999.2002. The decrease was primarily attributable to Electronics
Boutique's receipt of a $2.2 million bonus under the UK Services Agreement
recordedincrease in fiscal 1998. Electronics Boutique did not receive a bonus under this
agreement in fiscal




                                       21


1999, nor do we expect to receive such a bonus in the future. The absence of a
bonus in fiscal 1999 was partially offset by higher recurring management fees earned in fiscal 1999 under the UK Services Agreement.2002 was due to an increase in Game Group's sales.
              Cost of goods sold increased by 27.6%31.8%, from $338.5$626.9 million in fiscal 19982001 to $431.7$826.6 million in fiscal 1999.2002. As a percentage of net sales, cost of goods sold increaseddecreased from 75.4%78.1% in fiscal 19982001 to 75.7%78.0% in fiscal 1999.2002. The increasedecrease in cost of goods sold, as a percentage of net sales, was primarily attributable to several factors such as increased margins on PC products and a successful tiered pricing strategy of approximately 1.1%, reduced freight costs of approximately 0.5% and an increase in freight expenseshigh margin pre-owned sales of approximately 0.3%. These improvements were partially offset by the increased sales of low margin hardware sales of approximately 1.6% and the $2.3 million or 0.2% charge related to Electronics Boutique'sthe write-down of inventory associated with our decision to reduce
prices on selected electronic game titlesdiscontinue our EB Kids operations and sell our BC Sports Collectibles business. Cost of goods sold does not include purchasing and distribution center operating costs of approximately $13.9 million in order to increase market sharefiscal 2002 and sales volume. The increase$12.9 million in freight expenses was the result of several
factors. Electronics Boutique switched its primary freight carrierfiscal 2001, which are included in our selling, general and reorganized its third-party distribution framework in order to improve service
and merchandise availability to its stores. There was also an increase in the
overall number of units shipped by Electronics Boutique to its stores as a
result of a lower average cost per unit of product. These increases toadministrative costs. Accordingly, our cost of goods sold were partially offset by a reduction in inventory shortage and an
increase in purchase discounts earned from vendors.may not be comparable to the cost of goods sold of other retailers.
              Selling, general and administrative expense increased by 14.9%24.2%, from $87.0$144.5 million in fiscal 19982001 to $100.0$179.5 million in fiscal 1999.2002. The $35.0 million increase was primarily attributable to the increase in our domestic and international stores base and the associated increases in store expenses of $31.9 million, headquarter expenses of $7.4 million and distribution expenses of $0.8 million, which was partially offset by an increase in promotional and marketing reimbursements of $5.1 million. As a percentage of total revenues, selling, general and administrative expense decreased from 19.1%17.9% in fiscal 19982001 to 17.4%16.8% in fiscal 1999. The $13.0 million increase was primarily
attributable to the increase in Electronics Boutique's domestic and
international store base and the associated increases in store, distribution,
and headquarter operating expenses, which were partially offset by an increase
in promotional and marketing reimbursements.2002. The decrease in selling, general, and administrative expense as a percentage of total revenues was primarily attributable to anthe increase in net sales, which offset the impact of the above
factors on operating expenses.comparable store sales.
              Depreciation and amortization expense increased by 22.2%24.6%, from $8.0$15.9 million in fiscal 19982001 to $9.8$19.8 million in fiscal 1999. This2002. The increase was primarily attributable to capitalized expenditures for leasehold improvements and furniture and fixtures for new store openings.openings, remodeling of existing stores, and capital improvements, furniture and fixtures and computer software at the corporate headquarters. In addition, in fiscal 2002 we had a full year of depreciation, or an increase of $670,000 over the prior year, on capital expenditures we made in fiscal 2001 for the purchases of our corporate headquarters and distribution facility in West Chester, Pennsylvania, the relocation to a larger distribution facility in Louisville, Kentucky, and the construction of new distribution and office facilities in Australia and Canada.
              The restructuring and asset impairment charge of $12.6 million resulted from our adoption of a plan to close the operations of all 29 EB Kids stores and sell the 22 store BC Sports Collectibles business. The charge represents a $3.5 million write down of store leasehold improvements, a $2.3 million write down of store furniture, fixtures and equipment and $6.7 million in lease termination costs.
              Operating income increased by 58.4%33.8%, from $20.5$20.0 million in fiscal 19982001 to $32.4$26.8 million in fiscal 1999.2002. As a percentage of total revenues, operating income increased from 4.5%2.4% in fiscal 19982001 to 5.7%2.5% in fiscal 1999, as2002. Excluding the increase in$2.3 million charge to cost of goods sold as a percentageand the $12.6 million restructuring and asset impairment charge, operating income for fiscal 2002 would have been $41.7 million, or 3.9% of total revenuesrevenues.
              Other income of $1.6 million was more than
offset byrecorded in fiscal 2001. This income was the decline in operatingresult of a termination fee on the acquisition of Funco, Inc. of $3.5 million, net of associated expenses as a percentage of total revenues.

    Equity in earnings of affiliates$1.9 million.
      25

              Interest income, net, decreased by $3.1 million39.2%, from earnings of
$2.9$3.1 million in fiscal 19982001 to a loss of $0.2$1.9 million in fiscal 1999.2002. The decrease was attributabledue to the reorganization of Electronics Boutique in
conjunction with its initial public offering pursuant to which EB, a predecessor
company, retained the 25.1% investment in EB-UK. The loss of $0.2 million in
fiscal 1999 was attributable to this investment and was recorded prior to the
July 1998 reorganization. There will be no future equity income or losslower interest rates on this
investment.

    Interest expense, net, decreased by 79.1% from $1.4 million in fiscal 1998
to $0.3 million in fiscal 1999. The decrease was primarily attributable to the
repayment of Electronics Boutique's debt with the proceeds of the initial public
offering and the interest income earned from investing the excess cash in short
term investments during the third and fourth quarters of fiscal 1999.

    As a result of all the above factors, Electronics Boutique's income before
income taxes increased by 39.6% from $22.9 million in fiscal 1998 to $32.0
million in fiscal 1999.short-term investments.
              Income tax expense increased by 11.8%, from $0.8$9.8 million in fiscal 19982001 to $11.7$10.9 million in fiscal 1999. The increase was due to Electronics Boutique being taxed2002. As a percentage of pre-tax income, income tax expense decreased from 39.7% in fiscal 19992001 to 38.2% in fiscal 2002. Our effective tax rate decreased from the prior year principally as a "C" corporation insteadresult of a reduction of state tax expense as well as an S corporation afterincrease in operations in foreign jurisdictions that have a lower tax rate than the date
of the initial public offering.



                                       22



SEASONALITY AND QUARTERLY RESULTS

    Electronics Boutique'sUnited States.
      Seasonality and Quarterly Results
              Our business, like that of most retailers, is highly seasonal. A significant portion of our net sales, management fees and profits are generated during Electronics Boutique'sour fourth fiscal 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, net 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 Electronics Boutique'sour merchandise mix.
      26

              The following table sets forth certain unaudited quarterly income statement information for fiscal 19992002 and fiscal 2000.2003. The unaudited quarterly information includes all normal recurring adjustments that management considers necessary for a fair presentation of the information shown.
      

                                              (in thousands, except for number of stores)
                                        Fiscal 1999                              Fiscal 2000
                          ----------------------------------------------------------------------------------
                             1st       2nd       3rd       4th        1st        2nd       3rd       4th
                           Quarter   Quarter   Quarter   Quarter    Quarter    Quarter   Quarter   Quarter
                          ---------  --------  --------  ---------  ---------  --------  --------  --------

Total revenues             $107,301  $102,460  $111,300   $252,858   $123,605  $113,095  $177,410  $314,564
Gross profit                 27,781    26,556    27,672     60,166     33,167    30,756    41,430    76,870
Operating income              3,257        90     2,519     26,562      4,435       941     6,291    24,744
Stores open at
quarter end                     465       474       500        528        550       564       595       619

      


LIQUIDITY AND CAPITAL RESOURCES
       
      		 Fiscal 2003 (Restated)(1)
       
      		 1st
      Quarter(2)
      		 2nd
      Quarter
      		 3rd
      Quarter
      		 4th
      Quarter
       
      		 (Amounts in thousands, except for earnings per share and number of stores)

      Total revenues $237,640 $262,635 $282,960 $533,544
      Gross profit  63,044  66,174  75,129  141,228
      Operating income  1,918  549  5,682  49,947
      Income before cumulative effect of change in accounting principle  1,471  594  3,742  31,593
      Net income (loss)  (3,302) 594  3,742  31,593

      Income per share before cumulative effect of change in accounting principle:
       
       
       
       
       
       
       
       
       
       
       
       
       —Basic  0.06  0.02  0.14  1.22
       —Diluted  0.06  0.02  0.14  1.21

      Net income (loss) per share:
       
       
       
       
       
       
       
       
       
       
       
       
       —Basic  (0.13) 0.02  0.14  1.22
       —Diluted  (0.13) 0.02  0.14  1.21

      Stores open at quarter end
       
       
      948
       
       
      994
       
       
      1,078
       
       
      1,145
       
      		 Fiscal 2003 (as reported)(3)
       
      		 1st
      Quarter(2)
      		 2nd
      Quarter
      		 3rd
      Quarter
      		 4th
      Quarter
      Total revenues $237,640 $262,635 $282,960 $533,544
      Gross profit  56,800  60,144  66,055  120,286
      Operating income  553  714  11,186  48,004
      Net income  627  696  7,144  30,410

      Net income per share
       
       
       
       
       
       
       
       
       
       
       
       
       —Basic  0.02  0.03  0.28  1.18
       —Diluted  0.02  0.03  0.27  1.16

      Stores open at quarter end
       
       
      948
       
       
      994
       
       
      1,078
       
       
      1,145
       
      		 Fiscal 2002 (as reported)
       
      		 1st
      Quarter(2)
      		 2nd
      Quarter
      		 3rd
      Quarter
      		 4th
      Quarter
      Total revenues $189,657 $189,907 $182,153 $503,510
      Gross profit  41,734  45,938  46,762  104,194
      Operating income (loss)  (2,842) (2,704) 4,289  28,033
      Net income (loss)  (1,418) (1,532) 2,920  17,742

      Net income (loss) per share
       
       
       
       
       
       
       
       
       
       
       
       
      — Basic  (0.06) (0.07) 0.12  0.69
      — Diluted  (0.06) (0.07) 0.11  0.67

      Stores open at quarter end
       
       
      763
       
       
      813
       
       
      878
       
       
      937
      (1)
      We changed our accounting policy with respect to the recording of vendor advertising allowances effective retroactively as of the beginning of fiscal 2003. As a result, we recorded a non-cash charge of $7.6 million, $4.8 million net of income tax, in the first quarter of fiscal 2003 for the cumulative effect of the change on fiscal years prior to fiscal 2003. Quarterly results for fiscal 2003
      27
        have been restated to reflect this new accounting policy. See Note 2 to the consolidated financial statements for more details on this change in accounting principle.
      (2)
      Effective in the second quarter of fiscal 2003, Electronics Boutique haschanged the income statement classification for pre-owned merchandise trade-in activity to be consistent with industry practice. Previously, we recorded a reduction to both revenue and cost of goods sold for the cost of the pre-owned merchandise accepted for trade. The reclassification of these transactions increased both revenues and cost of goods sold by $9.8 million and $20.0 million in the first quarters of fiscal 2002 and fiscal 2003, respectively. There was no impact on operating income or net income as a result of this reclassification.

      (3)
      Table represents results of operations prior to adoption of EITF Issue 02-16, "Accounting by a Customer (Including a Reseller) for Cash Consideration Received from a Vendor."
              The $1.9 million of operating income in the first quarter of fiscal 2003 includes a $508,000 pre-tax restructuring reversal ($314,000 after-tax, or $0.01 per diluted share). This reversal related primarily to reversals of lease related accruals for the EB Kids stores. The $5.7 million of operating income in the third quarter of fiscal 2003 includes a $2.2 million pre-tax restructuring reversal ($1.4 million after-tax, or $0.05 per diluted share). This reversal related to store lease accruals that were not necessary due to the terms of the sale of the BC Sports Collectibles business.
              The $28.0 million of operating income in the fourth quarter of fiscal 2002 includes a $14.9 million pre-tax charge ($9.2 million after-tax, or $0.35 per diluted share) related to costs associated with our decision to close our EB Kids operations and sell our BC Sports Collectibles business. The pre-tax charge was recorded as follows: $2.3 million related to a write-down of inventory within cost of goods sold and $12.6 million as a restructuring and asset impairment charge.
      Liquidity and Capital Resources
              We have historically financed our operations through a combination of cash generated from operations, equity offerings and bank debt. On November 23,
1999, Electronics BoutiqueAugust 14, 2001, we completed a secondarypublic offering of 3,500,0004,600,000 shares of common stock. Of the 3,500,0004,600,000 shares sold, 2,000,0002,500,000 shares were for the account of the Electronics Boutique and 1,500,0002,100,000 shares were for the account of EB Nevada Inc., a selling shareholder controlled by the selling shareholder.Kim family. The transaction resulted in net proceeds (after offering expenses) to Electronics Boutiqueus of approximately $40.0$68.2 million.

    Electronics Boutique
              We generated $37.5$27.1 million in cash from operations in fiscal 20002003 and $30.8$31.4 million in fiscal 1999.2002. The $37.5$27.1 million of cash generated from operations in fiscal 20002003 was primarily the result of $22.8$32.6 million ofin net income, $12.6$23.9 million ofin non-cash charges to net income, an $8.9increase of $8.2 million in accrued expenses and a $6.1 million increase in income taxes payable, partially offset by a $38.5 million increase in merchandise inventory, net of accounts payable, a $2.1 million increase in accounts payablereceivable, a $1.6 million increase in prepaid expenses, and a $1.6 increase in other long-term assets. In fiscal 2003, the $38.5 million increase in inventory, net of accounts payable, was due to an increase in merchandise
inventories, a $1.7increased store base coupled with slower than expected holiday sales. The $8.2 million increase in accrued expenses was primarily due to an increased store base and a $0.4 million
decrease in deferred taxes, partially offset by a $5.3 millionan increase in receivables, a $3.5 million increase in prepaid expenses.customer liabilities. The $30.8$31.4 million of cash generated from operations in fiscal 19992002 was primarily the result of $20.3$17.7 million of net income, $10.2 million of non-cash charges to net income, an $8.1a $32.8 million increase in income taxesaccounts payable, an increase of $10.2 million in accrued expenses and deferred rent, and a $7.1$14.1 million increase in accrued
expenses,taxes payable, partially offset by a $7.5$3.6 million decreaseincrease in net affiliate
liabilities and receivables, anaccounts receivable, a $47.0 million increase of $7.3 million in Electronics
Boutique's investment in merchandise inventories, net of accounts payable, and a $0.6$2.3 million increase in prepaid expenses, and a $0.7 million increase in other long-term assets. Electronics
Boutique's working capital changed from a deficitIn fiscal 2002, merchandise inventories and related accounts payable increased primarily due to the higher average cost of $3.1 million at January 30,
1999products associated with the new console systems introduced in the year and also due to a positive $42.6 million at January 29, 2000.

    Electronics Boutique27% increase in our store base over the prior year.
      28

              We made capital expenditures of $31.8$35.8 million in the
fiscal 2000,2003, primarily to open new stores, to remodel existing stores, to buildrebrand 96 existing stores to the new EB Games name, and to enhance the inventory system in the Louisville distribution center. In fiscal 2003, we also made investments of $1.6 million to acquire additional interests in our European subsidiaries and to acquire a new distribution centerfive store retail chain in West Chester, Pennsylvania, for leasehold
improvements at Electronics Boutique's headquarters and primary distribution
center, and for equipment and leasehold improvements at a new customer service
facility in Las Vegas, Nevada to support our Internet and catalog sales
operations.the U.S. We made capital expenditures of $19.6$23.7 million in fiscal 1999,2002, primarily for openingto open new stores, to remodel existing stores, to purchase and install a new inventory system in the Louisville distribution center and to purchase our
West Chester,renovate and expand the Pennsylvania corporate headquarters. In fiscal 2002, we also made investments of $9.2 million to acquire various assets and businesses in several European countries including 32 retail stores, distribution center which was previously leased.


                                       23


    On March 16, 1998, EB entered intocenters, and mail order and Internet businesses.
              We have a credit agreement with Fleet, pursuant
to which Fleet agreed to make available an$50 million asset based revolving credit and term
loan facility in an amount up to $50.0 million.with Fleet Capital Corp. The revolving credit facility has been assigned to Electronics Boutique by EB. The revolving credit facility
expires and is repayablerenewed for a one-year term expiring on March 16, 2001.2004. Interest accrues on borrowings at a per annum rate equal to either LIBOR plus 250 basis points or Fleet's base rate of interest, at Electronics Boutique'sour option. The revolving credit facility is secured by certain assets, including accounts receivable, inventory, fixtures and equipment. As of January 29, 2000,February 1, 2003, we had no outstanding borrowings under the revolving credit facility.

    Electronics Boutique believes
              Letters of credit outstanding with various financial institutions were $1.8 million and $694,000 at February 2, 2002 and February 1, 2003, respectively.
              We believe that cash generated from itsour operating activities and available bank borrowings will be sufficient to fund itsour operations and store expansion programs for the next fiscal year.

    On March 31, 2000,
      Related Party Transactions
      Transactions with Affiliates
              In fiscal 1996, The Electronics Boutique, Inc. entered into a definitive mergerservices agreement with Game Group (formerly The Electronics Boutique Plc) to provide consulting, management, training, and advertising assistance, which expires in January 2006. The agreement was assigned to EB Services Company. The agreement prohibits us from competing in the United Kingdom during the term of the agreement, and for one year after its termination. Game Group is responsible for the acquisitionpayment of fees, payable, at our option, in cash or Game Group stock, equal to 1.0% of Game Group's adjusted sales, plus a bonus calculated on the basis of net income in excess of a pre-established target set by Game Group. The management fee receivable at February 2, 2002 was $573,000 and at February 1, 2003 was $605,000; both were included in accounts receivable-trade and vendors. Management fees received from Game Group for fiscal 2001, fiscal 2002 and fiscal 2003 were $4.4 million, $6.0 million and $7.4 million, respectively. Additionally, the agreement provides that EB Services is to be reimbursed by Game Group for all reasonable travel and subsistence expenses incurred during performance of the agreement. At February 2, 2002 and February 1, 2003, there were no outstanding balances due from Game Group.
              On November 2, 2002, we sold our BC Sports Collectibles business to SCAC for $2.2 million in cash and the assumption of lease related liabilities in excess of $13 million. The purchaser, SCAC, is owned by the family of James Kim, our Chairman. The transaction included the sale of all outstanding shares of Funco, Inc. for
$17.50 per share or approximately $110 million in cash. On April 6, 2000, Funco,
Inc. received a competing offer from Barnes and Noble Inc., for $135 million or
approximately $21.00 per share. On April 20, 2000, Electronics Boutique raised
our cash offer to $21.00 per share to match the competing offer by Barnes &
Noble Inc., which was accepted by Funco, Inc. On April 26, 2000, Barnes and
Noble Inc. raised its cash offer to $24.75 per share. Electronics Boutique is
currently evaluating whether to match or raise this latest offer. Should we
further pursue this acquisition, we believe we could obtain adequate debt
financing for completionassets of the deal.

RECENT ACCOUNTING PRONOUNCEMENTSbusiness including inventory, intellectual property and furniture, fixtures and equipment, and transitional services which were provided by us to SCAC for a six-month period after the closing for an additional $300,000. As of February 1, 2003, $150,000 of the services agreement has been earned and recognized as income. The transaction was negotiated and approved by a committee of our Board of Directors comprised solely of independent directors with the assistance of an investment banking firm engaged to solicit offers for the BC Sports Collectibles business.
      29

      Recent Accounting Pronouncements
              In June 1998,August 2001, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 133,143 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133").Asset Retirement Obligations." This statement establishes accounting and reporting standards for derivative instruments andaccounting for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities inobligation associated with the retirement of a long-lived asset. The statement of
financial position and measures those instruments at fair value. The adoptionis effective for our fiscal year ending January 31, 2004. We are finalizing our review of this standardstatement and are not expecting a material impact on our consolidated results of operations or financial condition.
              In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others," an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to materially impact Electronics Boutique's
resultshave a material effect on our Consolidated Financial Statements. The disclosure requirements of operations,this interpretation were effective on December 31, 2002. The disclosure requirements have been adopted and are included in Note 1 to the consolidated financial condition or long-term liquidity.statements, "Guarantees".
              In June 1999,December 2002, the FASB issued Statement of Financial Accounting Standards
No. 137, Accounting148 "Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date ofStock-Based Compensation." This statement amends FASB Statement No. 133123 to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. We adopted the disclosure requirement in this Form 10-K.
              In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" which addresses consolidation by businesses of variable interest entities. We do not anticipate any impact from this interpretation.
      Critical Accounting Policies and Estimates
              The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results may differ from those estimates. Our significant accounting policies can be found in Note 1 to the consolidated financial statements. We consider the following policies to be most critical to the portrayal of our financial condition and results of operations.
      Inventory Valuation
              Merchandise inventories are valued at the lower of cost or market. The cost is determined principally by a weighted-average method. The weighted-average cost method attaches a cost to each SKU, and is a blended average of the original purchase price and those of subsequent purchases or other cost adjustments throughout the life cycle of that SKU.
              Inherent in the video game business is the risk of obsolete inventory. As the new generation of products is introduced, demand for the prior generation decreases, thus reducing interest and value of the older games. Some vendors offer us credit to reduce the cost of products that are selling more slowly thus allowing for a reduction in the selling price and reducing the possibility for items to become obsolete. We monitor the aging of our inventory by item and provide a reserve for product that is considered "slow moving", using an established formula based on current inventory and a trailing sales history. We also monitor the difference between the selling ("SFAS"market"). SFAS 137 delays price of each item and its cost and provide a reserve for any differences below such cost.
      30

              We perform regular physical inventories and cycle counts in both our stores and distribution centers to adjust inventory balances and account for shrink and damaged product. An accrual for estimated loss is recorded between the implementationtiming of SFAS No. 133 until Electronics Boutique'sthese counts.
              Reserves of $2.7 million and $2.9 million were recorded against inventory as of February 2, 2002 and February 1, 2003, respectively. Management believes its inventory valuation system results in carrying inventory at the lower of cost or market.
      Revenue recognition and Related Policies
              We derive revenue primarily from two sources: (i) product revenue, which includes the retail sale of merchandise inventory, warranties, and shipping and handling fees and (ii) management services revenue. Sales are recorded net of estimated amounts for sales returns and other allowances.
              Retail sales are recognized as revenue at the point of sale. Mail order and Internet sales are recognized as revenue upon delivery to and acceptance by the customer. Revenues from shipping and handling are recorded in revenue and recognized upon shipment. Warranty revenue is amortized over the life of the warranty contract.
              We also engage in the sale and trading of pre-owned video game products. Effective in the second quarter of fiscal year 2002. As
of January 29, 2000,2003, Electronics Boutique hadchanged the income statement classification for pre-owned merchandise trade-in activity to be consistent with industry practice. Previously, we recorded a reduction to both revenue and cost of goods sold for the cost of the pre-owned merchandise accepted for trade. The reclassification of these transactions increased both revenues and cost of goods sold by $36.5 million for the fifty-three week period ended February 3, 2001 and $50.1 million for the fifty-two week period ended February 2, 2002. There was no derivative instrumentsimpact on operating income or hedging activities.

YEAR 2000 READINESS

    We met our Year 2000 project objectives and completed the project prior to
December 31, 1999. We have not experiencednet income for any disruption in our operationsperiod as a result of non-compliancethis reclassification.
              Revenues for management services are recorded as earned. In fiscal 2003, all management fees earned were derived under service agreements with Game Group and SCAC.
      Restructuring Costs
              In February 2002, we announced our plan to close all of vendors,our 29 EB Kids stores and sell our 22 store BC Sports Collectibles business. In fiscal 2002, we recorded a restructuring and asset impairment charge of $12.6 million. The charge represents a $3.5 million write down of store leasehold improvements, a $2.3 million write down of store furniture, fixtures and equipment and $6.7 million in lease termination costs. In fiscal 2003, a $2.6 million net reversal of the restructuring and asset impairment charge resulted primarily from store lease related accruals that were not necessary due to the terms of the sale of the BC Sports Collectibles business.
              Effective as of the close of business on November 2, 2002, we closed on the sale transaction of the BC Sports Collectibles business to SCAC for $2.2 million in cash and the assumption of the lease related liabilities for each of its 22 stores. The family of James Kim, who is Chairman of Electronics Boutique and a significant investor in our outstanding common stock, owns SCAC. The transaction included the sale of all assets of the business including inventory, intellectual property and furniture, fixtures and equipment, and transitional services which were provided to SCAC for a six-month period after the closing for an additional $300,000. Subsequent to year end, all of the store leases have been assigned to SCAC. We remain contingently liable for these leases and Mr. Kim has entered into an Indemnification Agreement with us for these leases. The purchase agreement provides SCAC the right, exercisable at any time after the second anniversary of the closing date, to assign back to us two of the store leases. We have retained an accrual of $204,000 for the estimated lease termination costs related to this option. These actual costs could be higher than this amount.
      31

      Income Taxes
              We are subject to income tax in many jurisdictions, including the United States, states and localities, and internationally. Income taxes are calculated in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires the use of the asset and liability method. Deferred tax assets and liabilities are recognized based on the difference between the financial institutions,statement carrying amounts of existing assets and liabilities and their respective tax bases. Inherent in the measurement of deferred balances are certain judgments and interpretations of enacted tax law and published guidance with respect to applicability to our operations. Significant examples of this concept include capitalization policies for various tangible and intangible costs, income and expense recognition and inventory valuation methods. We must also assess the likelihood that our deferred tax assets will be recovered from future taxable income. To the extent we believe that recovery is not more likely than not, we must establish valuation allowances. We have valuation allowances of $534,000 and $546,000 as of February 2, 2002 and February 1, 2003, respectively, due to uncertainties related to our ability to utilize the net operating loss carry forwards of certain foreign subsidiaries. Future tax expense may be impacted by this judgment.
      Valuation of Long-Lived and Intangible Assets and Goodwill
              We assess the impairment of identifiable intangibles and long-lived assets to determine if any part of the carrying value may not be recoverable. Factors we consider important when assessing impairment include:
        •
        significant underperformance relative to expected historical or other third
partiesprojected future operating results;

        •
        significant changes in the manner of our use of the acquired assets or external systems. At this time, the possibilitystrategy for our overall business;

        •
        significant negative industry or economic trends;

        •
        significant decline in our stock price for a sustained period; and

        •
        our market capitalization relative to net book value.
              When we determine that the carrying value of an identifiable intangible or long-lived asset may not be recoverable based on one or more of the above indicators, we test for impairment to determine if an impairment charge is needed.
              Goodwill is tested annually for impairment. We use a two-step impairment assessment to determine if an impairment charge is needed. The first step of the goodwill impairment test compares the fair value of a third-party risk
arising, which could havereporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, and the second step of the impairment test is not necessary. If the carrying amount of a material risk onreporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss if any. Electronics Boutique is not
reasonably likely to occur. We developed a Year 2000 program to identify,
evaluate, test, upgrade, or replace each of our computer based systems in
connection with Year2000 readiness. Wehas completed the processannual goodwill impairment test for fiscal 2003 and no charges were required.
              Net intangible assets, long-lived assets and goodwill amounted to $122.0 million as of modifying,
upgrading, remediatingFebruary 1, 2003. See Note 15 to the consolidated financials statements for more details.
      Contractual Obligations
              We have certain commitments under our operating leases which are disclosed in Note 3 to the consolidated financial statements. Furthermore, for information with respect to our debt and replacing major computer related systems that were
identified as potentially non-compliant by December 31, 1999. Total costs
associated with our Year 2000 project were funded with operating cash flowlines of credit, see Note 5 to the consolidated financial statements.
      32


      Item 7A. Quantitative and approximated $823,000, of which approximately $517,000 was incurred in fiscal
1999 and approximately $306,000 was incurred in fiscal 2000.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    Electronics Boutique investsQualitative Disclosures About Market Risk
              We invest cash balances in excess of operating requirements in short-term investment grade securities, generally with maturities of 90 days or less. In addition, Electronics Boutique'sour revolving credit facility provides for borrowings which bear interest at variable rates based on either the bank's base rate or LIBOR plus 250 basis points. Electronics
Boutiquepoints, at our option. We had no borrowings outstanding pursuant to the revolving credit facility as of January 29, 2000.February 1, 2003. We believe that the effect, if any, of reasonably possible near-term changes in interest rates on our financial position, results of operations, and cash flows should not be material.


                                       24


    Electronics Boutique has
              We have retail operations in various foreign countries.
Electronics Boutique iscountries including Australia, Canada, Denmark, Germany, Italy, New Zealand, Norway, South Korea and Sweden. We are subject to currency exchange rate and currency devaluation risks due to these operations. Since approximately 88%81% of Electronics Boutique'sour net sales are domestic, Electronics Boutique doeswe do not believe that currency exchange rate fluctuations wouldwill have a material adverse effect on Electronics Boutique'sour results of operations and financial conditioncondition. We routinely enter into forward and accordingly, does not hedge its riskcross-currency swap exchange contracts in this area.the regular course of business to manage exposure against foreign currency fluctuations on intercompany loans, investments in subsidiaries, and accounts payable. As of February 1, 2003, we have foreign currency forward contracts with a notional amount of $20.3 million and cross-currency swap contracts with a notional amount of $27.4 million. The total fair market value of all contracts is a deficit of approximately $4.9 million. Four contracts for $16.7 million expire during fiscal 2004 and the remaining contracts for $31.0 million expire in future years. We intend to monitor our exposure to these risks and reevaluate itsre-evaluate our hedging strategies as appropriate.



                                       25



ITEM
              The table below provides information about our derivative financial instruments and other financial instruments by functional currency and presents such information in U.S. dollar equivalents. The table summarizes information on instruments and transactions that are sensitive to foreign currency exchange rates, including foreign currency forward exchange agreements and cross currency swap agreements. For foreign currency forward exchange agreements and cross currency swap agreements, the table presents the notional amounts. These notional amounts are generally used to calculate the contractual payments to be exchanged under the contracts.
       
      		 Fiscal
      2004
      US$
      		 Fiscal
      2005
      US$
      		 Fiscal
      2006
      US$
      		 Fiscal
      2007
      US$
      		 Fiscal
      2008
      US$
      		 Thereafter
      US$
      		 Total
      US$
      		 FMV
      2003
      FYE
      		 
       
      		 (Amounts in thousands)

      		 
      Forward Exchange Contracts                 
      Contract Amount 16,750 3,550 — — — — 20,300 (961)
      Cross Currency Swap Contracts                 
      Contract Amount — 3,000 1,311 22,679 443 — 27,432 (3,978)
      33

      Item 8. CONSOLIDATED FINANCIAL STATEMENTS

                   Consolidated Financial Statements and Financial Statement Schedule
      INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

      		Page
                                                                                                 -----


      FINANCIAL STATEMENTS

      Independent Auditors' Report                                                                       27


      35
      Consolidated Balance Sheets                                                                        28
36
      Consolidated Statements of Income                                                                  29
37
      Consolidated Statements of Stockholders' Equity                                                    30
38
      Consolidated Statements of Cash Flows                                                              31
39
      Notes to Consolidated Financial Statements                                                         32
40

      FINANCIAL STATEMENT SCHEDULE

      Schedule II—Valuation and Qualifying Accounts

      58
      



                                       26






                          INDEPENDENT AUDITORS' REPORT


      34

      Independent Auditors' Report
      The Board of Directors and Stockholders
      Electronics Boutique Holdings Corp.:
              We have audited the accompanying consolidated balance sheets of Electronics Boutique Holdings Corp. and subsidiaries as of January 30, 1999February 1, 2003 and January 29,
2000,February 2, 2002, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended January 29,
2000. TheFebruary 1, 2003. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
              We conducted our audits in accordance with auditing standards generally accepted auditing
standards.in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
              In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Electronics Boutique Holdings Corp. and subsidiaries as of January 30, 1999February 1, 2003 and January 29, 2000February 2, 2002 and the results of their operations and their cash flows for each of the years in the three-year period ended January 29, 2000,February 1, 2003, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.
              As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting principles.

/s/for goodwill and intangible assets in the year ended February 1, 2003. As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for consideration received from a vendor in the year ended February 1, 2003.

      /s/ KPMG LLP

      Philadelphia, PA
March 8, 2000



                                       27
Pennsylvania
      April 17, 2003


      ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES

      CONSOLIDATED BALANCE SHEETS
      

                                                                              JANUARY 30,        JANUARY 29,
Assets                                                                           1999                2000
                                                                           ------------------  -----------------

Current assets:

     Cash and cash equivalents                                            $       42,006,179 $       88,356,091
     Accounts receivable:
        Trade and vendors                                                          4,010,293          9,187,991
        Other                                                                      1,516,085          2,630,622
     Due from affiliates                                                             984,096                  -
     Merchandise inventories                                                      65,433,008         90,550,508
     Deferred tax asset (note 12)                                                  2,694,000          3,691,000
     Prepaid expenses                                                                969,949          4,524,233
                                                                           ------------------  -----------------
Total current assets                                                             117,613,610        198,940,445
                                                                           ------------------  -----------------

Property and equipment:

     Building & Leasehold improvements                                            46,933,403         59,816,209
     Fixtures and equipment                                                       32,362,909         45,391,518
     Land                                                                                  -            908,000
     Construction in progress                                                      1,087,964          2,446,460
                                                                           ------------------  -----------------
                                                                                  80,384,276        108,562,187

     Less accumulated depreciation and amortization                               37,349,298         45,566,262
                                                                           ------------------  -----------------
Net property and equipment                                                        43,034,978         62,995,925

Goodwill and other intangible assets, net of accumulated amortization
     of $482,961 and $877,968 as of January 30, 1999 and January 29, 2000          1,898,395          1,503,387
Deferred tax asset (note 12)                                                       6,319,000          8,505,732
Other assets                                                                       3,181,566          3,567,388
                                                                           ------------------  -----------------
Total assets (note 4)                                                     $      172,047,549 $      275,512,877
                                                                           ==================  =================

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

     Revolving credit facility (note 4 )                                  $                - $                -
     Current portion of long-term debt (note 4 )                                      99,996              8,353
     Accounts payable                                                             90,835,578        122,822,260
     Accrued expenses (note 3 )                                                   19,625,068         23,437,268
     Income taxes payable                                                         10,144,023         10,105,424
                                                                           ------------------  -----------------
Total current liabilities                                                        120,704,665        156,373,305
                                                                           ------------------  -----------------

Long-term liabilities:

     Notes payable (note 4 )                                                           8,353                  -
     Deferred rent                                                                 2,492,140          2,653,103
                                                                           ------------------  -----------------
Total liabilities                                                                123,205,158        159,026,408
                                                                           ------------------  -----------------

Commitments (note 2 )

Stockholders' equity (notes 9 and 11)

     Preferred stock - authorized 25,000,000 shares; $.01 par value;
         no shares issued and outstanding at January 30, 1999 and
         January 29, 2000                                                                  -                  -
     Common stock - authorized 100,000,000 shares; $.01 par value;
        20,169,200 and 22,221,114 shares issued and outstanding
        at January 30, 1999 and January 29, 2000, respectively                       201,692            222,211
     Additional paid-in capital                                                   31,541,428         75,888,405
     Accumulated other comprehensive expense                                        (686,920)          (240,726)
     Retained earnings                                                            17,786,191         40,616,579
                                                                           ------------------  -----------------

Total stockholders' equity                                                        48,842,391        116,486,469
                                                                           ------------------  -----------------

Total liabilities and stockholders' equity                                $      172,047,549 $      275,512,877
                                                                           ==================  =================



      (Amounts in thousands, except per share amounts)
       
      		 February 2,
      2002
      		 February 1,
      2003
      		 
      Assets       

      Current assets:
       
       
       
       
       
       
       
       Cash and cash equivalents $126,523 $121,873 
       Accounts receivable:       
        Trade and vendors  11,475  14,298 
        Other  260  263 
       Merchandise inventories  149,792  226,866 
       Deferred tax asset  10,971  9,870 
       Prepaid expenses  7,426  9,310 
        
      		 
      		 
      Total current assets  306,447  382,480 
        
      		 
      		 

      Property and equipment:
       
       
       
       
       
       
       
       Building & leasehold improvements  85,029  97,107 
       Fixtures and equipment  76,247  93,399 
       Land  5,277  5,427 
       Construction in progress  1,176  1,968 
        
      		 
      		 
         167,729  197,901 
       Less accumulated depreciation and amortization  72,789  87,975 
        
      		 
      		 
      Net property and equipment  94,940  109,926 

      Goodwill and other intangible assets, net of accumulated amortization of $1,500 and $1,055
       
       
      8,742
       
       
      12,041
       
      Deferred tax asset  11,897  11,854 
      Other noncurrent assets  3,812  5,313 
        
      		 
      		 
      Total assets $425,838 $521,614 
        
      		 
      		 

      Liabilities and Stockholders' Equity
       
       
       
       
       
       
       

      Current liabilities:
       
       
       
       
       
       
       
       Current portion of long-term debt $325 $— 
       Accounts payable  136,375  176,146 
       Accrued expenses  34,326  43,242 
       Income taxes payable  13,975  18,595 
        
      		 
      		 
      Total current liabilities  185,001  237,983 
        
      		 
      		 

      Long-term liabilities:
       
       
       
       
       
       
       
       Notes payable  143  — 
       Deferred rent and other long-term liabilities  3,534  9,131 
        
      		 
      		 
      Total long-term liabilities  3,677  9,131 
        
      		 
      		 

      Total liabilities
       
       
      188,678
       
       
      247,114
       
        
      		 
      		 

      Stockholders' equity
       
       
       
       
       
       
       
       Preferred stock—authorized 25,000 shares; $.01 par value; no shares issued and outstanding at February 2, 2002 and February 1, 2003  —  — 
       Common stock—authorized 100,000 shares; $.01 par value; 25,783 and 25,882 shares issued and outstanding at February 2, 2002 and February 1, 2003, respectively  258  259 
       Additional paid-in capital  166,312  169,527 
       Accumulated other comprehensive loss  (2,610) (1,113)
       Retained earnings  73,200  105,827 
        
      		 
      		 

      Total stockholders' equity
       
       
      237,160
       
       
      274,500
       
        
      		 
      		 

      Total liabilities and stockholders' equity
       
      $
      425,838
       
      $
      521,614
       
        
      		 
      		 
      See accompanying notes to consolidated financial statements.

                                       28


      36

      ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES

      CONSOLIDATED STATEMENTS OF INCOME
      

                                                                                       YEARS ENDED
                                                                          --------------------------------------
                                                                          JANUARY 31,  JANUARY 30,   JANUARY 29,
                                                                             1998         1999          2000
                                                                          -----------  ------------  -----------




Net sales                                                              $ 449,179,603  $570,514,060 $723,800,624
Management fees                                                            4,791,553     3,404,862    4,872,822
                                                                          -----------  ------------  -----------
Total revenues                                                         $ 453,971,156  $573,918,922 $728,673,446
                                                                          -----------  ------------  -----------

Costs and expenses:

    Costs of merchandise sold, including freight                         338,497,642   431,743,771  546,451,099
    Selling, general and administrative (notes 5 and 6 )                  87,002,305    99,972,451  133,533,992
    Depreciation and amortization (notes 5 and 7 )                         7,996,506     9,774,388   12,277,797
                                                                          -----------  ------------  -----------

Operating income                                                          20,474,703    32,428,312   36,410,558
Equity in earnings (loss) of affiliate (note 5)                            2,902,780      (160,575)           -
Interest expense (income), net of interest income of
    $1,217,337, $829,631 and $1,590,270 in fiscal years 1998,
    1999 and 2000, respectively                                            1,380,046       289,188   (1,427,603)
Preacquisition loss of subsidiaries                                          913,028             -            -
                                                                          -----------  ------------  -----------

Income before income taxes                                                22,910,465    31,978,549   37,838,161
Income tax expense (note 12)                                                 846,280    11,693,270   15,007,773
                                                                          -----------  ------------  -----------

Net income                                                              $ 22,064,185  $ 20,285,279 $ 22,830,388
                                                                          ===========  ============  ===========

Net income per share - basic                                                                       $       1.11
                                                                                                     ===========

Weighted average shares outstanding - basic                                                          20,559,100
                                                                                                     ===========

Net income per share - diluted                                                                     $       1.10
                                                                                                     ===========

Weighted average shares outstanding - diluted                                                        20,762,249
                                                                                                     ===========

PRO FORMA DATA (UNAUDITED) (NOTE 8):

Income before income taxes                                              $ 22,910,465  $ 31,978,549
Pro forma income taxes                                                     9,415,631    11,866,084
                                                                          -----------  ------------

Pro forma net income                                                    $ 13,494,834  $ 20,112,465
                                                                          ===========  ============

Pro forma net income per share - basic                                  $       0.85  $       1.12
                                                                          ===========  ============

Pro forma weighted average shares outstanding - basic                     15,794,200    18,029,777
                                                                          ===========  ============

Pro forma net income per share - diluted                                $       0.85  $       1.11
                                                                          ===========  ============

Pro forma weighted average shares outstanding - diluted                   15,794,200    18,084,109
                                                                          ===========  ============



      (Amounts in thousands, except per share amounts)
       
      		 Years Ended
      		 
       
      		 February 3,
      2001
      		 February 2,
      2002
      		 February 1,
      2003
      		 
      Net sales $802,851 $1,059,338 $1,309,226 
      Management fees  4,425  5,889  7,553 
        
      		 
      		 
      		 
      Total revenues  807,276  1,065,227  1,316,779 
        
      		 
      		 
      		 

      Cost of goods sold
       
       
      626,939
       
       
      826,599
       
       
      971,204
       
        
      		 
      		 
      		 

      Gross profit
       
       
      180,337
       
       
      238,628
       
       
      345,575
       

      Costs and expenses:
       
       
       
       
       
       
       
       
       
       
       Selling, general and administrative expense  144,466  179,464  267,566 
       Restructuring and asset impairment charge (reversal)  —  12,638  (2,611)
       Depreciation and amortization  15,855  19,750  22,524 
        
      		 
      		 
      		 

      Operating income
       
       
      20,016
       
       
      26,776
       
       
      58,096
       
      Other income  1,550  —  — 
      Interest income, net  3,096  1,884  1,677 
        
      		 
      		 
      		 

      Income before income taxes and cumulative effect of change in accounting principle
       
       
      24,662
       
       
      28,660
       
       
      59,773
       
      Income tax expense  9,791  10,948  22,373 
        
      		 
      		 
      		 

      Income before cumulative effect of change in accounting principle
       
       
      14,871
       
       
      17,712
       
       
      37,400
       
        
      		 
      		 
      		 

      Cumulative effect of change in accounting principle, net of tax
       
       
      —
       
       
      —
       
       
      (4,773
      )
        
      		 
      		 
      		 

      Net income
       
      $
      14,871
       
      $
      17,712
       
      $
      32,627
       
        
      		 
      		 
      		 

      Income per share before cumulative effect of change in accounting principle:
       
       
       
       
       
       
       
       
       
       
      Basic $0.67 $0.74 $1.44 
        
      		 
      		 
      		 
      Diluted $0.66 $0.73 $1.42 
        
      		 
      		 
      		 

      Per share cumulative effect of change in accounting principle:
       
       
       
       
       
       
       
       
       
       
      Basic       $(0.18)
              
      		 
      Diluted       $(0.18)
              
      		 

      Net income per share:
       
       
       
       
       
       
       
       
       
       
      Basic $0.67 $0.74 $1.26 
        
      		 
      		 
      		 
      Diluted $0.66 $0.73 $1.24 
        
      		 
      		 
      		 

      Weighted average shares outstanding:
       
       
       
       
       
       
       
       
       
       
      Basic  22,254  23,868  25,833 
        
      		 
      		 
      		 
      Diluted  22,466  24,230  26,247 
        
      		 
      		 
      		 
      See accompanying notes to consolidated financial statements.

                                       29


      37

      ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY




      

                                                              CLASS A                 CLASS B
                                     PREFERRED STOCK        COMMON STOCK            COMMON STOCK               COMMON STOCK
                                     ---------------        ------------            ------------               ------------
                                     SHARES   AMOUNT     SHARES       AMOUNT     SHARES      AMOUNT       SHARES         AMOUNT
                                    ------- ----------  -----------  ----------  ----------- ---------  --------------  -----------

Balance, Feb. 1, 1997                    - $         -      1,900 $        190     21,000 $     2,100              - $          -

Capital contribution                     -           -          -            -          -           -              -            -
Comprehensive income:
  Net income                             -           -          -            -          -           -              -            -
  Foreign currency translation           -           -          -            -          -           -              -            -


Total comprehensive income




Distributions                            -           -          -            -          -           -              -            -
                                    -------  ---------------------  ----------------------  -------------------------  -----------
Balance, Jan. 31, 1998                   -           -      1,900          190     21,000       2,100              -            -

Effects of reorganization (note 1)       -           -     (1,900)        (190)   (21,000)     (2,100)    20,169,200      201,692
Comprehensive income:
  Net income                             -           -          -            -          -           -              -            -
  Foreign currency translation           -           -          -            -          -           -              -            -


Total comprehensive income




 Distributions                           -           -          -            -          -           -              -            -
                                    -------  ---------------------  ----------------------  -------------------------  -----------
Balance Jan. 30, 1999                    -           -          -            -          -           -     20,169,200      201,692
                                    =======  =====================  ======================  =========================  ===========

Comprehensive income:

  Net income                             -           -          -            -          -           -              -            -
  Foreign currency translation           -           -          -            -          -           -              -            -


Total comprehensive income




  Issuance of common stock               -           -          -            -          -           -      2,000,000       20,000
  Exercise of stock options              -           -          -            -          -           -         51,914          519
  Tax benefit from stock options
    exercised and other equity
    transactions                         -           -          -            -          -           -
                                    -------  ---------------------  ----------------------  -------------------------  -----------
Balance Jan. 29, 2000                    - $         -          - $          -          - $         -     22,221,114 $    222,211
                                    =======  =====================  ======================  =========================  ===========


      
                                                                           ACCUMULATED
                                     PARTNERS' CAPITAL    ADDITIONAL          OTHER                             TOTAL
                                      OF EB SERVICES       PAID-IN        COMPREHENSIVE        RETAINED     STOCKHOLDERS'

                                       COMPANY LLP         CAPITAL            INCOME           EARNINGS         EQUITY
                                     -----------------  ---------------  -----------------  --------------  ---------------

Balance, Feb. 1, 1997              $                  $      7,584,365 $                  $    12,770,179 $     20,356,834

Capital contribution                            1,000                -                  -               -            1,000
Comprehensive income:
  Net income                                        -                -                  -      22,064,185       22,064,185
  Foreign currency translation                      -                -         (1,023,493)              -       (1,023,493)
                                                                                                            ---------------
Total comprehensive income                                                                                      21,040,692
                                                                                                            ===============

Distributions                                       -                -                  -     (13,000,000)     (13,000,000)
                                     -----------------  ---------------  -----------------  --------------  ---------------
Balance, Jan. 31, 1998                          1,000        7,584,365         (1,023,493)     21,834,364       28,398,526

Effects of reorganization (note 1)             (1,000)      23,957,063                  -      (3,813,796)      20,341,669
Comprehensive income:
  Net income                                        -                -                  -      20,285,279       20,285,279
  Foreign currency translation                      -                -            336,573               -          336,573
                                                                                                            ---------------
Total comprehensive income                                                                                      20,621,852
                                                                                                            ===============

 Distributions                                      -                -                  -     (20,519,656)     (20,519,656)
                                     -----------------  ---------------  -----------------  --------------  ---------------

Balance Jan. 30, 1999                               -       31,541,428           (686,920)     17,786,191       48,842,391
                                     =================  ===============  =================  ==============  ===============

Comprehensive income:

  Net income                                        -                -                  -      22,830,388       22,830,388
  Foreign currency translation                      -                -            446,194               -          446,194
                                                                                                            ---------------
Total comprehensive income                                                                                      23,276,582
                                                                                                            ===============

  Issuance of common stock                          -       40,027,700                  -               -       40,047,700
  Exercise of stock options                         -          726,277                  -               -          726,796
  Tax benefit from stock options
    exercised and other equity
    transactions                                    -        3,593,000                  -               -        3,593,000
                                     -----------------  ---------------  -----------------  --------------  ---------------
Balance Jan. 29, 2000              $                - $     75,888,405 $         (240,726)$    40,616,579 $    116,486,469
                                     =================  ===============  =================  ==============  ===============


      






                                       30



              ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


      

                                                                                  YEARS ENDED
                                                                ------------------------------------------------
                                                                 JANUARY 31,      JANUARY 30,     JANUARY 29,
                                                                     1998             1999            2000
                                                                ---------------  --------------- ---------------

Cash flows from operating activities:
    Net income                                                $     22,064,185 $     20,285,279 $    22,830,388
    Adjustments to reconcile net income to cash provided by
       operating activities:

          Depreciation of property and equipment                     7,571,301        9,375,766      11,882,789
          Amortization of other assets                                 425,205          398,622         395,008
          Loss on disposal of property and equipment                   620,916          292,623         352,231
          Equity in loss of affiliates                              (2,902,780)         160,575               -
          Changes in assets and liabilities:
             Decrease (increase) in:

                Accounts receivable                                    385,737         (828,692)     (6,258,628)
                Due from affiliates                                 (2,142,774)       1,906,739         987,909
                Merchandise inventories                                 95,212      (12,309,661)    (24,526,184)
                Prepaid expenses                                       (27,311)       1,882,619      (3,532,696)
                Deferred taxes                                               -                -         413,008
                Other long-term assets                              (1,641,573)      (1,247,378)       (340,971)
             (Decrease) increase in:

                Accounts payable                                     8,348,016        4,993,290      33,463,199
                Accrued expenses                                     1,619,154        7,071,901       1,715,425
                Due to affiliate                                    (1,981,194)      (9,453,597)              -
                Income taxes payable                                   213,047        8,168,826         (49,424)
                Deferred rent                                         (368,059)          79,647         150,662
                                                                ---------------  --------------- ---------------
Net cash provided by operating activities                           32,279,082       30,776,559      37,482,716
                                                                ---------------  --------------- ---------------
Cash flows used in investing activities:

    Purchases of property and equipment                            (18,470,432)     (19,573,171)    (31,756,803)
    Proceeds from disposition of assets                                 12,455          132,592           5,323
    Net cash from businesses acquired                                2,922,411                -               -
    Purchase of investment securities in affiliate                  (2,215,933)               -               -
                                                                ---------------  --------------- ---------------
Net cash used in investing activities                              (17,751,499)     (19,440,579)    (31,751,480)
                                                                ---------------  --------------- ---------------
Cash flows from financing activities:

    Distributions                                                  (13,000,000)     (19,950,573)              -
    Proceeds from exercise of stock options                                  -                -         726,796
    Repayments of long-term debt                                   (24,514,276)     (12,896,594)        (99,996)
    Proceeds from issuance of common stock                                   -       54,962,500      40,047,700
    Capital contribution                                                 1,000                -               -
    Net cash retained by predecessors                                        -      (12,375,535)              -
                                                                ---------------  --------------- ---------------
Net cash provided by (used in) financing activities                (37,513,276)       9,739,798      40,674,500
                                                                ---------------  --------------- ---------------

Effects of exchange rates on cash                                   (1,102,543)         290,791         (55,824)

Net increase (decrease) in cash and cash equivalents               (24,088,236)      21,366,569      46,349,912
Cash and cash equivalents, beginning of period                      44,727,846       20,639,610      42,006,179
                                                                ---------------  --------------- ---------------
Cash and cash equivalents, end of period                      $     20,639,610 $     42,006,179 $    88,356,091
                                                                ===============  =============== ===============

Supplemental disclosures of cash flow information:
  Cash paid during the period for:
       Interest                                               $      2,714,593 $      1,207,210 $       187,223
       Income taxes                                                    672,842        2,853,773      13,577,519



      Consolidated Statements of Stockholders' Equity

      (Amounts in thousands)
       
      		 Preferred stock
      		 Common stock
      		  
      		 Accumulated
      other
      comprehensive
      income
      		  
      		  
      		 
       
      		 Additional
      paid-in
      capital
      		 Retained
      earnings
      		 Total
      stockholders'
      equity
      		 
       
      		 Shares
      		 Amount
      		 Shares
      		 Amount
      		 
      Balance Jan. 29, 2000 — $— 22,221 $222 $75,888 $(241)$40,617 $116,486 

      Comprehensive income:
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       Net income —  — —  —  —  —  14,871  14,871 
       Foreign currency translation —  — —  —  —  (1,311) —  (1,311)
                           
      		 
      Total comprehensive income                     13,560 
                           
      		 
       
      Issuance of common stock
       
      —
       
       
      —
       
      22
       
       
      —
       
       
      312
       
       
      —
       
       
      —
       
       
      312
       
       Exercise of stock options —  — 62  1  861  —  —  862 
        
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      Balance Feb. 3, 2001 —  — 22,305  223  77,061  (1,552) 55,488  131,220 
        
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 

      Comprehensive income:
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       Net income —  — —  —  —  —  17,712  17,712 
       Foreign currency translations —  — —  —  —  (1,417) —  (1,417)
       Hedging activities —  — —  —  —  359  —  359 
                           
      		 
      Total comprehensive income                     16,654 
                           
      		 
       
      Issuance of common stock
       
      —
       
       
      —
       
      2,519
       
       
      25
       
       
      68,586
       
       
      —
       
       
      —
       
       
      68,611
       
       Exercise of stock options —  — 959  10  13,926  —  —  13,936 
       Tax benefit from stock options exercised —  — —  —  6,739  —  —  6,739 
        
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      Balance Feb. 2, 2002 —  — 25,783  258  166,312  (2,610) 73,200  237,160 
        
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 

      Comprehensive income:
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       
       Net income —  — —  —  —  —  32,627  32,627 
       Foreign currency translations —  — —  —  —  6,574  —  6,574 
       Hedging activities —  — —  —  —  (5,077) —  (5,077)
                           
      		 
      Total comprehensive income                     34,124 
                           
      		 
       
      Issuance of common stock
       
      —
       
       
      —
       
      23
       
       
      —
       
       
      467
       
       
      —
       
       
      —
       
       
      467
       
       Exercise of stock options —  — 76  1  1,190  —  —  1,191 
       Tax benefit from stock options exercised —  — —  —  1,558  —  —  1,558 
        
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      Balance Feb. 1, 2003 — $— 25,882 $259 $169,527 $(1,113)$105,827 $274,500 
        
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      See accompanying notes to consolidated financial statements.



                                       31

      38

      ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES

      CONSOLIDATED STATEMENTS OF CASH FLOWS

      (Amounts in thousands)
       
      		 Years Ended
      		 
       
      		 February 3,
      2001
      		 February 2,
      2002
      		 February 1,
      2003
      		 
      Cash flows from operating activities:          
       Net income $14,871 $17,712 $32,627 
       Adjustments to reconcile net income to cash provided by operating activities:          
         Depreciation of property and equipment  15,491  19,493  22,209 
         Amortization of other assets  365  257  315 
         Loss on disposal of property and equipment  392  227  649 
         Deferred taxes  (994) (9,800) 1,284 
         Foreign currency transaction gain  —  —  (537)
         Changes in assets and liabilities:          
          Decrease (increase) in:          
           Accounts receivable  3,579  (3,617) (2,133)
           Merchandise inventories  (10,780) (47,009) (74,831)
           Prepaid expenses  (615) (2,261) (1,567)
           Other long-term assets  240  (660) (1,594)
          (Decrease) increase in:          
           Accounts payable  (19,535) 32,785  36,335 
           Accrued expenses  734  9,844  8,164 
           Income taxes payable  (3,471) 14,095  6,087 
           Deferred rent and other long-term liabilities  516  357  90 
        
      		 
      		 
      		 
      Net cash provided by operating activities  793  31,423  27,098 
        
      		 
      		 
      		 
      Cash flows used in investing activities:          
       Purchases of property and equipment  (44,817) (23,725) (35,762)
       Proceeds from disposition of assets  93  93  2,544 
       Net cash to acquire businesses  —  (9,223) (1,552)
        
      		 
      		 
      		 
      Net cash used in investing activities  (44,724) (32,855) (34,770)
        
      		 
      		 
      		 
      Cash flows from financing activities:          
       Proceeds from exercise of stock options  861  13,935  1,191 
       Repayments of long-term debt  (8) (24) (506)
       Proceeds from issuance of common stock  312  68,612  467 
        
      		 
      		 
      		 
      Net cash provided by financing activities  1,165  82,523  1,152 
        
      		 
      		 
      		 

      Effects of exchange rates on cash
       
       
      (479
      )
       
      321
       
       
      1,870
       

      Net increase (decrease) in cash and cash equivalents
       
       
      (43,245
      )
       
      81,412
       
       
      (4,650
      )
      Cash and cash equivalents, beginning of period  88,356  45,111  126,523 
        
      		 
      		 
      		 
      Cash and cash equivalents, end of period $45,111 $126,523  121,873 
        
      		 
      		 
      		 

      Supplemental disclosures of cash flow information:
       
       
       
       
       
       
       
       
       
       
       Cash paid during the period for:          
        Interest $5 $16 $31 
        Income taxes  13,824  8,221  13,469 
      See accompanying notes to consolidated financial statements.
      39

      ELECTRONICS BOUTIQUE HOLDINGS CORP.

      AND SUBSIDIARIES

      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
      (1)  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    FORMATION OF THE COMPANY

    Immediately prior to its initial public offering,
      Description of Business
              Electronics Boutique Holdings Corp. and(collectively with its subsidiaries, (collectively, the "Company") was formed and
acquired substantially all of the operating assets and liabilities of its
predecessors, The Electronics Boutique, Inc. and its subsidiaries and EB
Services Company LLP (collectively, "EB Group") for shares of the Company. This
acquisition has been treated as an acquisition between entities under common
control and, therefore, reflected at historical cost. The EB Group retained
certain assets including cash, accounts receivable, real estate, the cash
surrender value of certain split dollar life insurance policies and the
ownership of approximately 25% of Electronics Boutique Plc.

    DESCRIPTION OF BUSINESS

    The Company is among the world's largest specialty retailers of electronic
games.video game hardware and software, PC entertainment software and related accessories and products. The Company operates in only one business segment, as substantially all of its revenues, net income and assets are derived from itsthese primary products of
video games and personal computer entertainment software, supported by the sale
of video game hardware, PC productivity software and accessories.products.
              The Company had 737, 937 and its predecessors had 452, 528, and 6191,145 operating retail stores throughout the United States, Australia, Canada, Denmark, Germany, Italy, New Zealand, Norway, Puerto Rico, Canada, Australia and South Korea, and Sweden at January 31, 1998, January 30, 1999,February 3, 2001, February 2, 2002 and January 29, 2000.February 1, 2003, respectively. Total revenues from the U.S. and foreign operations were 91%86% and 9%14%, respectively in fiscal 19992001 and 88%fiscal 2002, and 12%81% and 19%, respectively in fiscal 2000.2003. Long-lived assets located in the United States and foreign countries were 89%79% and 11%21%, respectively in fiscal 19992002, and 74% and 26%, respectively in fiscal 2000.2003. The Company is subject to the risks inherent in conducting business across national boundaries. The Company also operates a mail order business and sells productits products via the World Wide Web.Internet. Approximately 36%32%, 31%,38% and 30%39% of fiscal 1998,2001, fiscal 1999,2002 and fiscal 20002003 sales, respectively, were generated from merchandise purchased from its three largest vendors. FISCAL YEAR-ENDThe Company is highly dependent on the introduction by its vendors of new and enhanced video game and PC hardware and software.
      Fiscal Year-End
              The fiscal year ends on the Saturday nearest January 31. Accordingly, the financial statements for the years ended January 31, 1998 (fiscal "1998"),
January 30, 1999 (fiscal "1999"February 2, 2002 ("fiscal 2002") and January 29, 2000 (fiscal "2000"February 1, 2003 ("fiscal 2003") each include 52 weeks of operations. PRINCIPLES OF CONSOLIDATION AND COMBINATIONFinancial statements for the year ended February 3, 2001 ("fiscal 2001") include 53 weeks of operations.
      Principles of Consolidation
              The consolidated financial statements include the financial position and results of operations of the Company sinceElectronics Boutique Holding Corp. and its initial public offering on July
28, 1998. Prior to that date, the consolidated financial statements include the
financial position and results of operations of the EB Group.subsidiaries. All significant intercompany transactions have been eliminated in consolidation. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included.

    REVENUE RECOGNITION
      Revenue Recognition
              Retail sales are recognized as revenue at the point of sale. Mail order and internetInternet sales are recognized as revenue upon shipment.delivery to and acceptance by the customer. Warranty revenue is amortized over the life of the warranty. Management fees are recognized in the period that related services are provided. Sales are recorded net of estimated allowanceamounts for sales returns and other allowances. CASH AND CASH EQUIVALENTSShipping and handling fee income from the mail order and Internet operations is recognized as net sales. The Company records shipping and handling costs in cost of goods sold. The Company engages in the sale and trading of pre-owned video game products. See Note 13 for additional information.
      Cost of Goods Sold
              Cost of goods sold includes the following: cost of merchandise purchased from its vendors, freight cost, purchase discounts, vendor advertising allowances in excess of incremental related advertising expenses, volume purchase rebates, and inventory shrinkage expense. The Company's gross margins
      40

      may not be comparable to those of other retailers or companies in general due to the items the Company includes in cost of goods sold.
      Selling, General and Administrative Expenses
              Selling, general and administrative costs include the following: retail store operating costs, distribution center operating costs, marketing and promotional expenses net of vendor reimbursements for these expenses, and corporate operating expenses.
      Vendor Programs
              The Company receives vendor allowances for certain events offered to its vendors. These events include items such as product catalog advertising, in-store display promotions, Internet advertising, co-op print advertising, product training and promotion at the Company's trade show and inclusion in its vendor-of-the-month program.
              Prior to fiscal 2003, all vendor advertising allowances were recognized as an offset to selling, general and administrative expenses. In fiscal 2003, the Company adopted the provision of Emerging Issues Task Force Issue 02-16, Accounting by a Customer (Including a Reseller) for Cash Consideration Received from a Vendor, effective retroactively as of the beginning of fiscal 2003. In accordance with the provisions of Issue 02-16, vendor advertising allowances which exceed specific, incremental and identifiable costs incurred in relation to the advertising and promotional events offered by the Company to its vendors are to be classified as a reduction in the purchase price of merchandise. See Note 2 for further discussion.
              The vendor allowances reflected in the financial statements were $45.8 million, $49.1 million and $54.1 million in fiscal 2001, fiscal 2002 and fiscal 2003, respectively. Advertising expenses, excluding the vendor allowances, were $10.1 million, $8.2 million and $11.3 million in fiscal 2001, fiscal 2002 and fiscal 2003, respectively.
      Cash and Cash Equivalents
              The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents for cash flow purposes.

    MERCHANDISE INVENTORIESequivalents.
      Merchandise Inventories
              Merchandise is valued at the lower of cost or market. Cost is determined principally by a weighted-average method.



                                       32



    PROPERTY AND EQUIPMENT
      Property and Equipment
              Property and equipment is recorded at cost and depreciated or amortized over the estimated useful life of the asset using the straight-line method. The estimated useful lives are as follows:
      Leasehold improvements...............        improvementsLesser of 10 years or the lease term
      Furniture and Fixtures...............        Fixtures5 years
      Computer equipment...................        equipment3 years
Building.............................        
      Buildings30 years
      

    Included in selling, general and administrative costs for fiscal years 1998,
1999 and 2000, are losses of $556,000, $293,000 and $352,000, respectively,
primarily related to the write-off of the net book value of property and
equipment associated with the closing of nine stores in 1998, ten stores in
fiscal 1999, eight stores in fiscal 2000 and the remodeling of several stores
each year.

     DEFERRED REVENUE
      41
              The Company defers revenue relatedcapitalizes significant costs to the saleacquire management information systems software and significant costs of frequent buyer cards which
entitle the cardholdersystem improvements. Computer software costs are amortized over estimated useful lives of three to receive discounts on purchases for one year from the
date of purchase.five years.
      Deferred Revenue is recognized over the one year period the card is
valid based on expected usage. The frequent buyer program was discontinued in
fiscal 2000. There was no deferred revenue at January 29, 2000.
              Amounts received under the Company's pre-sell program are recorded as a liability. Revenue is recognized when the customer receives the related product. Certain affinity programs include promotional gifts to customers that are supplied by vendors at no cost to the Company.

    GOODWILL AND OTHER INTANGIBLES

 
      Goodwill is beingand Other Intangibles
              In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets". Statement No. 141 requires that intangible assets acquired in a purchase method business combination must meet certain criteria to be recognized and reported apart from goodwill and should be used for all business combinations initiated after June 30, 2001. Statement No. 142 states that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. The adoption of Statement No. 141 by the Company in fiscal 2002 did not have a material impact on a straight-line basis over periods of up to ten
years. Goodwill is evaluated continually to determine whether later events or
circumstances warrant revised estimates of useful lives. The Company assesses
the recoverability of other intangiblesits financial statements. See Note 15, "Goodwill and Other Intangibles", for disclosures required by determining whether the remaining
balance can be recovered through projected undiscounted cash flows.

    OTHER ASSETSStatement No. 142.
      Other Assets
              Other assets consist principally of life insurance programs for certain key executives and security deposits.

     COMPUTER SOFTWARE COSTS
      Guarantees
              As of January 1, 2003, the Company has adopted FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others." This Interpretation requires certain disclosures be made by a guarantor in its interim and annual financial statements and requires that liabilities for guarantees entered into on or after January 1, 2003, be recorded at fair value. The Company capitalizes significantremains contingently liable for the 22 BC Sports Collectibles store leases assigned to Sports Collectibles Acquisition Corporation ("SCAC") which are discussed further in Note 6. Mr. Kim has entered into an indemnification agreement with the Company with respect to these leases. If SCAC were to default on these lease obligations, the Company would be liable to the landlords for up to $13 million in minimum rent and landlord charges. Due to Mr. Kim's agreement to indemnify the Company for any costs arising from the BC Sports Collectibles leases, no accrual was recorded for this potential liability. The purchase agreement provides SCAC the right, exercisable at any time after the second anniversary of the closing date, to acquire management information
systems software and significantassign back to the Company two of the store leases. The Company has an accrual of $204,000 for the estimated lease termination costs of system improvements. Computer software
costs are amortized over estimated useful lives of threerelated to five years.

    LEASING EXPENSESthis option. See Note 6, "Related Party Transactions," for more details on the BC Sports Collectibles sale.
      42

      Leasing Expenses
              The Company recognizes lease expense on a straight-line basis over the term of the lease when lease agreements provide for increasing fixed rentals. The difference between lease expense recognized and actual payments made is included in deferred rent and prepaid expenses on the balance sheet.

    PREOPENING COSTS AND ADVERTISING EXPENSE
      Preopening Costs and Advertising Expense
              Preopening and start-up costs for new stores are charged to operations as
incurred.the store in the first month of operations. Costs of advertising and sales promotion programs are charged to operations, offset by direct vendor reimbursements, as incurred.

     VENDOR PROGRAMS

    The Company receives manufacturer reimbursements for certain training,
promotional and marketing activities that offset the expenses of these
activities. The expenses and reimbursements are reflected in selling, general
and administrative expenses, as incurred or received.



                                       33



     FOREIGN CURRENCY
      Foreign Currency
              The accounts of the foreign subsidiaries are translated in accordance with Statement of Financial Accounting Standard No. 52, Foreign"Foreign Currency Translation,Translation", which requires that assets and liabilities of international operations be translated using the exchange rate in effect at the balance sheet date. The results of the operations are translated using an average exchange rate for the year. The effects of the rate fluctuations in translating assets and liabilities of international operations into U.S. dollars are accumulated and reflected as a
foreign currency translation adjustmentaccumulated other comprehensive income in the statements of stockholders' equity. Transaction gains and losses are included in net income.

    The Company currently does not hedge currency exchange rate risk
              In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and does
not currently believeHedging Activities" as amended by Statement 137 and Statement 138. This statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that currency exchange rate fluctuations have a material
adverse effect on its resultsan entity recognize all derivatives as either assets or liabilities in the statement of operationsfinancial position and financial condition.

    COMPREHENSIVE INCOME

    Effective February 1, 1998,measures those instruments at fair value. As required under Statement 137, the Company adopted Statement 133 as amended in fiscal year 2002. The cumulative effect of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This statement
requires thatthe adoption of this standard on February 4, 2001 did not materially impact the Company's results of operations, financial condition or long-term liquidity.
              Market risks relating to the Company's foreign operations result primarily from changes in foreign exchange rates. The Company routinely enters into forward and cross-currency swap exchange contracts in the regular course of business to manage its exposure against foreign currency fluctuations on intercompany loans, investments in subsidiaries, and accounts payable. These contracts vary in length of duration. On February 1, 2003, the Company had a total of seven forward contracts and 27 cross-currency swap contracts. The forward contracts had a notional amount of $20.3 million and the cross-currency swap contracts had a notional amount of $27.4 million. The total fair market value of all items recognized under accounting standardscontracts at February 1, 2003 was a deficit of approximately $4.9 million, which is recorded within other long-term liabilities on the consolidated balance sheet. On February 2, 2002, the Company had a total of seven forward contracts and seven cross-currency swap contracts. The forward contracts had a notional amount of $17.3 million and the cross-currency swap contracts had a notional amount of $10.8 million. The total fair market value of all contracts at February 2, 2002 was a gain of approximately $300,000. These contracts were purchased as componentsfair value hedges of comprehensive income be reportedintercompany loans and investments in subsidiaries, and cash flow hedges of trade payables. The Company recorded an annual financial statement that is
displayed withimmaterial net loss related to hedge ineffectiveness in fiscal 2002 and fiscal 2003. Changes in the fair value of derivatives are recorded in the same prominenceincome statement or balance sheet line as other financial statements. The Company
has included the required informationchange in value of the Statement of Stockholders' Equity.
Accumulated Other Comprehensive underlying hedged item. Four contracts for $16.8 million expire during fiscal year 2004 and the remaining contracts for $31.0 million expire in future years.
      43

      Income includes foreign currency translation
adjustments.

     INCOME TAXESTaxes
              The Company is subject to federal and state income taxes as a C corporation
whereas the EB Group had been treated as an S corporation and a partnership for
federal and certain state income tax purposes resulting in taxable income being
passed through to the shareholders and partners. For purposes of comparison, a
pro forma tax charge has been reflected on the statements of income for fiscal
1998 and 1999 to show the results of operations as if the EB Group had been
subject to taxes as a C corporation.Corporation. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

    NET INCOME PER SHARE
      Net Income Per Share
              Basic income per share is calculated by dividing net income by the weighted average number of shares of the Company's Common Stock outstanding during the period. Diluted income per share is calculated by adjusting the weighted average common shares outstanding for the dilutive effect of common stock equivalents related to stock options.

    USE OF ESTIMATES
              The following is a reconciliation of the basic weighted average number of shares outstanding to the diluted weighted average number of shares outstanding (amounts in thousands):
       
      		 Fiscal 2001
      		 Fiscal 2002
      		 Fiscal 2003
      Weighted average shares outstanding—basic 22,254 23,868 25,833
      Dilutive effect of stock options 212 362 414
        
      		 
      		 
      Weighted average shares outstanding—diluted 22,466 24,230 26,247
        
      		 
      		 
      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 amount of assets and liabilities and 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. Actual results could differ from those estimates.

    FAIR VALUE OF FINANCIAL INSTRUMENTS
      Fair Value of Financial Instruments
              The Company's financial instruments are accounts receivable, accounts payable, long-term debt,life insurance policies, and certain long-term investments.foreign exchange contracts. The carrying value of accounts receivable and accounts payable approximates fair value due to the short maturity of these instruments. The carrying value of life insurance policies included in other assets approximates fair value based on estimates received from insurance companies. 34
The fair value of the foreign exchange contracts is included in the foreign currency note section above.
      Stock-based Employee Compensation
              Effective February 1, 2003, the Company adopted Statement No. 148, "Accounting for Stock-based Compensation—Transition and Disclosures," which requires certain disclosures. The Company accounts for its employee stock options and the purchase plans under the intrinsic value recognition and
      44

      measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. The following table illustrates the effect on net income if the Company had applied the fair value recognition provisions of Statement No. 123, "Accounting for Stock-based Compensation," to stock-based employee compensation. See Note 9, "Equity Plans," for more details on the Company's stock option and purchase plans.
       
      		 Fiscal 2001
      		 Fiscal 2002
      		 Fiscal 2003(1)
      		 
       
      		 (Amounts in thousands, except per share amounts)

      		 
      Net income, as reported $14,871 $17,712 $32,627 
      Less: total stock based employee compensation  (2,771) (3,368) (4,796)
        
      		 
      		 
      		 
      Pro forma net income $12,100 $14,344 $27,831 
        
      		 
      		 
      		 
      Earnings per share:          
       Basic—as reported $0.67 $0.74 $1.26 
        
      		 
      		 
      		 
       Diluted—as reported $0.66 $0.73 $1.24 
        
      		 
      		 
      		 
       Basic—pro forma $0.54 $0.60 $1.08 
        
      		 
      		 
      		 
       Diluted—pro forma $0.54 $0.59 $1.06 
        
      		 
      		 
      		 
      (1)
      Fiscal 2003 net income included the cumulative effect of the change in accounting principle of $4.8 million, net of income tax, or $0.18 per share, related to vendor advertising allowance. See Note 2, "Change in Accounting Principle," for further disclosures of the change.
      Other New Accounting Pronouncements Adopted
              In October 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement provides guidance for the impairment or disposal of long-lived assets. The Company adopted this statement effective for the fiscal year ended February 1, 2003.
              In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements No. 4, 44 and 64, and amendment of FASB Statement No. 13." The Company adopted this statement effective for the fiscal year ended February 1, 2003.
              In July 2002, the FASB issued Statement No. 146, "Accounting for Restructuring Costs." This statement will impact the reporting of expense related to restructurings initiated after 2002. This statement is effective for activities initiated after December 31, 2002.
              The adoption of these pronouncements had no impact on the fiscal 2003 financial statements.
      (2)  CHANGE IN ACCOUNTING PRINCIPLE
              In November 2002, the EITF reached consensus on Issue 02-16, Accounting by a Customer (Including a Reseller) for Cash Consideration Received from a Vendor. Issue 02-16 addresses the accounting for cash consideration received from a vendor by a reseller for various vendor funded allowances, including cooperative advertising support. Issue 02-16 is effective for new arrangements or modifications to existing arrangements entered into after December 31, 2002, although early adoption is permitted. The Company elected to adopt early, effective February 3, 2002, the provisions of Issue 02-16 in the preparation of this Annual Report on Form 10-K. Accordingly, in fiscal 2003, the
      45

      Company recorded a cumulative effect of accounting change of $7.6 million, $4.8 million net of income tax, for the impact of this adoption on prior fiscal years. As of February 1, 2003, $10.0 million of the Company's vendor advertising allowances has been recorded as a reduction of inventory and will be recognized in cost of sales as inventory is sold. This adoption has also resulted in the reclassification of $45.3 million of vendor advertising reimbursements earned in fiscal 2003 from selling, general, and administrative expense. The fiscal 2003 impact on income before cumulative effect of change in accounting principle was a charge of $1.5 million, or $0.06 per diluted share.
              In accordance with the provisions of Issue 02-16, vendor advertising allowances which exceed specific, incremental and identifiable costs incurred in relation to the advertising and promotional events the Company conducts for its vendors are to be classified as a reduction in the purchase price of merchandise and recognized in income as the merchandise is sold. The amount of vendor allowances to be recorded as a reduction of inventory was determined by calculating the ratio of vendor allowances in excess of specific, incremental and identifiable advertising and promotional costs to merchandise purchases. The Company then applied this ratio to the value of inventory in determining the amount of the vendor reimbursements to be recorded as a reduction to inventory reflected on the balance sheet. This methodology resulted in a $7.6 million reduction in inventory as of February 3, 2002, the date of adoption of Issue 02-16. The $7.6 million, $4.8 million net of tax, is recorded as a cumulative effect of accounting change in fiscal year 2003. As of February 1, 2003, the methodology resulted in $10.0 million recorded as a reduction of inventory.
      46

              The following table reflects the vendor allowances received and how they were classified in the financial statements (actual and pro forma for the change in accounting) for fiscal 2001, fiscal 2002 and fiscal 2003:
       
      		 Fiscal 2001
      		 Fiscal 2002
      		 Fiscal 2003
      		 
       
      		 (Amounts in thousands)

      		 
      Actual          
      Total vendor allowances $45,830 $49,102 $54,116 

      Gross profit
       
      $
      180,337
       
      $
      238,628
       
      $
      345,575
       
      Percent to total revenues  22.3% 22.4% 26.2%

      Amount classified as a reduction in cost of goods sold
       
       
      —
       
       
      —
       
      $
      42,925
       
      Percent to total revenues  —  —  3.3%

      Amount classified as a reduction in selling, general & administrative expense
       
      $
      45,830
       
      $
      49,102
       
      $
      8,829
       
      Percent to total revenues  5.7% 4.6% 0.7%

      Amount classified as a reduction of merchandise inventory
       
       
       
       
       
       
       
      $
      9,989
       

      Pro forma
       
       
       
       
       
       
       
       
       
       
      Gross profit $218,544 $280,722    
      Percent to total revenues  27.1% 26.4%   

      Amount classified as a reduction in cost of goods sold
       
      $
      38,207
       
      $
      42,094
       
       
       
       
      Percent to total revenues  4.7% 3.9%   

      Amount classified as a reduction in selling, general & administrative expense
       
      $
      6,729
       
      $
      6,192
       
       
       
       
      Percent to total revenues  0.8% 0.6%   

      Amount classified as a reduction of merchandise inventory
       
      $
      6,812
       
      $
      7,628
       
       
       
       
              Prior to adoption of Issue 02-16, all vendor advertising allowances were recognized as an offset to selling, general and administrative expenses. These allowances exceeded the specific, incremental costs of the advertising and promotional events conducted by the Company. The portion of the allowances in excess of the specific, incremental costs was recorded as an offset to other operating expenses within selling, general and administrative expenses. These other operating expenses, which were incurred to support advertising and promotional expenses, included such items as: marketing and merchandise department expenses to develop, promote and manage the events; direct store and store supervisory payroll expenses to implement, manage and monitor the events; distribution expenses associated with receiving and shipping of materials necessary for the events; and corporate expenses related to the design, production and maintenance of Internet advertising events.
      47

              The following pro forma financial information for fiscal 2001 and fiscal 2002 reflects the impact of Issue 02-16 as if it had been adopted prior to fiscal 2001:
      Consolidated Statements of Income
      (Amounts in thousands, except per share amounts)
       
      		 As reported
      Fiscal
      2001
      		 Pro Forma
      Fiscal
      2001
      		 As reported
      Fiscal
      2002
      		 Pro Forma
      Fiscal
      2002
      Net sales $802,851 $802,851 $1,059,338 $1,059,338
      Management fees  4,425  4,425  5,889  5,889
        
      		 
      		 
      		 
      Total revenues  807,276  807,276  1,065,227  1,065,227

      Cost of goods sold
       
       
      626,939
       
       
      588,732
       
       
      826,599
       
       
      784,505
        
      		 
      		 
      		 
      Gross profit  180,337  218,544  238,628  280,722

      Costs and expenses:
       
       
       
       
       
       
       
       
       
       
       
       
      Selling, general and administrative  144,466  183,567  179,464  222,374
      Restructuring charge  —  —  12,638  12,638
      Depreciation and amortization  15,855  15,855  19,750  19,750
        
      		 
      		 
      		 
      Operating income  20,016  19,122  26,776  25,960
      Other income  1,550  1,550  —  —
      Interest income, net  3,096  3,096  1,884  1,884
        
      		 
      		 
      		 
      Income before income taxes  24,662  23,768  28,660  27,844
      Income tax expense  9,791  9,436  10,948  10,636
        
      		 
      		 
      		 
      Net income $14,871 $14,332 $17,712 $17,208
        
      		 
      		 
      		 
      Earnings per share:            
      Basic $0.67 $0.64 $0.74 $0.72
        
      		 
      		 
      		 
      Diluted $0.66 $0.64 $0.73 $0.71
        
      		 
      		 
      		 
      Weighted average shares outstanding:            
      Basic  22,254  22,254  23,868  23,868
        
      		 
      		 
      		 
      Diluted  22,466  22,466  24,230  24,230
        
      		 
      		 
      		 
      Selected Balance Sheet information:            
      Merchandise inventories  100,185  93,373  149,792  142,164
      Stockholders' equity  131,220  127,112  237,160  232,387
      48
      (3)  COMMITMENTS

     LEASE COMMITMENTS
      Lease Commitments
              At January 29, 2000,February 1, 2003, the future annual minimum lease payments under operating leases for the following five fiscal years and thereafter were as follows:


      

                                                   Retail
                                                    Store           Distribution          Total lease
                                                  Locations          facilities           Commitments
                                                --------------      --------------      ----------------

Fiscal 2001...........................       $    28,627,942     $       774,068     $      29,402,010
Fiscal 2002...........................            27,005,713             471,322            27,477,035
Fiscal 2003...........................            25,204,457             416,001            25,620,457
Fiscal 2004...........................            22,548,106             373,025            22,921,131
Fiscal 2005...........................            20,049,074             112,882            20,161,956
Thereafter............................            57,102,095                   -            57,102,095
                                                --------------      --------------      ----------------
                                             $   180,537,387     $     2,147,297     $     182,684,684
                                                ==============      ==============      ================

      follows (amounts in thousands):
       
      		 Retail
      Store
      Locations
      		 Distribution
      Facilities
      		 Total Lease
      Commitments
      Fiscal 2004 $53,302 $1,552 $54,854
      Fiscal 2005  52,024  1,279  53,303
      Fiscal 2006  49,335  595  49,930
      Fiscal 2007  46,385  181  46,566
      Fiscal 2008  40,739  126  40,865
      Thereafter  77,408  463  77,871
        
      		 
      		 
        $319,193 $4,196 $323,389
        
      		 
      		 
              The total future minimum lease payments include lease commitments for new retail locations not in operation at January 29, 2000,February 1, 2003, and exclude contingent rentals based upon sales volume and owner expense reimbursements. The terms of the operating leases for the retail locations provide that, in addition to the minimum lease payments, the Company is required to pay additional rent to the extent retail sales, as defined, exceed amounts set forth in the lease agreements and to reimburse the landlord for the Company's proportionate share of the landlord's costs and expenses incurred in the maintenance and operation of the shopping mall. Contingent rentals were approximately $8,132,000,
$10,695,000$10.0 million, $12.5 million and $12,605,000$12.2 million in fiscal 1998,2001, fiscal 1999,2002 and fiscal 2000,2003, respectively. Rent expense, including contingent rental amounts, was approximately $35,138,000, $43,008,000$58.5 million, $72.8 million and $53,178,000$85.1 million in fiscal 1998,2001, fiscal 19992002 and fiscal 2000,2003, respectively.
              Certain of the Company's lease agreements provide for varying lease payments over the life of the leases. For financial statement purposes, rental expense is recognized on a straight-line basis over the original term of the agreements. Actual lease payments are greaterless than (less than) the rental expense reflected in the statements of operations by approximately $368,000, ($84,000)$508,000, $462,000 and ($161,000)$592,000 for fiscal 1998,2001, fiscal 19992002 and fiscal 2000,2003, respectively.

(3)
      (4)  ACCRUED EXPENSES
              Accrued expenses consist of the following:


      

                                                                    January 30,           January 29,
                                                                        1999                  2000
                                                                  -----------------     -----------------


Employee compensation and related taxes                        $         5,801,742   $         7,439,552
Gift certificates, customer deposits and deferred revenue                4,758,197             5,596,779
Accrued rent                                                             4,152,666             4,970,409
Other accrued liabilities                                                4,912,463             5,430,528
                                                                  -----------------     -----------------
Total                                                          $        19,625,068   $        23,437,268
                                                                  =================     =================

      



                                       35



(4)following (amounts on thousands):
       
      		 February 2,
      2002
      		 February 1,
      2003
      Employee compensation and related taxes $9,947 $12,474
      Gift certificates and customer deposits  6,011  11,282
      Deferred revenue  6,145  6,961
      Accrued rent  4,038  2,060
      Other taxes  3,430  4,592
      Other accrued liabilities  4,755  5,873
        
      		 
      Total $34,326 $43,242
        
      		 
      49
      (5)  DEBT
              The Company had available a revolving credit facility allowing for maximum borrowings of $50,000,000$50.0 million at January 30, 1999February 2, 2002 and January 29, 2000.February 1, 2003. The facility is subject to an immaterial annual commitment fee. The revolving credit facility expires and is repayablewas renewed for a one-year term expiring on March 16, 2001.2004. Interest accrues on borrowings at a per annum rate equal to either LIBOR plus 250 basis points or the bank's base rate of interest, at the Company's option. The revolving credit agreement contains restrictive covenants regarding transactions with affiliates, the payment of dividends, and other financial and non-financial matters and is secured by certain assets, including accounts receivable, inventory, fixtures and equipment. If the Kim family does not own, indirectly through EB Nevada, at least 25% of the Company's outstanding capital stock, the Company may be declared in default under the credit facility. There was no outstanding balance at January
30, 1999February 2, 2002 and January 29, 2000February 1, 2003 on this facility.

    Long-term debt
              Letters of credit outstanding with various financial institutions were $1.8 million and $694,000 at January 30, 1999February 2, 2002 and January 29, 2000 is summarized as
follows:


      

                                                                            January 30,       January 29,
                                                                               1999              2000
                                                                           --------------    --------------


Promissory note, maturing on February 1, 2000 with interest and
principal payable monthly at 6.00% as of January 30, 1999 and            $       108,349   $         8,353
January 29, 2000
Less current installments............................................             99,996             8,353
                                                                        -----------------  ----------------


                                                                         $         8,353   $             -
                                                                         ===============   ================

      


(5)February 1, 2003, respectively.
              The Company had a line of credit and various bank notes with a total outstanding balance at February 2, 2002 of $468,000. These facilities were paid in full during fiscal 2003.
      (6)  RELATED PARTY TRANSACTIONS

    TRANSACTIONS WITH AFFILIATES

    Insurance and other expenses have been paid to an affiliated company through
intercompany billings. The amount of these expenses was approximately $431,000,
$41,000 and $0 for fiscal 1998, fiscal 1999 and fiscal 2000, respectively, and
is included in selling, general and administrative expenses.
      Transactions with Affiliates
              In fiscal 1996, the EB, Group acquired 25 percent of the outstanding shares
of Electronics Boutique Plc (formerly Rhino Group Plc). The EB Group accounted
for the investment in Electronics Boutique Plc under the equity method, which
requires the EB Group to recognize goodwill and 25% of the results of operations
of Electronics Boutique Plc from the date of acquisition in fiscal 1996. The
goodwill has been amortized over the expected period of benefit of 10 years. The
$3,200,000 of goodwill from this transaction resulted in amortization expense of
$321,000 in fiscal 1998 and $161,000 in fiscal 1999. The carrying value of the
investment exceeded the EB Group's 25 percent share of the underlying net assets
of Electronics Boutique Plc by the amount of the goodwill. The investment in
Electronics Boutique Plc was retained by a predecessor company prior to
completion of the initial public offering by the Company, in July, 1998.

    In fiscal 1996, the EB Group entered into a services agreement with Electronics Boutique PlcGame Group to provide consulting, management, training, and advertising assistance which expires on January 31, 2006. The agreement was assigned to EB Services. The agreement prohibits the Company.Company from competing in the United Kingdom during the term of the agreement, and for one year after its termination. The agreement provides for a fee to be paid to the EB GroupServices based on a formula of 1% of Game Group's adjusted sales and if budgeted profits are exceeded for the year, a bonus equal to 25% of such excess. For fiscal 1998, a
bonus was earned in the amount of $2,206,000. The management fee receivable at January 30, 1999February 2, 2002 was $879,000 and was included in due from affiliates$573,000 and at January 29, 2000February 1, 2003 was $1,301,000 and was$605,000; both were included in accounts receivable - receivable—trade and vendors. Included in managementManagement fees received from Game Group for fiscal 1998,2001, fiscal 19992002 and fiscal 20002003 was $1,953,000, $2,529,000$4.4 million, $6.0 million and $3,850,000,$7.4 million, respectively. Additionally, the agreement provides that the CompanyEB Services is to be reimbursed by Electronics Boutique
PlcGame Group for all reasonable travel and subsistence expenses incurred by employees of
the Company during their performance of the agreement. AmountsAt February 2, 2002 and February 1, 2003, there were no outstanding for
these expenses at January 30, 1999 were $105,000 and were included inbalances due from affiliates and at January 29, 2000 were $198,000 and were included in accounts
receivable - trade and vendors.



                                       36



Equity in earnings (loss) of affiliates includes $2,902,780 for fiscal 1998 and
($160,575) for fiscal 1999 for Electronics Boutique, Plc.

    The Company leases its headquarters and its primary distribution center,
which are located in a single 140,000 square foot building on several acres in
West Chester, Pennsylvania, from a majority shareholder. The lease has a two
year term expiring on May 30, 2000 and includes an option to purchase the
property for $6.7 million.

(6) CONSULTING AGREEMENT

    In July 1993, the EB Group entered into a consulting agreement with a
business that owns and operates retail stores. The Company provides consulting,
management, administrative, marketing, and advertising assistance to this retail
business. The Company received $633,000, $476,000 and $226,000 during fiscal
1998, fiscal 1999 and fiscal 2000, respectively, as reimbursement for
incremental costs incurred based on a formula as defined. Amounts owed toGame Group.
              On November 2, 2002, the Company sold its BC Sports Collectibles business to SCAC for these items$2.2 million in cash and trade credit at January 30, 1999 and January 29,
2000 arethe assumption of lease related liabilities in excess of $13 million. The purchaser, SCAC, is owned by the family of James Kim, the Company's Chairman. The transaction included in accounts receivable. Reimbursements offset selling, general
and administrative expenses. Based on certain performance criteria as defined,
the Company can also earn a performance fee. No performance fee was earned for
fiscal 1998, $648,000 was earned for fiscal 1999 ($248,000sale of which was recorded
in fiscal 2000) and $543,000 was earned for fiscal 2000.

(7) ACQUISITIONS

    EB CANADA

    In September 1993, the EB Group advanced funds to obtain a 50% interest in a
Canadian corporation ("EB Canada") formed for the purpose of selling computer,
video games and hand-held entertainment hardware, software, and related
peripherals and accessories in shopping malls throughout Canada. The EB Group
purchased the remaining 50% of EB Canada in October 1997 for $727,000 and now
owns 100% of EB Canada. The fair value ofall assets acquired totaled $3,879,000,
while liabilities assumed totaled $4,332,000 resulting in goodwill of
$1,180,000, which is being amortized over the expected period of benefit of ten
years. The EB Group consolidated the results of operations of EB Canada since
the beginning of fiscal 1998. The $236,000 loss of EB Canada prior to the
acquisition of the remaining 50% by the EB Group in fiscal 1998 has been
included in preacquisition loss of subsidiaries on the consolidated statement of
income.

    EB INTERNATIONAL

    In fiscal 1996, the EB Group formed a subsidiary, EB International, Inc., to
establish a 50% interest in a joint venture with a Korean company to operate a
chain of retail stores that sells computer software, video games, accessories,business including inventory, intellectual property and supplies in South Korea. In fiscal 1998, EB International acquired the
remaining 50% interest in the joint venture with $611,000 of additional fundsfurniture, fixtures and equipment, and transitional services which were provided by the EB Group. The fair valueCompany to SCAC for a six-month period after the closing for an additional $300,000. As of assets acquired totaled $3,579,000,
while liabilities assumed totaled $3,497,000 resulting in goodwill of $529,000
that is being amortized over the expected period of benefit of ten years. The EB
Group has consolidated the results of operationsFebruary 1, 2003, $150,000 of the joint venture since the
beginning of fiscal 1998. The $677,000 lossservices agreement has been earned and recognized as income. Subsequent to year end, all of the joint venture prior22 store leases have been assigned to the
acquisitionSCAC. The transaction was negotiated and approved by a committee of the remaining 50% byCompany's Board of Directors comprised solely of independent directors with the EB Group in fiscal 1998 has been
included in preacquisition lossassistance of subsidiaries on the consolidated statement of
income.

(8) PRO FORMA STATEMENT OF INCOME INFORMATION (UNAUDITED)

     For purposes of comparison, the following pro forma information for fiscal
1998 and fiscal 1999 is presentedan investment banking firm engaged to show pro forma income on an after-tax basis
as if the EB Group had been subject to taxes as a C corporation.


      

                                                 Fiscal 1998        Fiscal 1999
                                               --------------     --------------

Federal statutory tax rate                             35.00   %          35.00   %
State income taxes, net of federal benefit              3.74               3.18
Loss of foreign subsidiaries                            0.51                  -
Other                                                   1.85               3.34
Change in valuation allowance                              -              (4.41)
                                               --------------     --------------
Pro forma income tax rate                              41.10   %          37.11   %
                                               ==============     ==============

      



                                       37



     Set forth below are pro forma results of operations for fiscal 1998 and
fiscal 1999. The following table sets forth the calculation of basic and diluted
net income per share:


      
                                                    Fiscal            Fiscal
                                                     1998              1999
                                                  -------------     -------------

Income before income taxes                      $   22,910,465     $  31,978,549
Pro forma income taxes                               9,415,631        11,866,084
                                                  -------------     -------------
Pro forma net income                            $   13,494,834     $  20,112,465
                                                  =============     =============
Pro forma net income per share - basic          $         0.85     $        1.12
                                                  =============     =============
Pro forma weighted average shares
outstanding - basic                                 15,794,200        18,029,777
                                                  =============     =============
Pro forma net income per share - diluted        $         0.85     $        1.11
                                                  =============     =============
Pro forma weighted average shares
outstanding - diluted                               15,794,200        18,084,109
                                                  =============     =============

      


    The pro forma weighted average shares outstanding - basic reflects the
effect of shares issued by the Companysolicit offers for the acquisition of substantially all
the operating assets and liabilities of the EB Group for periods prior to the
initial public offering. The pro forma weighted average shares outstanding -
diluted additionally include the effect of dilutive stock options.

(9)BC Sports Collectibles business.
      50

      (7)  CAPITAL STOCK
              On July 28, 1998,August 14, 2001, the Company completed its reorganization and an initiala public offering of 5,000,0004,600,000 shares of its common stock. Of the 5,000,0004,600,000 shares sold, 4,375,0002,500,000 shares were for the account of the Companycompany and 625,000 shares
were for the account of EB Nevada, Inc., the selling shareholder. The net
proceeds to the Company, after deducting underwriting discounts and commissions
and expenses were $54,962,500. The net proceeds were recorded as an increase to
additional paid in capital and common stock. The proceeds were used, in part, to
retire debt under the Company's revolving credit facility and to repay an
outstanding demand note to the Company's Chairman.

On November 23, 1999, the Company completed a secondary offering of 3,500,000
shares of common stock. Of the 3,500,000 shares sold, 2,000,000 shares were for
the account of the Company and 1,500,0002,100,000 shares were for the account of EB Nevada Inc., the selling shareholder. The transaction resulted in net proceeds (after offering expenses) to the Company of approximately $40.0$68.2 million.

(10)
      (8)  EMPLOYEES' RETIREMENT PLAN
              The Company provides employees with retirement benefits under a 401(k) salary reduction plan. Generally, employees are eligible to participate in the plan after attaining age 21 and completing one year of service. Eligible employees may contribute up to 17%60% of their compensation to the plan. Company contributions are at the Company's discretion and may not exceed 15% of an
eligible employee's compensation.. Company contributions to the plan are fully vested for eligible employees with five years or more of service. Contributions under this plan were approximately $302,000, $389,000$456,000, $534,000 and $433,000$624,000 in fiscal 1998,2001, fiscal 19992002 and fiscal 2000,2003, respectively.

(11)
      (9)  EQUITY PARTICIPATION PLANPLANS
      Equity Participation Plan
              The Company in connection with its initial public offering, adopted an equity participation planplans (the "Equity Participation Plans"), pursuant to which 2,100,000 and 2,000,000 shares of common stock were reserved in 1998 and 2000, respectively, for issuance upon the exercise of stock options granted to employees, consultants and directors. The exercise price of options granted under this planthe Equity Participation Plans may not be less than fair market value per share of common stock at the grant date; options become exercisable one to three years after the



                                       38
 grant date and expire over a period of not more than ten years. Exercisability is accelerated on a change in control of the Company, as defined in the plan.Equity Participation Plans.
      Employee Stock Purchase Plan
              Under Electronics Boutique's Employee Stock Purchase Plan (the "Purchase Plan"), associates meeting specific employment qualifications are eligible to participate and can purchase shares quarterly through payroll deductions at the lower of 85% of the fair market value of the stock at the commencement or end of the offering period. The Purchase Plan permits eligible associates to purchase common stock through payroll deductions for up to 10% of qualified compensation. As of February 1, 2003, approximately 958,000 shares remain available for issuance under the Purchase Plan. The weighted-average fair value, net of the 15% discount, of the shares purchased by employees in fiscal 2001, fiscal 2002 and fiscal 2003 was $15.28, $19.08 and $20.27, respectively.
              Pro forma information regarding net income and income per share is required by FASB Statement of Financial Accounting Standard ("FAS") No.123, and has been determined as if the Company had accounted for its employee stock options and the purchase plan under the fair value method of that Statement.Statement No. 123. The fair value for these options was estimated at
      51

      the date of grant using a Black-Scholes option pricingoption-pricing model with the following weighted average assumptions:
      

                                               Fiscal 1999         Fiscal 2000
                                             --------------      --------------

Expected volatility                                  50.0   %            62.4  %
Risk-free interest rate                              4.55   %            4.93  %
Expected life in years                                3.5                 3.0
Dividend yield                                          0                   0

       
      		 Fiscal 2001
      		 Fiscal 2002
      		 Fiscal 2003
      		 
      Expected volatility 62.41%61.51%62.38%
      Risk-free interest rate 4.86%4.28%2.98%
      Expected life of options in years 3.0 4.15 4.76 
      Expected life of purchase rights in months 3.0 3.0 3.0 
      Dividend yield —%—%—%
              The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of theThe weighted-average grant-date fair value of its employee stock options.options granted during fiscal 2001, fiscal 2002 and fiscal 2003 was $6.94, $11.00 and $17.09 respectively.
              For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's information follows:


      

                                                       Fiscal 1999         Fiscal 2000
                                                      --------------      --------------

Net income:
    As reported (pro forma in fiscal 1999)         $     20,112,465     $    22,830,388
    Pro forma net income                           $     19,234,620     $    20,942,647
Pro forma income per common share:
    Basic                                          $           1.07     $          1.02
    Diluted                                        $           1.06     $          1.01

      follows (amounts in thousands, except per share amounts):
       
      		 Fiscal 2001
      		 Fiscal 2002
      		 Fiscal 2003(1)
      Net income, as reported $14,871 $17,712 $32,627

      Pro forma net income
       
      $
      12,100
       
      $
      14,344
       
      $
      27,831

      Pro forma earnings per share:
       
       
       
       
       
       
       
       
       
       Basic $0.54 $0.60 $1.08
       Diluted $0.54 $0.59 $1.06
      (1)
      The fiscal 2003 net income amount includes the cumulative effect of the change in accounting principle of $4.8 million, net of income tax, related to cooperative advertising allowances. See Note 2, "Change in Accounting Principle," for further disclosures of the change.
      52
              A summary of the Company's stock option activity, and related information for the fiscal year ended January 30, 1999February 3, 2001, February 2, 2002 and January 29, 2000 follows:


      

                                                                                            Weighted
                                                                   Exercise Price            Average
                                                                     - Range per         Exercise Price
                                               Shares                   Share
                                         --------------------      ----------------      ----------------


Outstanding at January 31, 1998                            -    $                -     $               -
Granted                                            1,599,133                 14.00                 14.00
Forfeited                                            (37,800)                14.00                 14.00
                                         ---------------------     ----------------      ----------------

Outstanding at January 30, 1999                    1,561,333                 14.00                 14.00
Granted                                              342,086         17.00 - 24.00                 19.82
Exercised                                            (51,914)                14.00                 14.00
Forfeited                                            (73,029)        14.00 - 19.88                 14.00
                                         ---------------------     ----------------      ----------------
Outstanding at January 29, 2000                    1,778,476

Exercisable at January 29, 2000                      449,716                     -

      February 1, 2003 follows (amounts in thousands, except per share amounts):
       
      		 Fiscal 2001
      		 Fiscal 2002
      		 Fiscal 2003
      		 
      Outstanding at beginning of year  1,779  2,050  2,093 
      Granted  412  1,085  433 
      Exercised  (61) (959) (76)
      Forfeited  (80) (83) (62)
        
      		 
      		 
      		 
      Outstanding at end of year  2,050  2,093  2,388 
        
      		 
      		 
      		 
      Exercisable at end of year  989  697  1,215 

      Weighted average price per share:
       
       
       
       
       
       
       
       
       
       
       Granted $15.32 $21.37 $31.74 
       Exercised  14.02  14.50  16.72 
       Forfeited  15.33  17.70  22.59 
              The weighted average exercise price for all options outstanding and exercisable as of February 2, 2002 and February 1, 2003 were $15.13 and $17.16, respectively. The weighted average exercise price for all options outstanding as of January
29, 2000 was $15.06.February 2, 2002 and February 1, 2003 were $18.34 and $20.71, respectively.
              The average remaining contractual lifetable below summarizes information about stock options outstanding as of those options was
8.7 years.



                                       39



(12)February 1, 2003 (share amounts in thousands):
       
      		 Options outstanding
      		 Options exercisable
      Range of exercise prices
      		 Number
      outstanding as
      of February 1,
      2003
      		 Weighted
      average
      remaining
      contractual life
      		 Weighted average
      exercise price
      		 Number
      exercisable as
      of February 1,
      2003
      		 Weighted
      average
      exercise price
      $9.50 - $17.50 868 6.42 $14.62 707 $14.48
      $17.51 - $29.06 860 7.80 $18.34 427 $18.79
      $30.00 $41.65 660 8.69 $31.79 81 $31.88
        
      		      
      		   
        2,388      1,215   
        
      		      
      		   
      (10) INCOME TAXES

    As discussed in notes 1 and 8, the Company is subject to federal and state
income taxes as a C corporation whereas its predecessors had been treated as an
S corporation and a partnership for federal and certain state income tax
purposes resulting in taxable income being passed through to the shareholders
and partners.
              Income before income taxestax expense and cumulative effect of change in accounting principle was as follows:


      

                                                 Fiscal 1998        Fiscal 1999       Fiscal 2000
                                                --------------     --------------    --------------

Domestic                                      $    21,354,205    $    31,331,801   $    32,585,914
Foreign                                             1,556,260            646,748         5,252,247
                                                --------------     --------------    --------------
Total                                         $    22,910,465    $    31,978,549   $    37,838,161
                                                ==============     ==============    ==============

      follows (amounts in thousands, except tax rates):
       
      		 Fiscal 2001
      		 Fiscal 2002
      		 Fiscal 2003
      Domestic $19,790 $25,801 $52,989
      Foreign  4,872  2,859  6,784
        
      		 
      		 
      Total $24,662 $28,660 $59,773
        
      		 
      		 
      53
               The provision for income taxes for fiscal 1998,2001, fiscal 19992002 and fiscal 20002003 consists of the following:
      

                                                 Fiscal 1998        Fiscal 1999         Fiscal 2000
                                               --------------     --------------      --------------

Federal statutory tax rate                             35.00   %          35.00   %           35.00  %
State income taxes, net of federal benefit              3.69               3.18                2.73
Foreign incremental taxes                                  -                   -               1.06
S corporation earnings not subject to                                     (0.22)                  -
   federal taxation                                   (35.00)
Other                                                      -               3.02                0.63
Change in valuation allowance                              -              (4.41)               0.24
                                               --------------     --------------      --------------
Income tax expense                                      3.69   %          36.57   %           39.66  %
                                               ==============     ==============      ==============

Current:
    Domestic - Federal                       $             -      $   9,767,127     $    12,022,610
    Domestic - State                                 840,000          3,050,653           1,601,952
    Foreign                                                              60,528           3,045,359

Deferred:
    Domestic - Federal                                     -            159,331          (1,245,891)
    Domestic - State                                       -           (719,669)           (317,963)
    Foreign                                            6,280           (624,700)            (98,294)
                                               --------------     --------------      --------------
Income tax expense                           $       846,280      $  11,693,270     $    15,007,773
                                               ==============     ==============      ==============

       
      		 Fiscal 2001
      		 Fiscal 2002
      		 Fiscal 2003
      		 
      Federal statutory tax rate  35.00% 35.00% 35.00%
      State income taxes, net of federal benefit  1.13  0.51  3.35 
      Foreign incremental taxes  1.59  0.59  (0.33)
      Other  1.26  1.51  (0.63)
      Change in valuation allowance  0.72  0.59  0.04 
        
      		 
      		 
      		 
      Income tax expense  39.70% 38.20% 37.43%
        
      		 
      		 
      		 
      Current:          
       Domestic—Federal $7,357 $16,684 $11,191 
       Domestic—State  1,031  1,825  2,091 
       Foreign  2,136  2,169  5,092 

      Deferred:
       
       
       
       
       
       
       
       
       
       
       Domestic—Federal  (115) (7,167) 5,932 
       Domestic—State  (603) (1,599) 994 
       Foreign  (15) (964) (2,927)
        
      		 
      		 
      		 
      Income tax expense $9,791 $10,948 $22,373 
        
      		 
      		 
      		 
              Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following is a summary of the significant components of the Company's deferred tax assets and liabilities as of January 30, 1999 (fiscal 1999)February 2, 2002 and January 29, 2000 (fiscal
2000).


      

Deferred tax assets:                                              Fiscal 1999        Fiscal 2000
                                                                 --------------     ---------------

    Inventory capitalized costs                                $     1,632,000    $      1,575,272
    Accrued expenses                                                   705,000           2,078,001
    Fixed assets                                                     4,962,000           7,161,428
    Deferred rent                                                      922,000           1,146,428
    Amortization of goodwill                                           167,000             235,603
    Foreign net operating loss                                         839,000             306,000
                                                                 --------------    ---------------
    Total gross deferred tax asset                                   9,277,000          12,502,732
    Valuation allowance                                               (214,000)           (306,000)
                                                                 ---------------   ---------------
    Net deferred tax asset                                     $     9,013,000    $     12,196,732
                                                                 ==============    ===============

      



                                       40



    As a result of the acquisition describedFebruary 1, 2003 (amounts in Note 1, tax assets were acquired
exceeding book basis, resulting in deferred tax assets of $7,828,000, net of a
valuation allowance of $1,622,000. The change in the valuation allowance of
$1,408,000 in fiscal 1999 results from management's assessment that taxable
income willthousands):
       
      		 February 2,
      2002
      		 February 1,
      2003
      		 
      Deferred tax assets:       
       Inventory $1,838 $5,825 
       Accrued expenses  9,133  3,001 
       State net operating loss  576  1,044 
       Fixed assets  9,019  7,191 
       Deferred rent  1,423  1,646 
       Amortization of goodwill  234  143 
       Foreign net operating loss  1,179  3,420 
        
      		 
      		 
       Total gross deferred tax asset  23,402  22,270 
       Valuation allowance  (534) (546)
        
      		 
      		 
       Net deferred tax asset $22,868 $21,724 
        
      		 
      		 
              Management believes it is more likely than not bethat the results of future operations will generate sufficient taxable income to realize the net deferred tax assets, of $9,013,000 as of January 30, 1999.except for certain net operating loss carryforwards for which the Company has provided a valuation allowance. The increase in the valuation allowance of $92,000$12,000 in fiscal 20002003 results from net operating losses from certain foreign subsidiaries.
      (11) RESTRUCTURING CHARGE
              On February 1, 2002, the Board of Directors of the Company adopted a plan related to the closing of the Company's 29 EB Kids stores and the sale of its 22 store BC Sports Collectibles business. A $14.9 million pre-tax charge ($9.2 million after-tax or $0.35 per diluted share) was recorded in fiscal 2002 related to this decision. The pre-tax charge was recorded as follows: $2.3 million related to a
      54
      write-down of inventory within cost of goods sold and $12.6 million as a restructuring and asset impairment charge. The $12.6 million charge consisted of a $3.5 million write down of store leasehold improvements, a $2.3 million write down of store furniture, fixtures and equipment and $6.7 million in lease termination costs.
              The following table summarizes activity in the restructuring accrual for February 2, 2002 and February 1, 2003 (amounts in thousands):
       
      		 Beginning
      Balance
      		 Cash
      Payments
      		 Charges
      		 Reversals
      		 Other
      		 Ending
      Balance
      Year ended February 2, 2002 $— $— $12,638 $— $(5,460)$7,178
      Year ended February 1, 2003 $7,178 $(2,989)$148 $(4,193)$96 $240
              In the fiscal year ended 2002, the $5.5 million in "Other" related to the write-down of $2.8 million of EB Kids fixed assets and the write-off of $2.7 million of BC Sports Collectibles fixed assets.
              In the fiscal year ended 2003, the Company made $3.0 million in cash payments consisting of: $2.2 million paid to landlords for EB Kids lease buy-outs; $177,000 in professional fees related to the EB Kids store closings; and $590,000 in professional fees related to the BC Sports Collectibles sale. The Company reversed $4.2 million of the restructuring accrual consisting of: $3.6 million related to lease termination costs that were not realized due to the sale of the BC Sports Collectibles business and $546,000 due to actual costs being lower than original estimates for the termination of the leases for the EB Kids stores.
              As of February 1, 2003, there is still $240,000 remaining of the restructuring accrual. This amount primarily represents a $204,000 accrual for the potential assigning back to the Company two of the BC Sports Collectibles store leases.
      (12) LEGAL CONTINGENCIES
              The Company is involved from time to time in legal proceedings arising in the ordinary course of its business. In the opinion of management, no pending proceedings could have a material adverse effect on the Company's results of operation or financial condition.
      (13) RECLASSIFICATIONS
              Effective in the second quarter of fiscal 2003, Electronics Boutique changed the income statement classification for pre-owned merchandise trade-in activity to be consistent with industry practice. Previously, the Company recorded a reduction to both revenue and cost of goods sold for the cost of the pre-owned merchandise accepted for trade. The reclassification of these transactions increased both revenues and cost of goods sold by $36.5 million and $50.1 million in fiscal years 2001 and 2002, respectively. There was no impact on operating income or net income for any period as a result of this reclassification.
      55

      (14) COMPREHENSIVE INCOME
              Comprehensive income is computed as follows (amounts in thousands):
       
      		 Year ended
      		 
       
      		 February 2,
      2002
      		 February 1,
      2003(1)
      		 
      Net income $17,712 $32,627 
      Foreign currency translations  (1,417) 6,574 
      Hedging activities  359  (5,077)
        
      		 
      		 
      Comprehensive income $16,654 $34,124 
        
      		 
      		 
      (1)
      The year ended February 1, 2003 net income amount includes the cumulative effect of the change in accounting principle, net of income tax, related to cooperative advertising allowances. See Note 2, "Change in Accounting Principle," for further disclosures of the change.
              Gains and (losses) on foreign currency translations are a result of the Company's investment in its foreign subsidiaries in Australia, Canada, Denmark, Germany, Italy, Norway, South Korea and Sweden. Gains and (losses) on hedging activities are primarily the result of foreign exchange forward contracts and cross currency swap agreements the Company has entered into to protect its investments in its European subsidiaries from foreign currency fluctuations. The net gains and (losses) on these activities is primarily the result of the Company's investment in its Australia, Canada and South Korea subsidiaries that have not been hedged.
      (15) GOODWILL AND OTHER INTANGIBLES
              In July 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets." Statement No. 142 states that goodwill and intangible assets with indefinite useful lives will no longer be amortized, but instead be tested for impairment at least annually. The following tables show the intangible assets and goodwill as of February 1, 2003 (amounts in thousands):
      Amortizable Intangible Assets
       
      		 Gross Carrying
      Amount
      		 Accumulated
      Amortization
      Key Money(1) $1,280 $237
      Other  200  140
        
      		 
      Total Intangible Assets $1,480 $377
        
      		 
      (1)
      Key Money represents payments made to landlords, outgoing tenants or other third parties to enter into certain store leases.
              Intangible assets are amortized over their estimated useful lives which range from three to five years. Amortization expense of amortizable intangible assets for the fiscal years 2001, 2002 and 2003 was $53,000, $44,000 and $315,000, respectively. Amortization expense for amortizable intangible assets for the next five years is: $291,000 in fiscal 2004, $240,000 in fiscal 2005, $239,000 in fiscal 2006, $229,000 in fiscal 2007 and $104,000 in fiscal 2008.
      56

      Goodwill
              The changes in carrying amount of goodwill for the year ended February 1, 2003 is as follows (amounts in thousands):
      Balance as of February 2, 2002 $8,354 
      Purchase additional 30% of Italian subsidiary(1)  1,005 
      Reduction in purchase price of Swedish subsidiary(2)  (547)
      Planet Games acquisition(3)  63 
      Buyout of German partner(4)  343 
      Foreign exchange fluctuations and other  1,720 
        
      		 
      Balance as of February 1, 2003 $10,938 
        
      		 
      (1)
      During fiscal 2003, the Company purchased the remaining 30% of the Italian subsidiary from its minority owner. The Company now owns 100% of its Italian subsidiary.

      (2)
      During the second quarter of fiscal 2003, an adjustment was made to the purchase price for the Company's acquisition completed in Sweden in the fourth quarter of fiscal 2002.

      (3)
      During the third quarter of fiscal 2003, the Company acquired the assets of a five store retail chain in Minnesota.

      (4)
      In January 2003, the Company bought out one of its partners in the German subsidiary. (13) NET INCOME AND PRO FORMA NET INCOME PER SHAREThis resulted in an increase of ownership of .3125%. The Company now owns 99.6875% of its German subsidiary.
      Comparison to prior year "As Adjusted"
              The following table presents prior year reported amounts adjusted to eliminate the computationeffect of basic and diluted actualgoodwill amortization in accordance with Statement No. 142.
       
      		 February 3,
      2001
      		 February 2,
      2002
      		 February 1,
      2003(1)
       
      		 (Amounts in thousands, except per share amounts)

      Net income, as reported $14,871 $17,712 $32,627
      Add: goodwill amortization, net of taxes  188  132  —
        
      		 
      		 
      Adjusted net income $15,059 $17,844 $32,627
        
      		 
      		 
      Basic earnings per share:         
      Net Income $0.67 $0.74 $1.26
      Goodwill amortization, net of taxes  0.01  0.01  —
        
      		 
      		 
      Adjusted net income $0.68 $0.75 $1.26
        
      		 
      		 
      Diluted earnings per share:         
      Net Income $0.66 $0.73 $1.24
      Goodwill amortization, net of taxes  0.01  0.01  —
        
      		 
      		 
      Adjusted net income $0.67 $0.74 $1.24
        
      		 
      		 
      (1)
      The year ended February 1, 2003 net income amount includes the cumulative effect of the change in accounting principle of $4.8 million, net of income tax, related to cooperative advertising allowances. See Note 2, "Change in Accounting Principle," for further disclosures of the change.
      57
      (16) ACQUISITIONS
              On May 14, 2001, the Company acquired the assets of a Danish company consisting of eight retail stores and pro forma net income per share:


      

                                                              Fiscal 1998       Fiscal 1999        Fiscal 2000
                                                             --------------    --------------     --------------


Basic net income per share:
  Net income                                                                                    $    22,830,388
                                                                                                  ==============
  Weighted average shares outstanding                                                                20,559,100
                                                                                                  ==============
  Net income per share - basic                                                                  $          1.11
                                                                                                  ==============
Diluted net income per share:
  Net income                                                                                    $    22,830,388
                                                                                                  ==============
  Weighted average shares outstanding                                                                20,559,100
  Diluted effect of stock options                                                                       203,149
                                                                                                  --------------
  Weighted average shares outstanding                                                                20,762,249
                                                                                                  ==============
 Net income per share - diluted                                                                 $          1.10
                                                                                                  ==============
Basic pro forma net income per share:
  Pro forma net income                                     $    13,494,834   $    20,112,465
                                                             ==============    ==============
  Pro forma weighted average shares outstanding                 15,794,200        18,029,777
                                                             ==============    ==============
  Pro forma net income per share - basic                   $          0.85   $          1.12
                                                             ==============    ==============
Diluted pro forma net income per share:
  Pro forma net income                                     $    13,494,834   $    20,112,465
                                                             ==============    ==============
  Pro forma weighted average shares outstanding                 15,794,200        18,029,777
  Diluted effect of stock options                                        -            54,332
                                                             --------------    --------------
  Pro forma weighted average shares outstanding                 15,794,200        18,084,109
                                                             ==============    ==============
  Pro forma net income per share - diluted                 $          0.85   $          1.11
                                                             ==============    ==============

      



                                       41



ITEMan Internet site in Denmark and Norway for approximately $2.2 million.
              On August 2, 2001, the Company acquired 70% of the capital stock of an Italian company, consisting of 10 retail stores and a distribution facility, for approximately $1.7 million.
              On October 5, 2001, the Company paid approximately $631,000 to acquire 90% of the capital stock of a German company, which then acquired assets consisting of three retail stores, a publishing business, a mail order operation and an Internet site.
              On November 15, 2001, the Company acquired all the outstanding shares of Tradition Svenska AB, a privately-held video and hobby games retailer with 11 stores located in several cities in Sweden for approximately $4.7 million.
              These acquisitions were accounted for using the purchase method of accounting and resulted in goodwill of $7.4 million.
              For more details on acquisitions during fiscal 2003, please refer to Note 15, "Goodwill and Other Intangibles."
      Schedule II—Valuation and Qualifying Accounts (amounts in thousands)
      Period Ended
      		 Description
      		 Beginning
      Balance
      		 Charged to
      costs and
      expenses
      		 Deductions
      		 Ending
      Balance
      Deferred Tax Valuation Allowance            
      February 3, 2001 Deferred tax valuation allowance $306 $114 $— $420
      February 2, 2002 Deferred tax valuation allowance  420  114  —  534
      February 1, 2003 Deferred tax valuation allowance  534  12  —  546

      Inventory Valuation Allowance
       
       
       
       
       
       
       
       
       
       
       
       
      February 3, 2001 Inventory valuation allowance $2,828 $2,782 $3,663 $1,947
      February 2, 2002 Inventory valuation allowance  1,947  8,284  7,535  2,696
      February 1, 2003 Inventory valuation allowance  2,696  6,794  6,605  2,885

      Trade Receivables Bad Debt Allowance
       
       
       
       
       
       
       
       
       
       
       
       
      February 3, 2001 Trade receivables bad debt allowances $250 $— $— $250
      February 2, 2002 Trade receivables bad debt allowances  250  —  —  250
      February 1, 2003 Trade receivables bad debt allowances  250  —  —  250
      58

      Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSUREChanges in and Disagreements with Accountants on Accounting and Financial Disclosure
              None

                                    PART

      Part III

ITEMS 10-13   DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
      Items 10-13. Directors and Executive Officers of the Company
              The information required by Part III (Items 10-13) is set forth in the Company's definitive proxy statement, which will be filed pursuant to Regulation 14A within 120 days of January 29, 2000,February 1, 2003, and in Item 1A hereof. SuchThe information is incorporated herein by reference and made a part hereof.

                                     PART

      Part IV

ITEM
      Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)      1. Financial Schedules attached hereto are as follows:

              - Schedule II - ValuationControls and Qualifying Accounts.

         2. Exhibits

          1.1Procedures
              Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing date of this Annual Report of Form of Underwriting Agreement(1)
          4.1     Specimen Stock Certificate(2)
         10.1     Form of Indemnification Agreement for Directors10-K, and, Officers(2)
         10.2     Form of 1998 Equity Participation Plan(2)
         10.3     Services Agreement, dated October 13, 1995, bybased on their evaluation, our chief executive officer and between The
                  Electronics Boutique, Inc.chief financial officer have concluded that these controls and Electronics Boutique plc(f/k/a
                  Rhino Group plc)(2)
         10.4     Loan and Security Agreement, dated March 16, 1998, by and
                  between The Electronics Boutique, Inc. and Fleet Capital
                  Corporation(2)
         10.5     Joinder Agreement by and between Electronics Boutique of
                  America Inc. and Fleet Capital Corporation(2)
         10.6     Form of Employment Agreement by and between Electronics
                  Boutique Holdings Corp. and Joseph J. Firestone(2)
         10.7     Form of Employment Agreement by and between Electronics
                  Boutique Holdings Corp. and John R. Panichello(2)
         10.8     Form of Employment Agreement by and between Electronics
                  Boutique Holdings Corp and Jeffrey W. Griffiths(2)
         10.9     Assignment, Bill of Sale, and Assumption Agreement, dated May
                  31, 1998, by and between The Electronics Boutique, Inc. and
                  Electronics Boutique of America Inc.(2)
         10.10    Form of Registration Rights Agreement between Electronics
                  Boutique Holdings Corp. and EB Nevada(2)
         10.11    Form of Demand Note by and between James J. Kim and
                  Electronics Boutique of America Inc.(2)
         10.12    Assignment of Trademarks, dated May 31, 1998, by and between
                  The Electronics Boutique, Inc. and Elbo, Inc.(2)
         10.13    Addendum to Assignment of Trademarks by and between EB and
                  Elbo(2)
         10.14    Form of Agreement of Lease by and between The Electronics
                  Boutique, Inc. and Electronics Boutique of America Inc.(2)
         10.15    Agreement and Bill of Sale, datedprocedures were effective as of July 13, 1998,the date of the evaluation. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
              Disclosure controls and procedures are our internal controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and between Electronics Boutique Holdings Corp.reported within the time periods specified in the Securities and EB Nevada(2)
         10.16    AgreementExchange Commission's rules and Consentforms. Disclosure controls and procedures include, without limitation, controls and procedures designed to Assignmentensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and Assumption of
                  Partnership Interests, datedcommunicated to our management, including our chief executive officer and chief financial officer, as of July 13, 1998(2)
         10.17    Amendment No. 1appropriate to Loanallow timely decisions regarding required disclosure.

      Item 15. Exhibits, Financial Statement Schedules, and Security Agreement by and among
                  The Electronics Boutique, Inc., Electronics Boutique of
                  America Inc. and Fleet Capital Corporation(2)
         10.18    Amendment No. 2 to Loan and Security Agreement by and among
                  The Electronics Boutique, Inc., Electronics Boutique of
                  America Inc. and Fleet Capital Corporation(2)



                                       42



         10.19    Form of Employment Agreement by and between Electronics
                  Boutique Holdings Corp. and Seth P. Levy(3)
         21.1     Subsidiaries of Electronics Boutique Holdings Corp.
         23.1     Auditors' Report and Consent of KPMG LLP
         27.1     Financial Data Schedule

- --------------
         (1)      Incorporated by reference from the applicable exhibits of
                  Electronics Boutique's Registration StatementReports on Form S-3
                  (Reg. No. 333-88561)
         (2)      8-K
      (a)  Documents Filed as Part of Report:
              Exhibits:
      Exhibit
      No.
      		Identification of Exhibit
      3.1Certificate of Incorporation(1)
      3.2Bylaws(1)
      4.1Specimen Stock Certificate(1)
      10.1Form of Indemnification Agreement for Directors and Officers(1)
      10.2Form of 1998 Equity Participation Plan(1)
      10.3Form of 2000 Equity Participation Plan(2)
      10.4Form of Employee Stock Purchase Plan(2)
      10.5Services Agreement, dated October 13, 1995, by and between The Electronics Boutique, Inc. and Electronics Boutique plc (f/k/a Rhino Group plc)(1)
      10.6Loan and Security Agreement, dated March 16, 1998, by and between The Electronics Boutique, Inc. and Fleet Capital Corporation(1)
      10.7Joinder Agreement by and between Electronics Boutique of America Inc. and Fleet Capital Corporation(1)
      59
      10.8Amendment No. 1 to Loan and Security Agreement by and among The Electronics Boutique, Inc., Electronics Boutique of America Inc. and Fleet Capital Corporation(1)
      10.9Amendment No. 2 to Loan and Security Agreement by and among The Electronics Boutique, Inc., Electronics Boutique of America Inc. and Fleet Capital Corporation(1)
      10.10Form of Employment Agreement by and between Electronics Boutique Holdings Corp. and Joseph J. Firestone(1)
      10.11Employment Agreement, dated November 7, 2002, by and between Electronics Boutique Holdings Corp. and Jeffrey W. Griffiths *
      10.12Employment Agreement, dated November 7, 2002, by and between Electronics Boutique Holdings Corp and John R. Panichello*
      10.13Employment Agreement, dated November 7, 2002, by and between Electronics Boutique Holdings Corp. and Seth P. Levy*
      10.14Employment Agreement, dated November 7, 2002, by and between Electronics Boutique Holdings Corp. and James A. Smith*
      10.15Form of Employment Agreement by and between Electronics Boutique Holdings Corp. and Steven R. Morgan(3)
      10.16Asset Purchase Agreement, dated as of October 10, 2002, between Electronics Boutique of America Inc. and Sports Collectibles Acquisition Corporation(4)
      10.17Form of Transition Agreement between Electronics Boutique of America Inc. and Sports Collectibles Acquisition Corporation(4)
      10.18Form of Indemnification Agreement between Electronics Boutique of America Inc. and Sports Collectibles Acquisition Corporation(4)
      21.1Subsidiaries of Electronics Boutique Holdings Corp.*
      23.1Consent of KPMG LLP*
      99.1Section 906 Certification of Jeffrey W. Griffiths*
      99.2Section 906 Certification of James A. Smith*
      (1)
      Incorporated by reference from the applicable exhibits of Electronics Boutique's Registration Statement on Form S-1 (Reg. No. 333-48523)

      (2)
      Incorporated by reference from Electronics Boutique's Proxy on Schedule 14A dated June 16, 2000

      (3)
      Incorporated by reference from the applicable exhibits ofto Electronics Boutique's Annual Report on Form 10-Q10-K for the quarterly period ended July 31, 1999

- --------------


February 3, 2001

      (4)
      Incorporated by reference from the applicable exhibits to Electronics Boutique's Report on Form 8-K dated October 10, 2002

      *
      Filed herewith
      (b)  Reports on Form 8-K

         The Company filed a Form 8-K on November 16, 1999 to report the
         consummation of a public offering of its securities.



                                       43



                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS


      

                                                               Charged to     Charged to
 Period                                         Beginning      costs and         other       Deductions        Ending
 Ended                 Description              Balance        expenses         accounts        (1)           Balance
- ---------------- --------------------------    ------------   -------------   ------------   -------------   ------------

January 30,      Deferred tax valuation      $   1,622,000  $            -  $           -   $   1,408,000  $     214,000
1999             allowance

January 29,      Deferred tax valuation            214,000          92,000              -               -        306,000
2000             allowance

      

(1) Realization of deferred tax assets.



                                       44

              None.


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

                                     ELECTRONICS BOUTIQUE HOLDINGS CORP.


                                     By:   /s/ Joseph J. Firestone
                                           -----------------------
                                           Joseph J. Firestone
                                           President and Chief Executive Officer


      ELECTRONICS BOUTIQUE HOLDINGS CORP.



      By:

      /s/        JEFFREY W. GRIFFITHS      
      Jeffrey W. Griffiths
      President and Chief Executive Officer
      Date: April 28, 2000May 1, 2003
              Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on April 28, 2000.

May 1, 2003.
      Name
      		Title
- ----                                                 -----


    /s/  

      /s/        JAMES J. KIM      
      James J. Kim

      Chairman of the Board
   ------------------------------
         James J. Kim

    /s/  Joseph J. Firestone                

      /s/        JEFFREY W. GRIFFITHS      
      Jeffrey W. Griffiths

      President and Chief Executive Officer and Director ------------------------------               (Principal Executive Officer)
         Joseph J. Firestone

    /s/  John R. Panichello                 

      /s/        JAMES A. SMITH      
      James A. Smith

      Senior Vice President and Chief Financial Officer ------------------------------               (Principal Financial and Accounting Officer)

      /s/        DEAN S. ADLER      
      Dean S. Adler

      Director

      /s/        SUSAN Y. KIM      
      Susan Y. Kim

      Director

      /s/        LOUIS J. SIANA      
      Louis J. Siana

      Director

      /s/        STANLEY STEINBERG      
      Stanley Steinberg

      Director

      /s/        ALFRED J. STEIN      
      Alfred J. Stein

      Director
      61

      CERTIFICATIONS
      I, Jeffrey W. Griffiths, certify that:
        1.
        I have reviewed this annual report on Form 10-K of Electronics Boutique Holdings Corp.;

        2.
        Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

        3.
        Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

        4.
        The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

        a)
        Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

        b)
        Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

        c)
        Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

        5.
        The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

        a)
        All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

        b)
        Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

        6.
        The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

      Date: May 1, 2003By:/s/  JEFFREY W. GRIFFITHS      
      Jeffrey W. Griffiths
      President and Chief Executive Officer (Principal Executive Officer)
      62
      I, James A. Smith, certify that:
        1.
        I have reviewed this annual report on Form 10-K of Electronics Boutique Holdings Corp.;

        2.
        Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

        3.
        Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

        4.
        The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

        a.
        Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

        b.
        Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

        c.
        Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

        5.
        The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

        a.
        All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

        b.
        Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

        6.
        The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

      Date: May 1, 2003By:/s/  JAMES A. SMITH      
      James A. Smith
      Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
      63

      EXHIBIT INDEX

      10.11

      Employment Agreement, dated November 7, 2002, by and between Electronics Boutique Holdings Corp. and Jeffrey W. Griffiths

      10.12

      Employment Agreement, dated November 7, 2002, by and between Electronics Boutique Holdings Corp. and John R. Panichello

    /s/  Dean S. Adler                      Director
   ------------------------------
         Dean S. Adler

    /s/  Susan Y. Kim                       Director
   ------------------------------
         Susan Y. Kim

    /s/  Louis J. Siana                     Director
   ------------------------------
         Louis J. Siana

    /s/  Stanley Steinberg                  Director
   ------------------------------
         Stanley Steinberg


      10.13

      Employment Agreement, dated November 7, 2002, by and between Electronics Boutique Holdings Corp. and Seth P. Levy

      10.14

      Employment Agreement, dated November 7, 2002, by and between Electronics Boutique Holdings Corp. and James A. Smith

      21.1

      Subsidiaries of Electronics Boutique Holdings Corp.

      23.1

      Consent of KPMG LLP

      99.1

      Section 906 Certification of Jeffrey W. Griffiths

      99.2

      Section 906 Certificate of James A. Smith
      



                                       45


      QuickLinks

      FORM 10-K FOR THE FISCAL YEAR ENDED FEBRUARY 1, 2003 INDEX
      PART I
      PART II
      Independent Auditors' Report
      ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except per share amounts)
      ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except per share amounts)
      ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Amounts in thousands)
      ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands)
      ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
      Part III
      Part IV
      Signatures
      CERTIFICATIONS
      EXHIBIT INDEX