GADZOOKS INC, 10-K, 1998-04-27

GADZOOKS INC
10-K, 1998-04-27
FAMILY CLOTHING STORES

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<PAGE> 1

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998

[ ] 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 0-26732

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

TEXAS 74-2261048
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

4121 INTERNATIONAL PARKWAY
CARROLLTON, TEXAS 75007
(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(972) 307-5555

Securities Registered Pursuant to Section 12(b) of the Act:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED

Common Stock, $0.01 par value The Nasdaq Stock Market

Securities Registered Pursuant to Section 12(g) of the Act: NONE

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

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

The aggregate market value of Common Stock held by non-affiliates of
the registrant on April 13, 1998 was approximately $191,963,408. All
outstanding shares of voting stock, except for shares held by executive
officers and members of the Board of Directors and their affiliates, are deemed
to be held by non-affiliates.

On April 13, 1998, the registrant had 8,817,757 shares of Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part II incorporates information by reference from the registrant's
Annual Report to Shareholders for the fiscal year ended January 31, 1998, filed
herewith as Exhibit 13.

Part III incorporates information by reference from the definitive
Proxy Statement for the 1998 Annual Meeting of Shareholders, to be filed with
the Commission no later than 120 days after the end of the registrant's fiscal
year covered by this Form 10-K.
<PAGE> 2
PART I

ITEM 1. BUSINESS.

Gadzooks, Inc. (the "Company" or "Gadzooks") is a rapidly growing,
mall-based specialty retailer of casual apparel and related accessories for
young men and women, principally between the ages of 13 and 19. The Company
currently operates 275 stores in both metropolitan and middle markets in 32
states throughout the, Southwest, Midwest, Southeast, Mid-Atlantic and
Northeast regions of the United States. The Company opened 67 new stores
during fiscal 1997. In addition, the Company plans to open approximately 70 to
75 new stores in fiscal 1998, 26 of which have been opened as of April 1998.

Management believes that current demographic trends provide the
Company with the opportunity to continue its rapid store expansion program.
According to the U.S. Census Bureau, there are approximately 25 million
teenagers in the United States today and the number is expected to grow to
approximately 31 million by the year 2010. Management believes that teenagers
represent both a growing part of the U.S. population and an increasing source
of purchasing power.

The Company was incorporated in Texas in 1982, its executive offices
are located at 4121 International Parkway, Carrollton, Texas 75007, and its
telephone number is (972) 307-5555.

BUSINESS STRATEGY

The Company is a leading retailer of brand name casual apparel and
related accessories to teenagers. The principal elements of the Company's
business strategy are:

o Focus on the Male and Female Teenage Customer. The Gadzooks concept
focuses on providing fashionable casual apparel and accessories to both
male and female teenage customers. By offering merchandise for both sexes,
Gadzooks believes that it serves a much broader customer base than many of
its specialty store competitors and that it reduces the potential fashion
risk of concentrating on one gender exclusively. Furthermore, Gadzooks
believes that it attracts additional customers by creating a shopping
environment where it is comfortable for both males and females to shop as
couples or with friends, as well as on their own.

o Multiple Merchandise Categories. A key component of the Company's
merchandising strategy is to reduce its dependence on any one fashion,
style, brand or item by offering products in a broad range of categories.
Each Gadzooks store carries approximately 2,500 stock-keeping units or
"SKUs" (excluding different sizes of the same item), including woven and
knit tops, jeans, shorts, junior dresses, swimwear, t-shirts, footwear,
sunglasses, watches, costume jewelry and other accessory items. The
Company regularly monitors store sales by classification, SKU and size to
identify emerging fashion trends, and manages the product mix in its stores
to respond to the spending patterns of its customers. The Company believes
that its success to date has been largely attributable to its ability to
meet the changing fashion preferences of its customers.

o Emphasis on Brand Name Merchandise. Another key feature of the
Company's merchandising strategy is to offer a wide variety of popular
brand name merchandise based on its belief that its customers shop
primarily for recognized labels and designs. The Company's merchandise
includes high visibility names such as JNCO, Dr. Marten, Kikwear, Adidas
and BC Ethic and other popular fashions and brand name merchandise. The
Company concentrates on merchandise that appeals to the mainstream teenager
rather than relying on "cutting edge" products. The Company believes that
this strategy is consistent with its philosophy of responding to its
customers' fashion preferences as opposed to attempting to establish
fashion trends.

2
<PAGE> 3
o Metropolitan and Middle Market Locations. A central aspect of the
Company's strategy has been the development of a store concept that is
successful in both metropolitan and middle markets. The Company believes
that teenagers throughout the United States frequently have similar fashion
preferences as a result of the influence of television programs, MTV and
music and fashion magazines. As a result, the Company has been able to
operate stores successfully across a broad range of demographic and
geographic markets, increasing the number of potential sites available to
the Company.

o Attentive Customer Service. The Company is committed to offering
professional, attentive and personalized customer service. Gadzooks hires
young, energetic, service-oriented sales associates who understand
teenagers and can relate to their changing needs and preferences. The
Company strives to give its teenage customers the same level of respect and
attention that is generally given to adult customers at other retail
stores. The Company trains sales associates to greet each customer
personally, to inform the customer about new fashion trends and to suggest
merchandise to suit the customer's wardrobe and lifestyle needs. The
Company believes that the high level of service given to its teenage
customers differentiates Gadzooks from its competition.

o Entertaining Store Environment. The Company believes that its stores
are visually appealing and provide a fun and enjoyable shopping experience
for its customers. Gadzooks stores are designed to create a high energy,
fun environment using neon lighting, television monitors featuring popular
music videos, playful mannequins and creative, eye-catching signage. The
Company's signature Volkswagen Beetle, decorated with merchandise, is a
feature attraction in the stores. The Company believes that its
entertaining store design encourages customers to visit the stores more
frequently and to shop in the stores for longer periods of time. While
Gadzooks stores are designed to appeal primarily to the teenage customer,
the Company also strives to create a shopping environment that is
comfortable for adults.

o Investment in Systems and Personnel. The Company is committed to
investing in information systems and using current technology to help
execute its merchandising strategy. The Company's systems provide its
buyers and merchandise planners with daily sales and inventory information
by store, SKU and size, allowing Gadzooks to respond to changing customer
preferences and to stock the appropriate quantities and styles of
merchandise at each store. The Company is also committed to attracting and
retaining highly-qualified, service-oriented management and sales
associates and providing them with career advancement opportunities. The
corporate culture at Gadzooks promotes the open exchange of new ideas and
information between all levels of the Company thereby enabling management
to supplement the data from its information systems with the practical
experience of its employees.

o Distribution Capabilities. The Company opened a new 110,000
square-foot distribution center in May 1997 that is three times the size of
its previous distribution center. The new facility can support the
merchandising needs of about 500 stores, providing for our continued store
expansion into the next century. The Company believes the new distribution
center is a critical element in its future growth plans.

3
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STORE LOCATIONS

As of April 17, 1998, the Company operated 275 stores in 32 states.
The Company's existing stores are located in metropolitan markets such as
Dallas, Chicago, Atlanta, Kansas City and Cincinnati, as well as middle markets
such as Amarillo, Texas; Tupelo, Mississippi; and Roanoke, Virginia. The
following store list shows the number of stores that Gadzooks operates in each
state and the cities in which Gadzooks stores are located.

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
ALABAMA KANSAS MISSOURI OKLAHOMA TEXAS (CONT.)
------- ------ -------- -------- -------------
Huntsville Hays Columbia Enid San Angelo
Mobile Hutchinson Joplin Lawton San Antonio (4)
Montgomery Manhattan Kansas City (3) Norman Sherman
ARKANSAS Salina Springfield Oklahoma City (4) Temple
-------- Topeka St. Louis (3) Shawnee Texarkana
Fayetteville Wichita (2) NEBRASKA Tulsa (2) Tyler
Ft. Smith KENTUCKY -------- PENNSYLVANIA Victoria
Jonesboro -------- Grand Island ------------ Waco
Little Rock (2) Ashland Lincoln Altoona Wichita Falls
FLORIDA Bowling Green Omaha (2) Erie VIRGINIA
------- Florence (Cincinnati) NEW HAMPSHIRE Johnstown --------
Jacksonville Owensboro ------------- Lancaster Charlottesville
Orlando (2) Lexington Manchester Philadelphia (2) Chesapeake
Pensacola Louisville (2) Salem Scranton Christianburg
Tallahassee Paducah NEW JERSEY State College Fredericksburg
GEORGIA LOUISIANA ---------- SOUTH CAROLINA Harrisonburg
------- ---------- Freehold -------------- Manassas
Athens Alexandria Livingston Charleston (2) Newport News
Atlanta (7) Baton Rouge (2) Paramus Columbia (2) Roanoke
Augusta Houma Rockaway Greenville Springfield
Macon Lafayette NEW MEXICO Myrtle Beach Virginia Beach
ILLINOIS Lake Charles ---------- Spartanburg Winchester
-------- Monroe Albuquerque (2) SOUTH DAKOTA WEST VIRGINIA
Bloomington New Orleans (3) Las Cruces ------------ -------------
Carbondale Shreveport (2) Santa Fe Sioux Falls Bridgeport
Champaign MARYLAND NEW YORK TENNESSEE Charleston
Chicago (12) -------- -------- --------- Huntington
Fairview Heights (St. Louis) Baltimore (2) Albany Chattanooga Parkersburg
Moline Frederick Nanuet Jackson WISCONSIN
Peoria MASSACHUSETTS Rochester Kingsport ---------
Rockford ------------- Staten Island Knoxville (2) Appleton
Springfield Boston (2) Syracuse Memphis (3) Eau Claire
INDIANA MICHIGAN NORTH CAROLINA Nashville (3) Green Bay
------- -------- --------------- TEXAS Madison (2)
Elkhart Flint Charlotte (2) ----- Milwaukee (3)
Evansville Portage Concord Abilene Wausau
Ft. Wayne Saginaw Fayetteville Amarillo
Indianapolis MINNESOTA Greensboro Austin (2)
Lafayette --------- Hickory Beaumont
Merrillville Mankato High Point College Station
Muncie Minneapolis / St. Paul (3) Raleigh-Durham (3) Corpus Christi
Terre Haute St. Cloud Winston-Salem Dallas / Ft. Worth (9)
IOWA MISSISSIPPI OHIO Denton
---- ----------- ---- El Paso (3)
Cedar Rapids (2) Biloxi Cincinnati (2) Harlingen
Council Bluffs Hattiesburg Cleveland (4) Houston (12)
Davenport Jackson Columbus Killeen
Des Moines (3) Meridian Dayton Laredo
Dubuque Tupelo Heath Longview
Fort Dodge Lancaster Lubbock
Sioux City Lima McAllen
Mansfield Midland
Niles Odessa
Sandusky Port Arthur
St. Clairsville
Toledo
</TABLE>

4
<PAGE> 5
Expansion Strategy

The following table provides a history of the Company's store expansion
program over the past five fiscal years.

<TABLE>
<CAPTION>
Fiscal Year
-------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Number of stores open at beginning of period . . . . . . . 43 65 90 126 183
Number of new stores opened . . . . . . . . . . . . . . . . 23 26 39 57 67
Number of stores closed . . . . . . . . . . . . . . . . . . 1 1 3 -- --
------- ------- ------- ------- -------
Number of stores open at end of period . . . . . . . . . . 65 90 126 183 250
======= ======= ======= ======= =======
</TABLE>

The Company's expansion strategy is to continue to open stores in enclosed
shopping malls in both metropolitan markets and middle markets primarily in its
existing markets, and to continue developing the northeast market where the
Company made its initial entry at the end of 1997. The Company expects to open
approximately 70 to 75 new stores during fiscal 1998, 26 of which have been
opened as of April 1998. The Company believes that the broad appeal of the
Gadzooks concept enables it to operate successfully in diverse geographic and
demographic markets, thereby increasing the total number of potential sites
available to the Company.

The Company selects locations for new store openings to achieve a balance
between (i) test markets where the Company has had no previous operating
experience, (ii) new markets where the Company has tested a Gadzooks store and
believes that the Company can successfully expand, and (iii) mature markets
where the Company desires to add new stores at attractive locations as they
become available. In general, the Company will open the highest number of
stores in new markets where the Company's concept has recently been introduced
and where the Company believes that it can capitalize on the potential of these
markets. The Company typically expands from existing markets into contiguous
new markets and attempts to cluster its stores within a market area in order to
achieve management and operating efficiencies and to enhance its name
recognition. In addition, from time to time the Company analyzes stores for
potential closing.

The Company has from time to time analyzed potential acquisitions of small
chains of stores that serve its target customer in order to provide the Company
with more rapid access to desirable locations and new markets and may consider
such acquisitions again in the future. Except for a limited number of stores
acquired from former franchisees, the Company has never made any such
acquisitions and does not currently have any agreements for any in the future.

STORE-LEVEL ECONOMICS

In 1997, the Company's 250 stores averaged $794,437 in annualized net sales
and produced annualized net sales per square foot of approximately $341.
Stores which were opened during all of fiscal 1997, a total of 183 stores,
generated average net sales of $785,797 and average store-level operating cash
flow (defined as store operating income before depreciation and excluding
changes in working capital) of approximately $134,000, or 17.0% of average net
sales. In general, the Company's newer stores typically generate lower sales
volumes and operating cash flow than its more mature stores. Capital
expenditures, including leasehold improvements and furniture and fixtures, for
the 67 new stores opened during fiscal 1997 averaged approximately $186,000
(approximately $116,000 net of all landlord allowances), and initial gross
inventory requirements (which were partially financed by trade credit) averaged
approximately $100,000 per store. Pre-opening costs ranged from $9,000 to
$13,000 for travel, hiring and training, and other miscellaneous costs
associated with the set-up of a new store prior to its opening for business.
Inventory requirements vary at new stores depending on the season during which
they are opened and current fashion trends. There can be no assurance that in
the future, the average store-level sales and operating cash flow will not vary
from historical results or that the total estimated capital expenditures for
new stores will not increase.

5
<PAGE> 6

MERCHANDISING

The Company's merchandising strategy is to provide a wide range of brand
name casual apparel and related accessories that reflect the fashion
preferences of young men and women principally between the ages of 13 and 19.
Each store typically carries an inventory of approximately 2,200 SKUs, with
most merchandise selling at prices ranging between $15 and $30.

The Company's merchandise includes high visibility names such as JNCO, Dr.
Marten, Kikwear, Adidas, BC Ethic and other popular fashions and brand name
merchandise. The Company concentrates on merchandise that appeals to the
mainstream teenager rather than relying on "cutting edge" products. The
Company believes that this strategy is consistent with its philosophy of
responding to its customers' fashion preferences as opposed to attempting to
establish fashion trends.

The Company classifies all of its merchandise into one of five categories
as follows:

<TABLE>
<S> <C>
o Young Men: The Young Mens category includes casual sportswear separates reflecting
current fashion trends, such as woven and knit tops and bottoms made of denim
and other fabrics. The key vendors in this category include JNCO, Airwair,
Kikwear, BC Ethic and Adidas.
o Juniors (Young Women): The Juniors category includes casual sportswear separates designed for the
fashion-current young woman, such as knit tops, woven shirts and vests,
denim, dresses and swimwear. Key vendors in this category include JNCO,
Kikwear, Mudd, BAI, Anxiety and Younique Clothing.
o Accessories: The Accessories category includes a variety of male, female and unisex
accessories including sunglasses, watches, wallets, key chains, handbags,
earrings, necklaces, hats and other accessories. Key vendors in this
category include Fossil, Oakley, Storm, Black Flys and Adidas.
o Unisex Apparel: The Unisex category consists primarily of t-shirts with logos containing
current topics and humorous designs and phrases. This category includes
merchandise from various vendors, including Logotel, as well as a small
selection of Company-designed products. Periodically, the Company will
supplement this category with other apparel appropriate for both sexes.
o Footwear: The Company offers a limited selection of male, female and unisex footwear
including sandals and active footwear. Key vendors in this category include
Airwair, Adidas, Skechers, Espirit and Converse.
</TABLE>

The following table sets forth the Company's merchandise by category as an
approximate percentage of net sales for fiscal 1997:

<TABLE>
<CAPTION>
Percentage of Net Sales
-----------------------
<S> <C>
Juniors (Young Women) . . . . . . . . . . . . . . . . . . . . . . . . 29%
Young Men . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Accessories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Unisex Apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Footwear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
-----
100%
===
</TABLE>

6
<PAGE> 7
By offering products in multiple categories, the Company is able to shift
its merchandise emphasis among and within its core categories to respond to
changing customer preferences. For example, in response to increased demand
for young men's apparel in fiscal 1997, the Company increased its emphasis in
these merchandise categories and decreased its emphasis in the junior
merchandise category. The Company expects to continue to adjust its emphasis
in particular categories in response to changing fashion trends and, therefore,
its merchandise mix may vary slightly from time-to-time.

In an effort to keep the stores fresh and exciting, the Company's
merchandising staff provides specific floor sets and merchandising ideas to the
stores and regularly instructs district and store managers on the creative
display of merchandise. The merchandise presentation in the stores is
significantly changed three times each year to highlight specific merchandise
for each of the Company's three peak selling seasons and to maintain a current
look. In addition, the Company maintains a constant flow of new merchandise to
the stores through shipments from its distribution center on a daily basis to
encourage our customers to frequently visit our stores. To reduce the risk
associated with the introduction of new products, the Company tests products in
selected stores before determining if it will purchase the product for a
broader group of stores.

PURCHASING

The Company's purchasing staff consists of a General Merchandising Manager,
two divisional merchandising managers, buyers, and associate buyers. The
General Merchandising Manager, divisional merchandise managers and the buyers
analyze current fashion directions by visiting major fashion markets and
maintaining close relationships with the Company's vendors in order to identify
styles and trends. In addition, the Company's buyers regularly attend concerts
and other events attended by teenagers. The General Merchandising Manager,
divisional merchandising managers and the buyers constantly monitor merchandise
flow through the stores and strive to maintain the appropriate merchandise mix
to meet customer demand. Several of the buyers were formerly district managers
or store managers of the Company and are familiar with the Company's customers
and their merchandise preferences.

Due to changes in fashion trends and seasonality, the Company purchases
merchandise from numerous vendors throughout the year. During fiscal 1997, the
Company did business with approximately 750 vendors. Of those vendors, JNCO,
accounted for approximately 12% of the Company's merchandise purchases. No
other single vendor accounted for more than 10% of merchandise purchases.
Certain of the Company's vendors have limited financial resources and
production capabilities. The Company believes that its relationships with its
vendors are good.

ALLOCATION AND DISTRIBUTION OF MERCHANDISE

The Company continually strives to improve its merchandising, distribution,
planning and allocation methods to manage its inventory more efficiently. The
Company's Director of Planning and Allocation and the staff in the planning and
allocation department work closely with merchandise buyers and store personnel
to meet the requirements of individual stores for appropriate merchandise in
sufficient quantities. The Company divides its stores into different
categories based on, among other things, geographic location, demographics and
sales volume. Product allocation and distribution are based in part on an
analysis of the stores by category. Information from the Company's
point-of-sale computer system is regularly reviewed and analyzed to assist in
making merchandise allocation and markdown decisions.

In May 1997, the Company relocated its headquarters to a larger site, in
the Dallas metropolitan area, which includes a distribution facility of
approximately 110,000 square feet. Merchandise is delivered by the vendors to
this facility, where it is inspected, entered into the Company's computer
system, allocated to stores, ticketed (to the extent that it was not
pre-ticketed by the vendor) and boxed for distribution to the Company's stores.
Merchandise is typically shipped to stores daily via United Parcel Service,
providing Gadzooks stores with a steady flow of new merchandise. For key
products, the Company maintains a backstock at its distribution center that is
allocated and distributed to the stores through an automatic replenishment
system.

7
<PAGE> 8

STORE OPERATIONS

Gadzooks stores are open seven days a week during normal mall hours. The
Company's store operations are managed by a Senior Vice President of Store
Operations, Director of Store Operations, regional managers and district
managers, who generally have responsibility for 8 to 10 stores within a
geographic district. Individual stores are managed by a store manager and two
assistant store managers. A typical store has 6 to 12 part time sales
associates, depending on the season. Gadzooks compensates its district and
store managers with a base salary, a performance bonus based on store sales,
payroll expense control and loss prevention. In addition, stock options are
granted to district managers at the time they assume this position, with
additional grants each year thereafter. Sales associates are compensated on an
hourly basis.

The Company believes that its continued success is dependent in part on its
ability to attract, retain and motivate quality employees. In particular, the
success of the Company's store expansion program will be dependent on its
ability to promote and/or recruit qualified district and store managers. To
date, the vast majority of the Company's district managers were previously
Gadzooks store managers. The Company has an established training program for
future district managers. Store managers, many of whom are selected from among
the Company's sales associates, currently complete a two-week training program
at a designated training store before taking responsibility for a store. The
hiring and training of new sales associates are the responsibility of store
managers, and the Company has established training and operations manuals to
assist them in this process. The Company is developing enhanced training
programs for its store managers, assistant managers and sales associates.

Management considers its employees' knowledge of the Company's customers
and merchandise to be significant to its marketing approach and customer
satisfaction. While all Gadzooks store employees are responsible for the
general appearance of the store, restocking of shelves and merchandise
presentation, the Company's major emphasis in training its store employees is
to give priority to customer service and assistance. Sales associates
regularly act as greeters, meeting customers as they enter the store, handing
out promotional materials and offering assistance. The Company trains its
sales associates to inform the customer about new fashion trends and to suggest
merchandise that suits the customer's wardrobe and lifestyle needs. The
Company monitors the customer service level at each store through various
programs, including its "I Spy" program of unannounced visits to the stores by
shoppers who are unknown by the store employees and by regularly reviewing and
responding to comment cards and e-mails received from its customers.

STORE ENVIRONMENT

The Company believes that its stores are visually appealing and provide a
fun and enjoyable shopping experience for its customers. Gadzooks stores are
designed to create a high energy, fun environment using neon signs, video
monitors featuring popular music videos, playful mannequins and creative,
eye-catching signage. Store entrances are typically decorated with a
checkerboard floor, and a Volkswagen Beetle, decorated with merchandise, is a
feature attraction in the stores. The Company typically displays a significant
amount of merchandise on the walls of the store, with male merchandise along
one side, female merchandise along the other and t-shirts along part of the
back wall. In the center of the store, lower fixtures are used to display
merchandise in order to maintain an open feeling. Stores typically feature
large windows along the mall which provide an open view of the entire store to
mall traffic and are merchandised to draw customers into the store. While
Gadzooks stores are designed to appeal primarily to the teenage customer, the
Company also strives to create a shopping environment that is comfortable for
adults.

SITE SELECTION

Based on its results to date in both metropolitan and middle markets, the
Company believes that it can operate successfully in markets with a broad range
of geographic and demographic profiles. The Company takes into account certain
demographic factors such as population density, concentration of teenagers,
income levels, lifestyle characteristics and the performance of other retailers
to identify attractive new markets, evaluate specific shopping malls and
project individual store sales volumes.

8
<PAGE> 9

Within each shopping mall, the Company typically seeks a highly visible
location and often locates its stores near major fashion-oriented department
stores, food courts and other specialty stores catering to teenage customers.
The Company's existing stores average approximately 2,300 square feet. The
Company typically seeks a location of approximately 2,000 to 2,500 square feet
with significant store frontage. However, the Company's flexible store design
enables it to take advantage of well-situated sites with more unique layouts.
Once a site is approved, the Company, with the assistance of an outside
architect, designs the store to meet the specific site characteristics. The
Company's construction department seeks competitive bids from outside
contractors for the build-out of each store and oversees the construction
process. The Company typically requires six to eight weeks to open a new store
after the beginning of build-out.

MANAGEMENT INFORMATION SYSTEMS

Each Gadzooks store is linked to the Company's headquarters through a
point-of-sale system that interfaces with an IBM RS6000 computer equipped with
an integrated merchandising, distribution and accounting software package. The
Company's point-of-sale computer system has several features, including
merchandise scanning, "price look-up," the ability to compile preferred
customer lists and on-line credit card approval. These features improve
transaction accuracy, speed and checkout time, increase overall store
efficiency, and enable the Company to track the productivity of individual
sales associates.

The Company's management information and control systems enable the
Company's corporate headquarters to promptly identify sales trends, replenish
depleted store inventories, reprice merchandise and monitor merchandise mix and
inventory shrinkage at individual stores and throughout the Company's store
network. Management believes that these systems provide a number of benefits,
including improved store inventory management, better in-stock availability,
higher operating efficiency and fewer markdowns.

The Company's merchandising, distribution and accounting software system
was installed in late 1993, and the point-of-sale software system was
installed during the second quarter of fiscal 1995. In 1997, a new planning
and allocation software system was installed to enhance store level planning
and to further monitor product sales and inventory levels. In addition, a new
reporting package was integrated with the planning and allocation software
system to maximize its utilization. The Company estimates that its current
management information and control systems are adequate to support the
Company's planned expansion, but has plans to continue to improve and enhance
numerous functions on a continuing basis.

The Company's business depends in part upon its ability to store, retrieve,
process and manage significant databases and, periodically, to expand and
upgrade its information processing capabilities. The Company recognizes the
need to ensure that its operations will not be adversely impacted by Year 2000
software failures. The Company has reviewed and continues to review, on a
regular basis, its computer equipment and software systems with regard to Year
2000 problems. To a lesser extent, the Company is also relying on its computer
equipment and software suppliers' ability to ensure that all products provided
by them are Year 2000 compliant. The Company has formulated a plan and
methodology for addressing Year 2000 problems and is currently implementing
such plan. The cost of implementing this plan is not expected to have a
material impact on the Company's results of operations or financial position.

ADVERTISING AND PROMOTION

The Company relies primarily on the enthusiasm of its sales associates and
existing customers, highly visible store locations and eye-catching signage to
attract new customers to the stores. The Company has generally found this
approach to be more cost effective than more traditional media advertising.
The Company plans the opening of new stores to coincide with peak shopping
seasons and mall grand openings when customer traffic is greater. The Company
also uses promotions to generate repeat visits to its stores, such as a
"preferred customer program" that entitles high volume customers to attend
private sale events held twice each year. The Company advertises to a limited
extent in national magazines, such as Seventeen and YM, in cooperation with
certain of its vendors. The Company also benefits from advertising by its
vendors, especially where Gadzooks is listed as a retailer of their products.

9
<PAGE> 10
TRADEMARKS

The Company has registered on the Principal Register of the United States
Patent and Trademark Office "Gadzooks" (in various formats) and "Gatitude", and
has an application pending for "Cool Stuff for Teens." Each federal
registration is renewable indefinitely if the mark is in use at the time of the
renewal. The Company is not aware of any claims of infringement or other
challenges to the Company's right to use its marks in the United States.

Competition

The teenage retail apparel and accessories industry is highly competitive.
The Company competes with other retailers for customers, suitable retail
locations and qualified management personnel. Gadzooks currently competes with
traditional department stores, with national specialty chains such as The Gap
and certain divisions of The Limited, with numerous other teen retailers such
as The Buckle, Pacific Sunwear, Rave, Contempo, Wet Seal, Hot Topic and
American Eagle, with local specialty stores in certain markets, and to a lesser
extent, with mass merchandisers. Many of the Company's competitors are larger
and have substantially greater financial, marketing and other resources than
the Company. The principal factors of competition in the Company's business
are fashion, merchandise selection, customer service, store location and price.

EMPLOYEES

At April 13, 1998, the Company had 1,007 full-time employees and 2,265
part-time employees. Of the Company's 3,272 employees, 151 were corporate
personnel, 98 were distribution center employees and 3,023 were store
employees. The number of part-time employees fluctuates with seasonal needs.
None of the Company's employees is covered by a collective bargaining
agreement. The Company seeks to create a casual and supportive working
environment and considers its employee relations to be excellent.

10
<PAGE> 11
RISK FACTORS

This Report contains certain forward looking statements about the business,
operations and financial condition of the Company. The actual results of the
Company could differ materially from those forward looking statements. The
following information sets forth certain factors that could cause the actual
results of the Company to differ materially from those contained in the forward
looking statements.

AGGRESSIVE GROWTH STRATEGY; FUTURE OPERATING RESULTS

The Company's net sales and net income have grown significantly during the
past several years, primarily as a result of the opening of new stores and, to
a lesser extent, increases in comparable store sales. The Company intends to
continue to pursue an aggressive growth strategy for the foreseeable future,
and its future operating results will depend largely upon its ability to open
and operate new stores successfully and to manage a larger business profitably.
The Company anticipates opening approximately 70 to 75 new stores during fiscal
1998, which will result in a significant increase in the number of stores
operated by the Company. The Company also plans to enter several new markets
in various regions of the United States. Expansion into new markets may
present competitive and merchandising challenges that are different from those
currently encountered by the Company in its existing markets. As an additional
part of its growth strategy, the Company has occasionally analyzed the
acquisition of other retailers that serve the Company's target customer and may
consider such acquisitions again in the future. Except for a limited number of
stores acquired from former franchisees, the Company has never made any such
acquisitions and does not currently have any agreements for any in the future.
There can be no assurance that the operations of any acquired entities could be
successfully integrated with the Company's existing operations or that the
combined business would be profitable.

The Company is subject to a variety of business risks generally associated
with rapidly growing companies. The Company's ability to open new stores will
depend upon many factors, including, among others, the ability to identify and
enter new markets, locate suitable store sites, negotiate acceptable lease
terms, hire and train store managers and sales associates and obtain adequate
capital resources on acceptable terms. There can be no assurance that the
Company will be able to integrate successfully new stores into its operations
or that new stores will achieve sales and profitability levels comparable to
the Company's existing stores. In addition, there can be no assurance that the
Company's expansion within its existing markets will not adversely affect the
individual financial performance of the Company's existing stores or its
overall results of operations. Furthermore, the Company will need to
continually evaluate the adequacy of its store management and management
information and distribution systems to manage its planned expansion. There
can be no assurance that the Company will anticipate all of the changing
demands that its expanding operations will impose on such systems and
facilities, and the failure to adapt its systems, facilities and procedures
could have a material adverse effect on the Company's business. There can be
no assurance that the Company will successfully achieve its planned expansion
or, if achieved, that the expansion will result in profitable operations. See
"Business -- Store Locations" and "-- Expansion Strategy."

The Company anticipates that it will spend approximately $9.4 million for
capital expenditures and approximately $5.0 million for initial inventories to
open approximately 70 to 75 new stores and to remodel 5 to 7 existing stores in
fiscal 1998. The actual costs that the Company will incur in connection with
opening new stores cannot be predicted with precision because such costs will
vary based upon, among other things, geographic location, the size of the store
and the extent of the build-out required at the selected site. The Company
believes that its existing cash balances, cash generated from operations, net
proceeds received by the Company from its public offerings and funds available
under the Company's revolving line of credit will be sufficient to fund its
expansion requirements through at least 1998. There can be no assurance that
the Company may not be required to seek additional sources of funds for such
expansion.

11
<PAGE> 12
FLUCTUATIONS IN COMPARABLE STORE SALES RESULTS

A variety of factors affect the Company's comparable store sales results
including, among others, economic conditions, fashion trends, the retail sales
environment, sourcing and distribution of products and the Company's ability to
execute its business strategy efficiently. The Company's quarterly comparable
store sales results have fluctuated significantly in the past. The Company's
comparable store sales results were 7.3%, 8.6%, 5.9% and 3.9% in the first,
second, third and fourth quarters of fiscal 1996, respectively, and 4.4%,
(3.6%), 3.3% and 3.1% in the first, second, third and fourth quarters of fiscal
1997 respectively. The Company has recorded comparable store sales decreases
in past months and quarters, and there can be no assurance that comparable
store sales for any particular month, quarter or fiscal year will not decrease
in the future. The Company's comparable store sales results could cause the
price of the Common Stock to fluctuate substantially.

CHANGES IN FASHION TRENDS

The Company's profitability is largely dependent upon its ability to
anticipate the fashion tastes of its customers and to provide merchandise that
appeals to their preferences in a timely manner. The fashion tastes of the
Company's customers may change frequently, and the Company's failure to
anticipate, identify or react appropriately to changes in styles, trends or
brand preferences could lead to, among other things, excess inventories and
higher markdowns, which could have a material adverse effect on the Company's
business. In addition, fashion misjudgments could materially and adversely
affect the Company's operating results, comparable store sales results and
image with its customers. See "Business -- Merchandising."

IMPACT OF ECONOMIC CONDITIONS

Certain economic conditions affect the level of consumer spending on
merchandise offered by the Company, including, among others, business
conditions, interest rates, taxation and consumer confidence in future economic
conditions. If the demand for apparel and related merchandise by teenagers
were to decline, the Company's business, comparable store sales results and
results of operations would be materially and adversely affected. Although the
Company advertises in national magazines to a limited extent through
cooperative agreements with certain of its vendors, its stores rely principally
on mall traffic for customers. Therefore, the Company is dependent upon the
continued popularity of malls as a shopping destination and the ability of mall
anchor tenants and other attractions to generate customer traffic for its
stores. A decrease in mall traffic or a decline in economic conditions in the
markets in which the Company's stores are located would adversely affect the
Company's growth, net sales, comparable store sales results and profitability.
See "Business."

QUARTERLY RESULTS AND SEASONALITY

The Company's quarterly results of operations may fluctuate materially
depending on, among other things, the timing of new store openings and related
pre-opening expenses, net sales contributed by new stores, increases or
decreases in comparable store sales, shifts in timing of certain holidays and
changes in the Company's merchandise mix. The Company's business is also
subject to seasonal influences, with heavier concentrations of sales during the
Christmas holiday, back-to-school and spring break seasons. As is the case
with many apparel retailers, the Company's net sales and net income are
typically lower in the first quarter. The Company has experienced first
quarter losses in the past and may experience such losses in the future.
Because of these fluctuations in net sales and net income, the results of
operations of any quarter are not necessarily indicative of the results that
may be achieved for a full fiscal year or any future quarter.

DEPENDENCE ON KEY VENDORS

The Company's business depends on its ability to purchase current season,
brand name apparel in sufficient quantities at competitive prices. During the
Company's 1997 fiscal year, JNCO, accounted for approximately 12% of the
Company's merchandise purchases. Of the Company's other vendors, no single
vendor accounted for more than 10% of the Company's merchandise purchases. The
inability or failure of key vendors to supply the Company with adequate
quantities of desired

12
<PAGE> 13
merchandise, the loss of one or more key vendors or a material change in the
Company's current purchase terms could have a material adverse effect on the
Company's business. Many of the Company's smaller vendors have limited
resources, production capacities and operating histories, and many have limited
the distribution of their merchandise in the past. The Company has no
long-term purchase contracts or other contractual assurances of continued
supply, pricing or access to new products. There can be no assurance that the
Company will be able to acquire desired merchandise in sufficient quantities on
terms acceptable to the Company in the future. See "Business -- Merchandising"
and "-- Purchasing."

DEPENDENCE ON KEY PERSONNEL

The Company's success will depend largely on the efforts and abilities of
senior management, particularly Gerald R. Szczepanski, the Chairman of the
Board and Chief Executive Officer and a founder of the Company. The loss of
his services or the services of other members of senior management could have a
material adverse effect on the Company's business. The Company has a
$1,000,000 key-man life insurance policy on Mr. Szczepanski. There can be no
assurance that the Company's existing management team will be able to manage
the Company or its growth or that the Company will be able to attract and
retain additional qualified personnel as needed in the future.

COMPETITION

The Company operates in a highly competitive environment. The Company
currently competes with traditional retail department stores, with national
specialty chains such as The Gap and certain divisions of The Limited, with
numerous regional chains such as The Buckle, Pacific Sunwear, Rave, Contempo,
Wet Seal, Hot Topic and American Eagle, with smaller chains and local specialty
stores, and to a lesser extent, with mass merchandisers. Many of these
competitors are larger and have substantially greater resources than the
Company. Direct competition with these and other retailers may increase
significantly in the future, which could require the Company, among other
things, to lower its prices and/or increase its advertising expenses.
Increased competition could have a material adverse effect on the Company's
operations and comparable store sales results. See "Business -- Competition."

STOCK PRICE VOLATILITY

The market price of the Company's Common Stock has risen substantially
since the Company's initial public offering in October 1995. The Company's
Common Stock is quoted on The Nasdaq Stock Market, which has experienced and is
likely to experience in the future significant price and volume fluctuations
which could adversely affect the market price of the Common Stock without
regard to the operating performance of the Company. In addition, the Company
believes that factors such as quarterly fluctuations in the financial results
of the Company, the Company's comparable store sales results, announcements by
other apparel retailers, the overall economy and the condition of the financial
markets could cause the price of the Common Stock to fluctuate substantially.

ANTI-TAKEOVER MATTERS

The Company's Restated Articles and its Bylaws contain provisions that may
have the effect of delaying, deterring or preventing a takeover of the Company
that shareholders may consider to be in their best interests. The Company's
Restated Articles and Bylaws provide for a classified Board of Directors
serving staggered terms of three years, the prohibition of shareholder action
by written consent in certain circumstances and certain "fair price
provisions." Additionally, the Board of Directors has the authority to issue up
to 1,000,000 shares of preferred stock having such rights, preferences and
privileges as designated by the Board of Directors without shareholder
approval.

13
<PAGE> 14
ITEM 2. PROPERTIES.

All of the existing stores are leased by the Company, with lease terms
(excluding renewal option periods exercisable by the Company at escalating
rents) expiring between April 1998 and January 2009. The leases for most of
the existing stores are for terms of 10 years and provide for contingent rent
based upon a percent of sales in excess of specified minimums.

In May 1997, the Company relocated its office and distribution center to a
larger site in the Dallas metropolitan area in order to accommodate its
expanding operations. The Company's new office and distribution center is
located in Carrollton, Texas and will be occupied under a lease covering
approximately 150,000 square feet, which is scheduled to expire on May 1, 2007.

ITEM 3. LEGAL PROCEEDINGS.

In the ordinary course of its business, the Company is periodically a party
to lawsuits. The Company believes that any resulting liability from existing
legal proceedings, individually or in the aggregate, will not have a material
adverse effect on its operations or financial condition.

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

No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the fiscal year covered by this report.

PART II

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

The Common Stock is traded on The Nasdaq Stock Market under the symbol
"GADZ." The following table sets forth, for the Company's fiscal periods
indicated and is adjusted to give retroactive effect to the Company's
three-for-two Common Stock split paid on May 30, 1996, the high and low sale
prices per share for the Common Stock, as reported on The Nasdaq Stock Market.

<TABLE>
<CAPTION>
High Low
--------- ---------
<S> <C> <C>
1996
----
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30 5/8 $ 15 13/16
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 23 1/4
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 3/4 22
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 1/4 17 1/2

1997
----
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 1/4 24 1/4
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 16 13/16
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 3/4 15 3/8
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 1/2 19 5/16
</TABLE>

On April 13, 1998, the last sale price of the Common Stock as reported on
The Nasdaq Stock Market was $22 3/4 per share. As of April 13, 1998, there
were approximately 92 holders of record of the Common Stock, although the
Company believes the number of beneficial holders is substantially greater.

14
<PAGE> 15
The Company intends to retain its earnings, if any, to finance the growth
and development of its business and does not anticipate paying cash dividends
on its Common Stock in the foreseeable future. The payment of any future
dividends will be at the discretion of the Company's Board of Directors and
will depend upon, among other things, the future earnings, operations, capital
requirements and financial condition of the Company. In addition, the
Company's current revolving line of credit ("Revolving Line") contains various
financial covenants, including covenants relating to net worth, which may have
the effect of restricting the Company's ability to pay dividends.

ITEM 6. SELECTED FINANCIAL DATA.

The selected financial and operating data in response to Item 6 is
contained in the section entitled "Selected Financial Data," located on page 13
of the registrant's 1997 Annual Report to Shareholders, filed as Exhibit 13 to
this Report. Such Selected Financial Data is incorporated herein by reference.

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

The information in response to item 7 is contained in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," located on pages 14 to 19 of the registrant's 1997 Annual Report
to Shareholders, filed as Exhibit 13 to this Report. Such Management's
Discussion and Analysis of Financial Condition and Results of Operations are
incorporated herein by reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company does not engage in trading market risk sensitive instruments
and does not purchase as investments, as hedges, or for purposes "other than
trading" instruments that are likely to expose the Company to market risk,
whether it be from interest rate, foreign currency exchange, commodity price or
equity price risk. The Company has issued no debt instruments, entered into no
forward or futures contracts, purchased no options and entered into no swaps.

The Company's primary market risk exposure is that of interest rate risk.
A change in LIBOR or the Prime Rate as set by Wells Fargo Bank (Texas),
National Association, would affect the rate at which the Company could borrow
funds under its Revolving Line.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The information in response to item 8 is contained in the registrant's 1997
Annual Report to Shareholders, filed as Exhibit 13 to this Report. Such
information is incorporated herein by reference. A cross-reference for
location of the requested information is below.

<TABLE>
<CAPTION>
Page Number(s) in
Financial Statements and Supplementary Data Annual Report*
- ------------------------------------------- --------------
<S> <C>
Unaudited Quarterly Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Balance Sheets at January 31, 1998 and February 1, 1997 . . . . . . . . . . . . . . . . . . 20
Statements of Income for the Years Ended January 31, 1998,
February 1, 1997, and January 27, 1996 . . . . . . . . . . . . . . . . . . . . . . . 21
Statements of Stockholders' Equity for the Years Ended January 31, 1998,
February 1, 1997, and January 27, 1996 . . . . . . . . . . . . . . . . . . . . . . . 22
Statements of Cash Flows for the Years Ended January 31, 1998,
February 1, 1997, and January 27, 1996 . . . . . . . . . . . . . . . . . . . . . . . 23
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 -32
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
</TABLE>

*The indicated pages of the Company's 1997 Annual Report to Shareholders are
filed as Exhibit 13 to this Report. Such Exhibit is incorporated herein by
reference.

15
<PAGE> 16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Information with respect to this item is incorporated by reference from the
registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the registrant's fiscal year.

ITEM 11. EXECUTIVE COMPENSATION.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

PART IV

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

<TABLE>
<S> <C>
(a) 1. The financial statements as cross-referenced in Item 8 of this Report, together with the report thereon of
Price Waterhouse LLP dated March 6, 1998, appearing in the accompanying 1997 Annual Report to Shareholders are
incorporated by referenced in this Report. With the exception of the aforementioned information and
information incorporated in Items 6 and 7, the 1997 Annual Report to Shareholders is not deemed filed as part
of this Report.

2. Financial statement schedules are omitted because they are not applicable or the required information is shown
in the financial statements or notes thereto.

3. Exhibits included or incorporated herein:

See Exhibit Index.
</TABLE>

(b) Reports on Form 8-K

There were no reports on Form 8-K filed during the last quarter of the
fiscal year covered by this report.

16
<PAGE> 17

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 April 24, 1998 on its behalf by the undersigned, thereunto duly authorized.

GADZOOKS, INC.

By /s/ Gerald R. Szczepanski
------------------------------------------
Gerald R. Szczepanski,
Chairman of the Board, President
and Chief Executive Officer

Each person whose signature appears below hereby authorizes Gerald R.
Szczepanski and Monty R. Standifer or either of them, as attorneys-in-fact to
sign on his behalf, individually, and in each capacity stated below and to file
all amendments and/or supplements to the Annual Report on Form 10-K.

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

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Gerald R. Szczepanski Chairman of the Board, President April 24, 1998
- ------------------------------------------
Gerald R. Szczepanski and Chief Executive Officer
(Principal Executive Officer)

/s/ Monty R. Standifer Senior Vice President, Chief April 24, 1998
- ------------------------------------------
Monty R. Standifer Financial Officer, Treasurer and
Secretary (Principal Financial and
Accounting Officer)

/s/ Alan W. Crites Director April 24, 1998
- ------------------------------------------
Alan W. Crites

/s/ G. Michael Machens Director April 24, 1998
- ------------------------------------------
G. Michael Machens

/s/ Robert E.M. Nourse Director April 24, 1998
- ------------------------------------------
Robert E.M. Nourse

/s/ Lawrence H. Titus, Jr. Director April 24, 1998
- ------------------------------------------
Lawrence H. Titus, Jr.

</TABLE>

17
<PAGE> 18

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit
No. Description of Documents Page
- --------- ------------------------ ----
<S> <C> <C>
3.1 -- Second Restated Articles of Incorporation of the Company (filed as Exhibit 4.1 to the Company's
Form S-8 (No. 33-98038) filed with the Commission on October 12, 1995 and incorporated herein
by reference).

3.2 -- Amended and Restated Bylaws of the Company (filed as Exhibit 4.2 to the Company's Form S-8 (No.
33-98038) filed with the Commission on October 12, 1995 and incorporated herein by reference).

3.3 -- First Amendment to the Amended and Restated Bylaws of the Company (filed as Exhibit 3.3 of the
Company's Quarterly Report on Form 10-Q for the quarter ended August 2, 1997 filed with the
Commission on September 16, 1997 and is incorporated herein by reference).

4.1 -- Specimen Certificate for shares of Common Stock, $.01 par value, of the Company (filed as
Exhibit 4.1 to the Company's Amendment No. 2 to Form S-1 (No. 33-95090) filed with the
Commission on September 8, 1995 and incorporated herein by reference).

10.1 -- Purchase Agreement dated as of January 31, 1992 among the Company, Gerald R. Szczepanski,
Lawrence H. Titus, Jr. and the Investors listed therein (filed as Exhibit 10.1 to the Company's
Form S-1 (No. 33-95090) filed with the Commission on July 28, 1995 and incorporated herein by
reference).

10.2 -- Purchase Agreement dated as of May 26, 1994 among the Company, Gerald R. Szczepanski, Lawrence
H. Titus, Jr. and the Investors listed therein (filed as Exhibit 10.2 to the Company's Form S-1
(No. 33-95090) filed with the Commission on July 28, 1995 and incorporated herein by
reference).

10.3 -- Credit Agreement dated as of January 30, 1997 between the Company and Wells Fargo Bank (Texas),
National Association (filed as Exhibit 10.3 to the Company's 1996 Annual Report on Form 10-K
filed with the Commission on April 23, 1997 and incorporated herein by reference).

10.4 -- Form of Indemnification Agreement with a schedule of director signatories (filed as Exhibit
10.5 to the Company's Form S-1 (No. 33-95090) filed with the Commission on July 28, 1995 and
incorporated herein by reference).

10.5 -- Employment Agreement dated January 31, 1992 between the Company and Gerald R. Szczepanski, as
continued by letter agreement (filed as Exhibit 10.6 to the Company's Form S-1 (No. 33-95090)
filed with the Commission on July 28, 1995 and incorporated herein by reference).

10.6 -- 1992 Incentive and Nonstatutory Stock Option Plan dated February 26, 1992, and Amendments No. 1
through 3 thereto (filed as Exhibit 10.8 to the Company's Form S-1 (No. 33-95090) filed with
the Commission on July 28, 1995 and incorporated herein by reference).

10.7 -- 1994 Incentive and Nonstatutory Stock Option Plan for Key Employees dated September 30, 1994
(filed as Exhibit 10.9 to the Company's Form S-1 (No. 33-95090) filed with the Commission on
July 28, 1995 and incorporated herein by reference).
</TABLE>

18
<PAGE> 19

<TABLE>
<S> <C>
10.8 -- 1995 Non-Employee Director Stock Option Plan (filed as Exhibit 10.10 to the Company's Form S-1
(No. 333-00196) filed with the Commission on January 9, 1996 and incorporated herein by
reference).

10.9 -- Gadzooks, Inc. Employees' Savings Plan (filed as Exhibit 10.11 to the Company's Form S-1 (No.
33-95090) filed with the Commission on July 28, 1995 and incorporated herein by reference).

10.10 -- Severance Agreement dated September 5, 1996 between the Company and Gerald R. Szczepanski
(filed as Exhibit 10.10 to the Company's 1996 Annual Report on Form 10-K filed with the
Commission on April 23, 1997 and incorporated herein by reference).

10.11 -- Form of Severance Agreement with a schedule of executive officer signatories (filed as Exhibit
10.11 to the Company's 1996 Annual Report on Form 10-K filed with the Commission on April 23,
1997 and incorporated herein by reference).

10.12 -- Amendment No. 4 to the Gadzooks, Inc. 1992 Incentive and Nonstatutory Stock Option Plan (filed
as Exhibit 10.14 to the Company's Amendment No. 3 to Form S-1 (No. 33-95090) filed with the
Commission on September 27, 1995 and incorporated herein by reference).

10.13 -- Amendment No. 5 to the Gadzooks, Inc. 1992 Incentive and Nonstatutory Stock Option Plan dated
September 12, 1996 (filed as Exhibit 10.13 to the Company's 1996 Annual Report on Form 10-K
filed with the Commission on April 23, 1997 and incorporated herein by reference).

10.14 -- Amendment No. 1 to the 1994 Incentive and Nonstatutory Stock Option Plan for Key Employees
dated September 12, 1996 (filed as Exhibit 10.14 to the Company's 1996 Annual Report on Form
10-K filed with the Commission on April 23, 1997 and incorporated herein by reference).

10.15 -- Gadzooks, Inc. Employee Stock Purchase Plan (filed as Exhibit 4.5 to the Company's Form S-8
(No. 333-50639) filed with the Commission on April 21, 1998 and incorporated herein by
reference).

10.16*-- Gadzooks, Inc., Deferred Compensation Plan.

10.17*-- Lease Agreement between Gadzooks, Inc. (Lessee) and CB Midway International, LTD. (Lessor)
dated August 23, 1996.

13* -- Pages 13-33 of the Company's 1997 Annual Report to Shareholders.

23.1* -- Consent of Price Waterhouse LLP.

24* -- Power of Attorney (included on signature page of this report).

27* -- Financial Data Schedule.
</TABLE>
- -----------------

* Filed herewith (unless otherwise indicated exhibits are previously filed).

<PAGE> 1
EXHIBIT 10.16

GADZOOKS, INC. DEFERRED COMPENSATION PLAN

<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I TITLE AND DEFINITIONS...................................................................................1
1.1 Title......................................................................................................1
1.2 Definitions................................................................................................1

ARTICLE II PARTICIPATION..........................................................................................4

ARTICLE III SOURCES OF DEFERRALS..................................................................................4
3.1 Elections to Defer Compensation............................................................................5
3.2 Discretionary Credits by Company...........................................................................5
3.3 Maximum 401(k) Contributions...............................................................................6
3.4 Deemed Investment Elections................................................................................6

ARTICLE IV DEFERRAL ACCOUNTS......................................................................................7
4.1 Deferral Accounts..........................................................................................7

ARTICLE V VESTING.................................................................................................7

ARTICLE VI DISTRIBUTIONS..........................................................................................8
6.1 Distribution of Distributable Amount.......................................................................8
6.2 Early Distributions........................................................................................9
6.3 Hardship Distributions....................................................................................10
6.4 Inability to Locate Participant...........................................................................10

ARTICLE VII ADMINISTRATION.......................................................................................11
7.1 Committee.................................................................................................11
7.2 Committee Action..........................................................................................11
7.3 Powers and Duties of the Committee........................................................................11
7.4 Construction and Interpretation...........................................................................12
7.5 Information...............................................................................................12
7.6 Compensation, Expenses and Indemnity......................................................................12
7.7 Quarterly Statements......................................................................................13
7.8 Disputes..................................................................................................13

ARTICLE VIII MISCELLANEOUS.......................................................................................14
8.1 Unsecured General Creditor................................................................................14
8.2 Restriction Against Assignment............................................................................14
8.3 Withholding...............................................................................................14
8.4 Amendment, Modification, Suspension or Termination........................................................15
8.5 Adoption by Affiliates....................................................................................15
8.6 Governing Law.............................................................................................15
8.7 Receipt of Release........................................................................................15
8.8 Payments on Behalf of Persons Under Incapacity............................................................15
8.9 Limitation of Rights and Employment Relationship..........................................................15
8.10 Headings.................................................................................................16
</TABLE>

<PAGE> 3

DEFERRED COMPENSATION PLAN

WHEREAS, Gadzooks, Inc. (the "Company") desires to establish, effective
as of February 1, 1998, the Gadzooks, Inc. Deferred Compensation Plan to provide
supplemental retirement income benefits for a select group of management and
highly compensated employees through deferrals of salary, commissions and
bonuses;

NOW, THEREFORE, the terms of the Plan are as follows:

ARTICLE I
TITLE AND DEFINITIONS

1.1 Title.

This Plan shall be known as the Gadzooks, Inc. Deferred
Compensation Plan.

1.2 Definitions.

Whenever the following words and phrases are used in this
Plan, with the first letter capitalized, they shall have the meanings specified
below:

(a) "Account" or "Accounts" shall mean a Participant's
Deferral Account.

(b) "Base Salary" shall mean a Participant's annual base
salary, excluding bonus, incentive compensation and all other remuneration for
services rendered to Company and shall be determined without reduction for any
salary reduction contributions to a qualified plan with a deferral feature under
Section 401(k) of the Code or a plan established pursuant to Section 125 of the
Code.

(c) "Beneficiary" or "Beneficiaries" shall mean, at the
relevant time, the person or persons, including a trustee, personal
representative or other fiduciary, last designated by a Participant in
accordance with procedures established by the Committee to receive the benefits
specified hereunder in the event of the Participant's death. No beneficiary
designation shall become effective until it is filed with the Committee. Any
designation shall be revocable at any time through a written instrument filed by
the Participant with the Committee with or without the consent of the previous
Beneficiary. However, no designation of a Beneficiary other than the
Participant's spouse shall be valid unless consented to in writing by the
Participant's then existing spouse. If there is no such designation or if there
is no surviving designated Beneficiary, then the Participant's surviving spouse
shall be the Beneficiary. If there is no surviving spouse to receive any
benefits payable in accordance with the preceding sentence, the duly appointed
and currently acting personal representative of the Participant's estate shall
be the Beneficiary. In any case where there is no such personal representative
of the Participant's estate duly appointed and acting in that capacity within 90
days after the Participant's death (or such extended period as the Committee
determines is reasonably necessary to allow such personal

<PAGE> 4

representative to be appointed, but not to exceed 180 days after the
Participants' death), then Beneficiary shall mean the person or persons who can
verify by affidavit or court order to the satisfaction of the Committee that
they are legally entitled to receive the benefits specified hereunder. In the
event any amount is payable under the Plan to a minor, payment shall not be made
to the minor, but instead be paid, unless otherwise required by law, (a) to that
person's living parent(s) to act as custodian, (b) if that person's parents are
then divorced, and one parent is the sole custodial parent, to such custodial
parent, or (c) if no parent of that person is then living, to a custodian
selected by the Committee to hold the funds for the minor under the Uniform
Transfers or Gifts to Minors Act in effect in the jurisdiction in which the
minor resides. If no parent is living and the Committee decides not to select
another custodian to hold the funds for the minor, then payment shall be made to
the duly appointed and currently acting guardian of the estate for the minor or,
if no guardian of the estate for the minor is dully appointed and currently
acting within 60 days after the date the amount becomes payable, payment shall
be deposited with the court having jurisdiction over the estate of the minor.
Payment by the Company pursuant to any unrevoked Beneficiary designation, or to
the Participant's estate if no such designation exists, of all benefits owed
hereunder shall terminate any and all liability of the Company.

(d) "Board of Directors" or "Board" shall mean the board of directors
of the Company.

(e) "Bonuses" shall mean such cash amounts of income in addition
to Base Salary and Commissions as Company may determine to pay to an employee,
as determined in the sole and absolute discretion of Company, or as determined
by a formula established in the discretion of the Company.

(f) "Code" shall mean the Internal Revenue Code of 1986, as amended,
and the Treasury Regulations promulgated thereunder.

(g) "Committee" shall mean the committee appointed by the Board to
administer the Plan in accordance with Article VII.

(h) "Commissions" shall mean a Participant's remuneration earned from
Company that is designated as such and that is dependent on sales activity and
does not constitute Base Salary or Bonuses.

(i) "Company" shall mean Gadzooks, Inc. and any successor corporations.

(j) "Company Credits" shall mean Company Credits described in Section
3.2 hereof.

(k) "Compensation" shall mean the Base Salary, Commissions and Bonuses
that the Participant is entitled to receive for services rendered to the
Company.

(l) "Deferral Account" shall mean the bookkeeping account maintained by
the Committee for each participant that is credited or debited, as the case may
be, with amounts

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<PAGE> 5

equal to (i) the portion of the Participant's Compensation that he or she elects
to defer under Section 3.1, (ii) the amounts credited under Sections 3.2, (iii)
earnings or losses pursuant to Section 4.1, and (iv) amounts deducted pursuant
to Section 3.3.

(m) "Distributable Amount" shall mean, as of any particular time, the
balance in the Participant's Deferral Account as determined under Article IV,
less (i) any credited amounts that are attributable to any non-vested Company
Credits and (ii) any net earnings on such non-vested Company Credits.

(n) "Early Distribution" shall mean an election by a Participant in
accordance with Section 6.2 to receive a withdrawal of amounts from his or her
Deferral Account prior to the time in which such Participant would otherwise be
entitled to such amounts.

(o) "Effective Date" shall mean February 1, 1998.

(p) "Eligible Employee" shall mean a member of a select group of
management or a highly compensated employee that is designated by the Company
for participation in this Plan and who has not been removed by the Committee
from participation.

(q) "401(k) Plan" shall mean the Gadzooks, Inc. Savings Plan, as it
shall be amended from time to time.

(r) "Fund" or "Funds" shall mean one or more of the investment funds
selected and communicated by the Committee pursuant to Section 3.4(a).

(s) "Hardship Distribution" shall mean a distribution described in
Section 6.3 hereof.

(t) "Initial Election Period" shall mean, for those who are Eligible
Employees on February 1, 1998, the 30-day period immediately prior to such date
and, for all other Eligible Employees, the 30-day period following the time he
or she is designated by the Company as an Eligible Employee.

(u) "Interest Rate" shall mean, for each Fund, an amount equal to the
net rate of gain or loss on the assets of such Fund during each month or other
relevant period.

(v) "Maximum 401(k) Contributions" shall mean, for a given Plan Year,
the least of: (1) the Participant's total deferrals of Compensation under
Section 3.1 (excluding investment earnings and reduced by investment losses and
expenses) attributable to Base Salary earned and any Bonus that was payable in
that Plan Year; (2) the maximum elective deferrals that the Participant can make
to the 401(k) Plan under the limitations in Code Sections 402(g) and 415 for
that Plan Year, determined by the Company at the end of that Plan Year after
taking into account all contributions actually made by or on behalf of the
Participant to the 401(k) Plan for that Plan Year; or (3) the maximum elective
deferrals that the Company determines pursuant to Section 3.3 may be made by the
Participant for that Plan Year based on the Company's preliminary testing of the
401(k) Plan's compliance with the actual deferral percentage and actual

3
<PAGE> 6

contribution percentage discrimination testing for that Plan Year described in
Code Section 401(k)(3), after taking into account all elective deferrals
actually made by the Participant for that Plan Year.

(w) "Participant" shall mean any Eligible Employee who becomes a
Participant in accordance with Article II.

(x) "Payment Date" shall mean a date selected by the Committee that is
no later than sixty (60) days after the earlier of (1) the first day of the
month following the end of the calendar quarter in which the Participant's
employment terminates for any reason, or (2) a relevant Scheduled Withdrawal
Date.

(y) "Plan" shall mean the Gadzooks, Inc. Deferred Compensation Plan set
forth herein, or as amended from time to time.

(z) "Plan Year" shall mean the 12 consecutive month period beginning on
each January 1 and ending on December 31.

(aa) "Scheduled Withdrawal Date" shall mean the distribution date that
may be elected by the Participant for an in-service withdrawal, pursuant to
Section 6.1(c), of amounts of Compensation deferred in a given Plan Year, and
earnings and losses attributable thereto, as set forth on the election form for
such Plan Year.

ARTICLE II
PARTICIPATION

An Eligible Employee shall become a Participant in the Plan by electing
to defer a portion of his or her Compensation in accordance with Section 3.1. An
Eligible Employee who completes the requirements of the preceding sentence shall
commence participation in this Plan as of the first day of the month in which
Compensation is so deferred. Notwithstanding any provision to the contrary, if
it is determined or reasonably believed, based on a judicial or administrative
determination or an opinion of Company's legal counsel that a Participant is not
a member of a select group of management or a highly compensated employee, such
individual shall cease to be a Participant and his Distributable Amount shall be
paid to him in a lump sum as soon as practicable after the determination is made
that he is not a management or highly compensated employee.

ARTICLE III
SOURCES OF DEFERRALS

3.1 Elections to Defer Compensation. A Participant may elect in
accordance with this Section 3.1 to suspend current payment of his Bonuses, Base
Salary or Commissions and agree to payment of such amounts in future years.

4
<PAGE> 7

(a) Initial Election Period. Subject to the provisions of
Article II, each Eligible Employee may initially elect to defer Base Salary,
Bonuses and or Commissions by filing with the Committee an election that
conforms to the requirements of this Section 3.1, on a form provided by the
Committee, no later than the last day of his or her Initial Election Period.

(b) General Rule. The Compensation which an Eligible Employee
may elect to defer is, except as otherwise provided for Bonuses in Section
3.1(c), Compensation earned after the time at which the Eligible Employee elects
to defer in accordance with this Section 3.1 and shall be a flat dollar amount
or percentage which shall not exceed 100% of the Eligible Employee's Base
Salary, Bonuses and Commissions, provided that the total amount deferred by a
Participant shall be limited in any calendar year, if necessary, to satisfy
Social Security taxes (including Medicare), income taxes and employee benefit
plan withholding requirements as determined in the sole and absolute discretion
of the Committee. The minimum contribution which may be made in any Plan Year by
an Eligible Employee shall not be less than $5,000, provided such minimum
contribution can be satisfied from deferrals of Base Salary and/or Bonus and/or
Commission deferrals.

(c) Duration of Compensation Deferral Election. A Participant
may increase, decrease or terminate a deferral election with respect to Base
Salary or Commissions for any subsequent Plan Year by filing a new election on
or before December 15, which election shall be effective on the first day of the
next following Plan Year. An Eligible Employee's Initial Election to defer
Bonuses payable for 1998 must be filed by February 1, 1998. Any subsequent
election with respect to Bonuses must be filed by November 1 of the year just
prior to the year in which the Bonus is to be earned. All elections with respect
to Bonuses are for one Plan Year only.

(d) Elections other than Elections during the Initial Election
Period. Subject to the limitations of Section 3.1(b) above, any Eligible
Employee who fails to elect to defer Compensation during his or her Initial
Election Period may subsequently become a Participant, and any Eligible Employee
who has terminated a prior Compensation deferral election may elect to again
defer Compensation, by filing an election, on a form provided by the Committee,
to defer Compensation as described in Sections 3.1(b) and 3.1(c) above. An
election to defer Compensation must be filed in a timely manner in accordance
with the other provisions of this Section 3.1.

3.2 Discretionary Credits by Company. The Board may, in its sole
discretion, agree at any time to pay amounts of deferred compensation to
Participants hereunder. Such amounts shall be in addition to any deferrals by
Participants under Section 3.1 hereof and are herein referred to as "Company
Credits." Company Credits may be based on individual or business performance
criteria and may be made subject to vesting provisions. Participants shall be
notified of the terms and provisions of all Company Credits.

3.3 Maximum 401(k) Contributions. On or before the January 31st
immediately following the end of any Plan Year beginning on or after the
Effective Date during which a Participant has made deferrals of Compensation
payable during that Plan Year, the Company shall determine the Maximum 401(k)
Contribution that each such Participant would be permitted to make to the 401(k)
Plan for that Plan Year, based on preliminary actual deferral percentage and
actual contribution percentage testing for the 401(k) Plan for that Plan Year in
accordance with

5
<PAGE> 8

Code Section Sections 401(k)(3) and 402(g), taking into account any elective
deferrals actually contributed to the 401(k) Plan by or on behalf of the
Participant for that Plan Year and other relevant factors. As soon as
practicable after the Maximum 401(k) Contribution for each such Participant for
that Plan Year has been determined, but in all events no later than the March
15th immediately the end of that Plan Year, the Company shall deduct the
Participant's Maximum 401(k) Contribution amount for that Year from the
Participant's Deferral Account and pay that amount in one lump sum either to the
401(k) Plan as an additional elective deferral on the Participant's behalf or to
the Participant as additional compensation for that Year, as elected by the
Participant as a part of his or her Compensation deferral election for that Plan
Year and made prior to that Plan Year. Notwithstanding anything to the contrary,
under no circumstances shall the Participant be permitted to change his or her
election with respect to the Maximum 401(k) Contribution for any Plan Year on or
after the beginning of that Plan Year nor in any way accelerate or extend the
date the amount of the Maximum 401(k) Contribution is to be paid to the
Participant or the 401(k) Plan pursuant to this Section 3.3. A Participant's
Maximum 401(k) Contribution amount shall be paid from the Plan only at the time
described in this Section 3.3 and the provisions of Article VI shall not apply
to the Maximum 401(k) Contribution amount for any Plan Year.

3.4 Deemed Investment Elections.

(a) At the time of making the deferral elections described in
Section 3.1, the Participant shall designate, on a form provided by the
Committee, the investment funds the Participant's Deferral Account will be
deemed to be invested in for purposes of determining the amount of earnings (and
losses) to be credited (or debited) to that Account. In making the designation
pursuant to this Section 3.4, the Participant may specify that all or any
multiple of his Deferral Account (equal to or greater than 10% (but not more
than 100%) in whole percentage increments) shall be deemed to be invested in one
or more of the types of investment funds selected and communicated from time to
time by the Committee (the "Funds"). Effective as of the end of any calendar
quarter, a Participant may change the designation made under this Section 3.4 by
filing an election, on a form provided by the Committee, at least 30 days prior
to the end of such quarter. If a Participant fails to elect a fund under this
Section 3.4, he or she shall be deemed to have elected a money market type of
investment fund.

(b) Although the Participant may designate the deemed
investments, neither the Company, nor the Committee shall be obligated to
actually make any such investments. The Interest Rate of each of the Fund(s)
designated by a Participant shall be used to determine the amount of earnings or
losses to be credited or debited to Participant's subaccount for that Fund under
Article IV.

6
<PAGE> 9

ARTICLE IV
DEFERRAL ACCOUNTS

4.1 Deferral Accounts.

The Committee shall establish and maintain a Deferral Account
for each Participant under the Plan. Each Participant's Deferral Account shall
be further divided into separate subaccounts ("investment fund subaccounts"),
each of which corresponds to a Fund elected by the Participant pursuant to
Section 3.4(a). A Participant's Deferral Account shall be credited or debited as
follows:

(a) As of the last day of each month, the Committee shall
credit the investment fund subaccounts of the Participant's Deferral Account
with an amount equal to Compensation deferred by the Participant during each pay
period ending in that month in accordance with the Participant's election under
Section 3.1; that is, the portion of the Participant's deferred Compensation
that the Participant has elected to be deemed invested in a particular Fund
shall be credited to the investment fund subaccount corresponding to that Fund;

(b) The Committee shall, as directed by the Board, credit the
investment fund subaccounts of the Participant's Deferral Account with an amount
equal to any Company Credits that the Board may grant from time to time.

(c) The amount of the Maximum 401(k) Contribution for a
Participant made pursuant to Section 3.3 shall be deducted pro rata from the
various investment subaccounts of the Participant at the time specified in
Section 3.3.

(d) As of the last day of each month, each investment fund
subaccount of a Participant's Deferral Account shall be credited (or debited)
with earnings (or losses) in an amount equal to that determined by multiplying
the balance credited to such investment fund subaccount as of the last day of
the preceding month by the Interest Rate for the corresponding Fund.

(e) In the event that a Participant elects for a given Plan
Year's deferral of Compensation to have a Scheduled Withdrawal Date, all amounts
attributed to the deferral of Compensation for such Plan Year shall be accounted
for in a manner which allows separate accounting for the deferral of
Compensation and investment gains and losses associated with such withdrawal.

ARTICLE V
VESTING

All amounts credited to a Participant's Deferral Account, except for
all amounts attributable to Company Credits, shall be 100% vested at all times.
All amounts in the Deferral Account that are attributable to Company Credits
shall be vested at any particular time only to the extent provided by the Board
at the time it grants the Company Credits pursuant to Section 3.2 hereof.

7
<PAGE> 10

ARTICLE VI
DISTRIBUTIONS

6.1 Distribution of Distributable Amount.

(a) Distribution Without Scheduled Withdrawal Date. Except as
otherwise provided in Section 6.1(b) hereof, in the case of a Participant who
terminates employment with Company and has an Account balance of more than
$25,000, the Company shall pay such Participant's Distributable Amount to the
Participant (and after his or her death to his or her Beneficiary) from among
the following optional forms of benefit as elected by the Participant on the
most recent effective deferral form executed and given by the Participant:

(1) A single lump sum distribution beginning on the
Participant's Payment Date.

(2) Substantially equal quarterly installments over
five (5) years beginning on the Participant's Payment Date.

(3) Substantially equal quarterly installments over
ten (10) years beginning on the Participant's Payment Date.

(4) Substantially equal quarterly installments over
fifteen (15) years beginning on the Participant's Payment Date.

A Participant may modify the optional form of benefit
that he or she has previously elected, provided such modification occurs more
than one (1) year before the Participant terminates employment with Company.

In the event a Participant fails to properly elect an
optional form of benefits, the Participant's Distributable Amount will be
distributed in forty (40) quarterly installments beginning on his or her Payment
Date.

The foregoing notwithstanding, in the case of a Participant
who terminates service with the Company and has a Distributable Amount of
$25,000 or less, the Distributable Amount shall be paid to the Participant (and
after his or her death to his or her Beneficiary) in a lump sum distribution on
the Participant's Payment Date.

In the event a Participant dies after he has left the employ
of the Company and still has a Distributable Amount, the balance shall continue
to be paid in the same mode as it was being paid to the Participant.

The Participant's Account shall continue to be credited (or
debited) with earnings (or losses) pursuant to Section 4.1 of the Plan until the
Participant's entire Distributable Amount under the Plan has been distributed.

8
<PAGE> 11

(b) Certain Involuntary Terminations. Notwithstanding Section
6.1(a), in the event a Participant's employment with the Company is terminated
involuntarily without "cause" (as defined in any employment or other agreement
between the Company and the Participant), the Company shall distribute such
Participant's Distributable Amount to the Participant (or after his or her death
to his or her Beneficiary) in a single lump sum distribution beginning on the
Participant's Payment Date.

(c) Distribution With Scheduled Withdrawal Date. In the case
of a Participant who has elected a Scheduled Withdrawal Date for a distribution
while still in the employ of the Company, such Participant shall receive his or
her Distributable Amount, but only with respect to those deferrals of
Compensation and earnings on such deferrals of Compensation as shall have been
validly elected by the Participant to be subject to the Scheduled Withdrawal
Date in accordance with Section 1.2(aa) of the Plan. A Participant's Scheduled
Withdrawal Date with respect to amounts of Compensation deferred in a given Plan
Year can be no earlier than two years from the last day of the Plan Year for
which the deferrals of Compensation are made. A Participant may extend the
Scheduled Withdrawal Date for the deferral of Compensation for any Plan year,
provided such extension occurs more than one year before the previous Scheduled
Withdrawal Date and is for a period of not less than two years from the previous
Scheduled Withdrawal Date. The Participant shall have the right to twice extend
any Scheduled Withdrawal Date, provided the second such modification shall only
be effective if consented to by Company. In the event a Participant terminates
employment with Company prior to a Scheduled Withdrawal Date, the portion of the
Participant's Account associated with Scheduled Withdrawal Date which have not
occurred prior to such termination shall be distributed in a lump sum.

6.2 Early Distributions.

A Participant shall be permitted to elect an Early
Distribution from his or her Deferral Account prior to the Payment Date, subject
to the following restrictions:

(a) The election to take an Early Distribution shall be made
by filing a form provided by and filed with the Committee prior to the end of
any calendar month.

(b) The amount of the Early Distribution shall in all cases be
an amount no less than 45%, and no more than 90%, of the Distributable Amount as
of the end of the calendar month as of which the distribution is to be made.

(c) The amount described in subsection (b) above shall be paid
in a single cash lump sum as soon as practicable after the end of the calendar
month in which the Early Distribution election is made.

(d) If a Participant receives an Early Distribution, an amount
equal to 11.111% of the amount of the distribution, shall be permanently
forfeited and subtracted from the Distributable Amount remaining immediately
after the distribution and neither the Company nor the Plan shall have any
obligation to the Participant or his Beneficiary with respect to such forfeited
amount.

9
<PAGE> 12

(e) If a Participant receives an Early Distribution of either
all or a part of his Deferral Account, the Participant will be ineligible to
participate in the Plan for the balance of the Plan Year and for the following
Plan Year.

6.3 Hardship Distributions. The Committee may, in its sole discretion,
permit a distribution to a participant of all or a portion of the Participant's
Distributable Amount in the event the Committee determines that such
distribution is reasonably needed to satisfy an emergency need arising from an
unforeseeable emergency ("Hardship Distribution"). No Hardship Distribution may
exceed the amount reasonably needed to satisfy the emergency need. For purposes
of this Section, the term "unforeseeable emergency" shall mean severe financial
hardship to the Participant resulting from a sudden and unexpected illness or
accident of the Participant or of a dependent (as defined in Code section
152(a)) of the Participant, loss of the Participant's property due to casualty,
or other similar extraordinary and unforeseeable circumstances arising as a
result of the events beyond the control of the Participant. The circumstances
that will constitute an unforeseeable emergency will depend upon the facts of
each case, but, in any case, payment may not be made to the extent that such
hardship is or may be relieved:

(i) through reimbursement or compensation by
insurance or otherwise,

(ii) by liquidation of the Participant's assets, to
the extent the liquidation of such assets would not itself cause severe
financial hardship, or

(iii) by cessation of deferrals under the Plan.

Examples of what are not considered to be unforeseeable emergencies include the
need to send a Participant's child to college or the desire to purchase a home.

6.4 Inability to Locate Participant.

In the event that the Committee is unable to locate a
Participant or Beneficiary within two years following the required Payment Date,
the amount allocated to the Participant's Deferral Account, shall be forfeited.
If, after such forfeiture, the Participant or Beneficiary later claims such
benefit, such benefit shall be reinstated without the accrual of interest or
earnings thereon after the Payment Date.

ARTICLE VII
ADMINISTRATION

7.1 Committee.

A committee of individuals (who need not be members of the
Board) shall be appointed by, and serve at the pleasure of, the Board to
administer the Plan (the "Committee"). The number of members comprising the
Committee shall be determined by the Board which may from time to time vary the
number of members. A member of the Committee may resign by delivering

10
<PAGE> 13

a written notice of resignation to the Board. The Board may remove any member by
delivering a certified copy of its resolution of removal to such member.
Vacancies in the membership of the Committee shall be filled promptly by the
Board.

7.2 Committee Action.

The Committee shall act at meetings by affirmative vote of a

majority of the members of the Committee. Any action permitted to be taken at a
meeting may be taken without a meeting if, prior to such action, a written
consent to the action is signed by all members of the Committee and such written
consent is filed with the minutes of the proceedings of the Committee. A member
of the Committee shall not vote or act upon any matter which relates solely to
himself or herself as a Participant. The Chairman or any other member or members
of the Committee designated by the Chairman may execute any certificate or other
written direction on behalf of the Committee.

7.3 Powers and Duties of the Committee.

(a) The Committee, on behalf of the Participants and their
Beneficiaries, shall enforce the Plan in accordance with its terms, shall be
charged with the general administration of the Plan, and shall have all powers
necessary to accomplish its purposes, including, without limitation, the
following:

(1) To select the Funds in accordance with Section
3.4(a) hereof;

(2) To construe and interpret the terms and
provisions of this Plan;

(3) To compute and certify to the amount and kind of
benefits payable to Participants and their Beneficiaries;

(4) To maintain all records that may be necessary for
the administration of the Plan;

(5) To provide for the disclosure of all information
and the filing or provision of all reports and statements to Participants,
Beneficiaries or governmental agencies as shall be required by law;

(6) To make and publish such rules for the regulation
of the Plan and procedures for the administration of the Plan as are not
inconsistent with the terms hereof;

(7) To appoint a plan administrator or any other
agent, and to delegate to them such powers and duties in connection with the
administration of the Plan as the Committee may from time to time prescribe; and

(8) To take all actions necessary for the
administration of the Plan, including determining whether to hold or discontinue
the Policies.

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<PAGE> 14

7.4 Construction and Interpretation.

The Committee shall have full discretion to construe and
interpret the terms and provisions of this Plan, which interpretations or
construction shall be final and binding on all parties, including, but not
limited to, the Company and any Participant or Beneficiary. The Committee shall
administer such terms and provisions in a uniform and nondiscriminatory manner
and in full accordance with any and all laws applicable to the Plan.

7.5 Information.

To enable the Committee to perform its functions, the Company
shall supply full and timely information to the Committee on all matters
relating to the Compensation of all Participants, their deaths or other events
which cause termination of their participation in the Plan, and such other
pertinent facts as the Committee may require.

7.6 Compensation, Expenses and Indemnity.

(a) The members of the Committee shall serve without
compensation for their services hereunder.

(b) The Committee is authorized at the expense of the Company
to employ such legal counsel as it may deem advisable to assist in the
performance of its duties hereunder. Expenses and fees in connection with the
administration of the Plan shall be paid by the Company.

(c) To the extent permitted by applicable state law, the
Company shall indemnify and save harmless the Committee and each member thereof,
the Board of Directors and any delegate of the Committee who is an employee of
the Company against any and all expenses, liabilities and claims, including
legal fees to defend against such liabilities and claims arising out of their
discharge in good faith of responsibilities under or incident to the Plan, other
than expenses and liabilities arising out of willful misconduct. This indemnity
shall not preclude such further indemnities as may be available under insurance
purchased by the Company or provided by the Company under any bylaw, agreement
or otherwise, as such indemnities are permitted under state law.

7.7 Quarterly Statements.

Under procedures established by the Committee, a Participant
shall receive a statement showing the Distributable Amount (broken down by
investment fund subaccount) with respect to such Participant's Accounts on a
quarterly basis as of each March 31, June 30, September 30 and December 31.

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<PAGE> 15

7.8 Disputes.

(a) Claim.

A person who believes that he or she is being denied
a benefit to which he or she is entitled under the Plan (hereinafter referred to
as "Claimant") must file a written request for such benefit with the Company,
setting forth his or her claim. The request must be addressed to the President
of the Company at its then principal place of business.

(b) Claim Decision.

Upon receipt of a claim, the Company shall advise the
Claimant that a reply will be forthcoming within ninety (90) days and shall, in
fact, deliver such reply within such period. The Company may, however, extend
the reply period for an additional ninety (90) days for special circumstances.

If the claim is denied in whole or in part, the
Company shall inform the Claimant in writing, using language calculated to be
understood by the Claimant, setting forth: (A) the specified reason or reasons
for such denial; (B) the specific reference to pertinent provisions of the Plan
on which such denial is based; (C) a description of any additional material or
information necessary for the Claimant to perfect his or her claim and an
explanation of why such material or such information is necessary; (D)
appropriate information as to the steps to be taken if the Claimant wishes to
submit the claim for review, the (E) the time limits for requesting a review
under subsection (c).

Within sixty (60) days after the Committee's receipt
of a request for review, after considering all materials presented by the
Claimant, the Committee will inform the Claimant in writing, in a manner
calculated to be understood by the Claimant, of its decision, setting forth the
specific reasons for the decision containing specific references to the
pertinent provisions of the Plan on which the decision is based. If special
circumstances require that the sixty (60) day time period be extended, the
Committee will so notify the Claimant and will render the decision as soon as
possible, but no later than one hundred twenty (120) days after receipt of the
request for review.

ARTICLE VIII
MISCELLANEOUS

8.1 Unsecured General Creditor.

Participants and their Beneficiaries, heirs, successors, and
assigns shall have no legal or equitable rights, claims, or interest in any
specific property, investments or assets of the Company or of any trust or fund
that may be established or purchased by the Company to help satisfy its
obligations hereunder. No assets of the Company shall be held in any way as
collateral security for the fulfilling of the obligations of the Company under
this Plan. Any and all of the

13
<PAGE> 16

Company's assets shall be, and remain, the general unpledged, unrestricted
assets of the Company. The Company's obligation under the Plan shall be merely
that of an unfunded and unsecured promise of the Company to pay money in the
future, and the rights of the Participants and Beneficiaries shall be no greater
than those of unsecured general creditors. The Company may satisfy its
obligations hereunder by causing a third party to make any of the payments
required of the Company hereunder. It is the intention of the Company that this
Plan be unfunded for purposes of the Code and for purposes of Title I of ERISA.

8.2 Restriction Against Assignment.

The Company shall pay all amounts payable hereunder only to
the person or persons designated pursuant to the provisions of the Plan and not
to any other person or corporation. No part of a Participant's Accounts shall be
liable for the debts, contracts, or engagements of any Participant, his or her
Beneficiary, or successors in interest, nor shall a Participant's Accounts be
subject to execution by levy, attachment, or garnishment or by any other legal
or equitable proceeding, nor shall any such person have any right to alienate,
anticipate, sell, transfer, commute, pledge, encumber, or assign any benefits or
payments hereunder in any manner whatsoever. If any Participant, Beneficiary or
successor in interest is adjudicated bankrupt or purports to anticipate,
alienate, sell, transfer, commute, assign, pledge, encumber or charge any
distribution or payment from the Plan, voluntarily or involuntarily, such
distribution or payment shall be null and void and of no force or effect.

8.3 Withholding.

There shall be deducted from each payment made under the Plan
or any other Compensation payable to the Participant (or Beneficiary) all taxes
and other amounts which are required to be withheld by the Company in respect to
such payment or this Plan. The Company shall have the right to reduce any
payment (or compensation) of a Participant by the amount of cash sufficient to
provide such taxes and amounts.

8.4 Amendment, Modification, Suspension or Termination.

The Board may amend, modify, suspend or terminate the Plan in
whole or in part, except that no amendment, modification, suspension or
termination shall have any retroactive effect to reduce any amounts allocated to
a Participant's Accounts and the Plan may not be terminated solely in order to
accelerate the payment of benefits. In the event that this Plan is terminated,
the amounts credited to a Participant's Accounts shall be distributed to the
Participant or, in the event of his or her death, his or her Beneficiary in a
lump sum within thirty (30) days following the date of Plan termination.

8.5 Adoption by Affiliates.

With the permission of the Board, the Plan may be adopted by
any corporation which is a member of a controlled group of corporations (within
the meaning of Section 414(b) of the

14
<PAGE> 17

Code) of which Gadzooks, Inc. is a component member. Such adoption may be on
such terms and conditions as the Board may prescribe.

8.6 Governing Law.

This Plan shall be construed, governed and administered in
accordance with the laws of the State of Texas.

8.7 Receipt of Release.

Any payment to a Participant or the Participant's Beneficiary
in accordance with the provisions of the Plan shall, to the extent thereof, be
in full satisfaction of all claims against the Committee and the Company. The
Committee may require such Participant or Beneficiary, as a condition precedent
to any such payment, to execute a receipt and release to such effect.

8.8 Payments on Behalf of Persons Under Incapacity.

In the event that any amount becomes payable under the Plan to
a person who, in the sole judgment of the Committee, is considered by reason of
physical or mental condition to be unable to give a valid receipt therefore, the
Committee may direct that such payment be made to any person determined by the
Committee, in its sole judgment, to have assumed the guardianship or care of
such person. Any payment made pursuant to such determination shall constitute a
full release and discharge of the Committee and the Company.

8.9 Limitation of Rights and Employment Relationship.

Neither the establishment of the Plan and Trust nor any
modification thereof, nor the creating of any fund or account, nor the payment
of any benefits shall be construed as giving to any Participant or other person
any legal or equitable right against the Company, except as provided in the Plan
and Trust; and in no event shall the terms of employment of any employee or
Participant be modified or in any way be affected by the provisions of the Plan
and Trust.

8.10 Headings.

Headings and subheadings in this Plan are inserted for
convenience of reference only and are not to be considered in the construction
of the provisions hereof.

IN WITNESS WHEREOF, the Company has caused this document to be
executed by its duly authorized officer as of the Effective Date.

GADZOOKS, INC.

By: /s/ MONTY R. STANDIFER
------------------------------------------
Title: Senior Vice President
---------------------------------------

<PAGE> 1
EXHIBIT 10.17

STANDARD INDUSTRIAL LEASE AGREEMENT

157,704 SQUARE FOOT OFFICE DISTRIBUTION CENTER
INTERNATIONAL PARKWAY
CARROLLTON, TEXAS

CB MIDWAY INTERNATIONAL, LTD., LESSOR

GADZOOKS, INC., LESSEE

EXECUTION DATE: AUGUST 23, 1996

<PAGE> 2

TABLE OF CONTENTS

STANDARD INDUSTRIAL LEASE AGREEMENT
BY AND BETWEEN
CB MIDWAY INTERNATIONAL PARTNERS, LTD., AS LESSOR,
AND
GADZOOKS, INC., AS LESSEE

<TABLE>
<CAPTION>
PAGE
----

<S> <C> <C>
1. PREMISES AND TERM........................................................................................1
A. Building to be Constructed or Shell Space.......................................................1
(i) Preparation of Design........................................................................1
(ii) Construction.................................................................................2
(iii) Excused Delays...............................................................................3
(iv) Move In Period...............................................................................3
(v) DISCLAIMER OF CONSTRUCTION WARRANTIES........................................................3
(vi) Third-Party Warranties.......................................................................3
(vii) Change Orders................................................................................4
(viii) Substantial Completion.......................................................................4
(ix) Punch List...................................................................................5
(x) Late Completion..............................................................................5
B. Office Finish...................................................................................5
(i) Preparation of Office Plans..................................................................5
(ii) Interior Finish Allowance....................................................................6
(iii) Bid of Interior Finish.......................................................................6
C. Failure to Occupy or Lessee Delay.....................................................................6
2. BASE RENT, SECURITY DEPOSIT AND OPERATING EXPENSES.......................................................7
3. TAXES....................................................................................................9
4. LESSOR'S REPAIRS AND MAINTENANCE........................................................................10
5. LESSEE'S REPAIRS AND MAINTENANCE........................................................................11
6. ALTERATIONS.............................................................................................13
7. SIGNS...................................................................................................13
8. UTILITIES...............................................................................................14
9. INSURANCE...............................................................................................14
10. FIRE AND CASUALTY DAMAGE................................................................................16
11. LIABILITY AND INDEMNIFICATION...........................................................................17
12. USE.....................................................................................................17
13. INSPECTION..............................................................................................18
14. ASSIGNMENT AND SUBLETTING...............................................................................19
15. CONDEMNATION............................................................................................20
16. HOLDING OVER............................................................................................20
17. QUIET ENJOYMENT.........................................................................................21
18. EVENTS OF DEFAULT.......................................................................................21
19. REMEDIES................................................................................................22
</TABLE>

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<PAGE> 3

<TABLE>
<S> <C> <C>
20. MORTGAGES...............................................................................................25
21. MECHANIC'S LIENS........................................................................................25
22. LESSOR'S LIEN...........................................................................................26
23. HAZARDOUS MATERIALS.....................................................................................26
24. MISCELLANEOUS...........................................................................................28
25. NOTICES.................................................................................................31
26. ADDITIONAL PROVISIONS...................................................................................32
27. ATTACHMENTS.............................................................................................33
</TABLE>

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<PAGE> 4

EXHIBITS

Exhibit A - Legal Description of Land (boundary description and boundary
sketch)

Exhibit B - Site Plan and Floor Plan
Representative Elevations
Base Building Standard Specifications
Base Building Lessee-Specific Specifications

Rider 1 - Option for Expansion of Premises

Schedule R1 - Option Price Multiplier

Rider 2 - Option for Renewal of Term

-iii-
<PAGE> 5

STANDARD INDUSTRIAL LEASE AGREEMENT

157,704 Sq. Ft.

THIS LEASE AGREEMENT ("LEASE") made and entered into by and between CB
MIDWAY INTERNATIONAL PARTNERS, LTD., a Texas limited partnership, hereinafter
referred to as "Lessor", and GADZOOKS, INC., a Texas corporation, hereinafter
referred to as "LESSEE".

W I T N E S S E T H:

1. PREMISES AND TERM. In consideration of the mutual obligations of
Lessor and Lessee set forth herein, Lessor leases to Lessee, and Lessee hereby
takes from Lessor the premises (the "LAND") situated within the County of
Denton, State of Texas, more particularly described on EXHIBIT A attached hereto
and incorporated herein by reference (subject to adjustment as provided in
Section 26.D.) and the improvements contemplated to be constructed thereon
pursuant to this Lease (the "IMPROVEMENTS") (the Land and Improvements being
herein collectively referred to as the "PREMISES") together with all rights,
privileges, easements, appurtenances, and amenities belonging to or in any way
pertaining to the Premises, to have and to hold, subject to the terms, covenants
and conditions in this Lease. The term of this Lease (the "PRIMARY TERM") shall
commence on the commencement date hereinafter set forth and shall end on the
last day of the month that is 120 months after the commencement date (subject to
extension as provided in this Lease). Lessor shall notify Lessee of the
substantial completion of the Improvements, which shall be deemed to occur on
the date determined in accordance with this Paragraph. The term of this Lease
shall commence on the latest of the following three dates (herein referred to as
the "COMMENCEMENT DATE"): (i) the date which is fourteen (14) days after
Lessor's notice to Lessee that the Premises are fixture-ready, permitting Lessee
to install furniture, equipment, fixtures, and other personal property in the
warehouse portion of the Improvements in accordance with Paragraph I A(iv) (the
"MOVE IN Period"); (ii) the date of substantial completion of the Improvements,
determined in accordance with Paragraph 1; and (iii) April 1, 1997. Lessor
hereby waives payment of rent during the Move In Period, or at any time prior to
the commencement date.

A. BUILDING TO BE CONSTRUCTED OR SHELL SPACE.

(i) PREPARATION OF DESIGN. Lessor agrees to furnish,
at Lessor's sole cost and expense, all of the material, labor and equipment
necessary for the construction of the Improvements in accordance with the plans
and/or specifications to be prepared in accordance with the terms and provisions
of this Lease. Lessor agrees to cause detailed plans and specifications (the
"PRELIMINARY PLANS") to be prepared in accordance with EXHIBIT B attached hereto
and incorporated herein by reference for all purposes, and in accordance with
all applicable statutes and building codes, governmental rules, regulations,
orders, covenants, conditions, and restrictions applicable to the Premises (the
"LEGAL REQUIREMENTS") and to submit the same to Lessee, for Lessee's approval,
within ten (10) business days from execution of this Lease. Lessee shall respond
to Lessor's proposed Preliminary Plans within ten (10) business days of receipt.
If Lessee and Lessor are unable to agree upon the Preliminary Plans within
fifteen (15)

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<PAGE> 6

business days following Lessor's submittal of same to Lessee, either party may
terminate this Lease by written notice to the other, in which event Lessee and
Lessor shall split the costs of preparing the Preliminary Plans and neither
party shall have any further rights or obligations hereunder.

Upon Lessee's approval of the Preliminary Plans, Lessor agrees
to cause detailed final plans for construction of the Premises conforming with
the building permit application requirements of the City of Carrollton to be
prepared without material variance from the Preliminary Plans approved by
Lessee. Such detailed final plans shall be delivered to Lessee upon completion
for Lessee's review and approval. If Lessee wishes to dispute that such Final
Plans vary from the Preliminary Plans by reason of a variance in dimensions,
structural elements, or exterior building materials which is not minor, or other
variance from the Preliminary Plans not previously approved by Lessee which will
unreasonably impair Lessee's intended use of the Premises or unreasonably
increase the costs to be incurred by Lessee under this Lease pertaining to the
Improvements, compared to Improvements constructed per the Preliminary Plans
(collectively, the "VARIANCE CRITERIA"), Lessee shall give Lessor written notice
within five (5) business days after receipt of the Final Plans describing in
detail the variance claimed by Lessee. Lessee's failure to give such notice with
such five (5) day period shall be deemed to constitute Lessee's approval of the
Final Plans for all purposes. If the variance stated by Lessee shall not be
minor, in fact, based upon the Variance Criteria, Lessor shall have an option
either to tender modified Final Plans addressing Lessee's stated concerns within
ten (10) days after receipt of Lessee's notice, to dispute Lessee's
determination by commencing a Binding Arbitration proceeding, or to terminate
this Lease without declaring a default, in which event Lessee and Lessor shall
split all costs incurred by Lessor in connection with this Lease (including,
without limitation, all design costs) and neither party shall have any further
rights or obligations hereunder. Lessor agrees to provide Lessee with one copy
of "as-built" drawings of the Premises within thirty (30) days of substantial
completion (as hereinafter defined).

(ii) CONSTRUCTION. If Lessor shall utilize, as its
general contractor for building shell construction, any contractor other than
McFadden and Miller Construction Co., Rogers-O'Brien Construction Co., or Butler
Construction, Inc., Lessor agrees to obtain Lessee's approval of the general
contractor. Lessee's approval shall not be unreasonably withheld, and shall be
deemed to have been given if Lessee has not responded within three t3) days of
Lessor's written request for approval.

Subject to Excused Delays (hereafter defined) Lessor shall commence
construction of the Premises on or before thirty (30) days after execution of
this Lease, such commencement to be evidenced by movement of site clearing or
excavation equipment to the site. Lessor shall diligently proceed with the
construction of the Improvements and use its best efforts to complete the
construction of the Improvements and deliver possession of the Premises to
Lessee, together with a temporary certificate of occupancy, on or before seven
(7) months after execution of this Lease (as such period may be extended by
reason of Excused Delays). Lessor shall take such steps as are necessary to
obtain a final Certificate of Occupancy for the Improvements within the time
period required by the City of Carrollton.

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<PAGE> 7

(iii) EXCUSED DELAYS. If delay in review or approval
of plans, commencement of construction, or substantial completion is caused or
contributed to by Lessee, or those acting for or under Lessee, or Lessee
requests changes to plans requiring additional design and/or construction time
(compared to the Improvements reflected in plans and specifications attached as
EXHIBIT B to this Lease)("LESSEE DELAYS"), casualties, acts of God (including
ice storms, blizzards, rain and other severe weather conditions substantially
impairing construction activity, but not including the average precipitation
days for the construction period predicted by the prior seven years of National
Weather Service data for the region), material shortages, strikes, lockouts,
governmental embargo restrictions, action or non-action of public utilities,
acts or omissions of local, state or federal governments affecting their work or
other causes of delay beyond the reasonable control of Lessor (all of which
delays, including Lessee Delays, are referred to as "EXCUSED DELAYS") then the
time periods for submittal of design plans, commencement of such construction
and substantial completion (except as provided in Paragraph 1A(x)), as the case
may be, shall be extended for the additional time caused by such delay.

(iv) MOVE IN PERIOD. Lessor shall use its best
efforts to prepare the warehouse portion of the Improvements for fixturing by
Lessee within six (6) months of the execution of this Lease and to secure the
cooperation of Lessor's general contractor to allow such activities. At such
time as the warehouse portion of the Improvements is fixture-ready, Lessee shall
be allowed to install, subject to Legal Requirements, its furniture, equipment
and fixtures and other personal property in the Improvements during completion
of construction provided that Lessee does not thereby interfere with substantial
completion of construction, and provided further that Lessor's general
contractor consents to Lessee's proposed activity. Substantial completion of the
Improvements shall not be deemed to have occurred solely by reason of such
installations.

(v) DISCLAIMER OF CONSTRUCTION WARRANTIES. LESSOR'S
CONSTRUCTION OF THE IMPROVEMENTS TO THE PREMISES SHALL BE MADE WITHOUT WARRANTY
BY LESSOR OF ANY KIND, AND BY ITS EXECUTION OF THIS LEASE, LESSEE HEREBY WAIVES
ALL WARRANTIES BY LESSOR, EXPRESS OR IMPLIED, CONCERNING THE CONSTRUCTION OF
SUCH IMPROVEMENTS, THE QUALITY, SIZE, OR CHARACTER OF SUCH IMPROVEMENTS, THE
SUITABILITY OF SUCH IMPROVEMENTS FOR LESSEE'S INTENDED USE, OR ANY OTHER MATTER
(EXCEPT AS EXPRESSLY PROVIDED IN PARAGRAPH 26). HOWEVER, LESSOR'S DISCLAIMER OF
WARRANTIES SHALL NOT IMPAIR LESSOR'S MAINTENANCE OBLIGATIONS SET FORTH IN
PARAGRAPH 4 OF THIS LEASE.

(vi) THIRD-PARTY WARRANTIES. Following Lessee's
written acknowledgment of completion of the punch list items and delivery of the
Letter of Acceptance referred to below, Lessor agrees to assign to Lessee,
without recourse against or warranty by Lessor, each and every warranty as to
the construction of the Improvements to the Premises received by Lessor from
Lessor's general contractor or from any contractors or materialmen employed by
Lessor in the course of such construction. Items subject to such warranties are
herein referred to collectively as "WARRANTY ITEMS." Lessor's assignment shall
be in form reasonably acceptable to Lessee. Lessor hereby covenants that no such
assigned warranty of

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<PAGE> 8

Lessor's general contractor shall be of shorter duration than one (1) year from
substantial completion of the Improvements, and that the general contractor's
warranties assigned to Lessee shall include a guaranty that the Improvements
have been completed substantially in accordance with the Final Plans (with such
changes thereto as Lessee may have ordered or approved); that only new materials
have been incorporated into the Improvements (except as otherwise authorized by
Lessee); that such Improvements have been constructed in a good and workmanlike
manner; and such other warranties and guaranties as may be customarily extended
by general contractors for commercial warehouse structures operating in the
Dallas-Fort Worth area.

(vii) CHANGE ORDERS. Lessor and Lessee acknowledge
that changes to the Final Plans and to the construction contract entered into
based on the Final Plans ("CONSTRUCTION CONTRACT") may be necessary. If Lessee
shall request changes to the Final Plans and Construction Contract (all of which
requests must be in writing and must include Lessee s architect's detailed
rendering of the necessary changes to the Final Plans and Construction
Contract), then within ten (10) days of Lessor's receipt of such request, Lessor
shall notify Lessee in writing of Lessor's estimated additional construction
costs and construction delays attributable to such changes. Lessor shall have no
obligation to incur any expenses in preparing design modifications or
modifications to the Construction Contract unless and until Lessee shall
authorize the changes in question. Within five (5) days of its receipt of
Lessor's Notice, Lessee shall notify Lessor that Lessor is authorized to make
such changes at Lessee's expense. If Lessee does not authorize Lessor to make
such changes within the five (5) day period, Lessee shall be deemed to have
withdrawn its request to make changes. One-half (1/2) of Lessor's actual
additional costs attributable to such changes shall be paid by Lessee within
fifteen (15) days after written request by Lessor and the remainder of such
excess costs shall be paid by Lessee within fifteen (15) days after Lessor's
notice that the item covered by such change is substantially completed. If such
changes would result in a construction delay, the delay shall be an Excused
Delay, and Lessor shall not be required to give any further notice to Lessee of
such delay.

(viii) SUBSTANTIAL COMPLETION. As used herein, the
term "SUBSTANTIALLY COMPLETED" shall mean (i) that in the opinion of the
architect or space planner that prepared the Final Plans set forth in a
certificate of substantial completion, such improvements have been completed in
accordance with the Final Plans and the Legal Requirements applicable to
temporary certificates of occupancy and the Premises are in good and
satisfactory condition subject only to completion of minor punch list items; and
(ii) the City of Carrollton shall have issued its temporary certificate of
occupancy for such improvements (or other City consent to the Lessee's occupancy
of the Premises). The date the last such event occurs shall be the date on which
substantial completion shall be deemed to occur, subject to a different
determination in accordance with the terms of this Paragraph 1. Upon Lessor's
request, Lessee shall execute and deliver to Lessor a Letter of Acceptance of
delivery of the Premises.

As soon as the Improvements have been substantially completed,
Lessor shall so notify Lessee. If Lessee wishes to dispute that the Improvements
have been completed substantially in accordance with the Final Plans, Lessee
shall notify Lessor within fifteen (15) days after Lessor's notice of
substantial completion, providing the specific grounds for Lessee's
determination. Lessor and Lessee shall attempt to resolve their disagreements as
to substantial completion promptly, but if they are unable to do so within
thirty (30) days after Lessee's notice

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<PAGE> 9

to Lessor, either party shall have the right thereafter to commence Binding
Arbitration to resolve the dispute as to substantial completion and determine
the date of substantial completion as well as the parties' rights and
obligations under this Lease determined by such date, in accordance with and
subject to the terms and conditions of this Lease. The date determined by the
arbitrator through Binding Arbitration, with reference to the terms and
conditions of this Lease relevant to substantial completion? shall be the date
of substantial completion under this Lease for all purposes, and the parties
shall be otherwise bound by the award entered in the Binding Arbitration.

(ix) PUNCH LIST. Within thirty (30) days after
substantial completion, Lessee shall submit to Lessor in writing a punch list of
items needing completion or correction in order to conform substantially with
the Final Plans. Lessor shall complete all such punch list items within forty
five (45) days after receipt of the punch list and in the event of Lessor's
failure to do so, after a minimum of ten (10) days' prior written notice to
Lessor, Lessee may complete such punch list items and apply the costs of such
completion as a credit for rental payments until Lessee has been reimbursed the
full cost thereof.

(x) LATE COMPLETION. In the event that Lessor has not
achieved substantial completion on or before the later of: (a) seven (7) months
after execution hereof, or (b) April 1, 1997 (as either such date may be
extended by Lessee Delays), Lessee shall be entitled to a credit against Base
Rent payable from and after the commencement date in the amount of 1/30 of the
monthly Base Rent installment multiplied by the number of days elapsing between
the later of such dates and substantial completion. In the event that Lessor has
not achieved substantial completion on or before twelve (12) months after the
execution of this Lease (as such date may be extended by Lessee Delays), or has
failed to provide Lessee, at Lessor's cost, with temporary lease space which
reasonably accommodates Lessee's operational needs from and after such date (as
extended by Lessee Delays) (which temporary lease space shall have been approved
by Lessee, such approval not to be unreasonably withheld), Lessee shall have the
right to terminate this Lease if substantial completion is not achieved within
thirty (30) days after Lessee's written notice to Lessor of Lessee's intention
to terminate the Lease. If Lessor's delay in achieving substantial completion is
caused by Lessee Delays, Lessee shall not have the right to terminate this
Lease, notwithstanding any term hereof to the contrary.

B. OFFICE FINISH.

(i) PREPARATION OF OFFICE PLANS. Within five (5)
business days of the date hereof, Lessee shall furnish Lessor with the
programming information relating to office finish contemplated for the Building
(the "INTERIOR FINISH") as requested by Lessor's architect. Based on Lessee's
information, Lessor shall prepare and furnish to Lessee for review and approval
preliminary plans and specifications for the Interior Finish. Lessee shall
review such preliminary plans and notify Lessor of any comments or changes
requested within fifteen (15) days of Lessee's receipt, and if Lessee has not
responded to Lessor within such fifteen (15) day period, Lessee shall be deemed
to have approved the preliminary plans for all purposes. Lessor shall then
prepare final plans and specifications for the Interior Finish in accordance
with the Lessee's comments on the preliminary plans and all Legal Requirements.
The proposed final plans shall conform with the building permit application
requirements of the City of Carrollton. Lessor shall

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<PAGE> 10

furnish Lessee with the proposed final plans for review within fifteen (15) days
of receipt of Lessee's comments on the preliminary plans. Lessee shall review
such proposed final plans and notify Lessor of any comments or changes requested
within fifteen (15) days of Lessee's receipt, which Lessor's architect shall
incorporate into the final plans if Lessee shall request. If Lessee has not
responded to Lessor within such fifteen (15) day period, Lessee shall be deemed
to have approved the final plans for all purposes. The final plans drawn by
Lessor s architect, incorporating Lessee's comments and changes, if any, as
approved or deemed approved by Lessee, are herein referred to as the "FINAL
INTERIOR Plans."

(ii) INTERIOR FINISH ALLOWANCE. Design and
construction of MEP systems and interior finish improvements in accordance with
the Final Interior Plans shall be provided by Lessor in the form of an allowance
of $720,000 net of any construction management fees. One-half (1/2) the excess
costs (over $720,000.00) shall be paid by Lessee on or before the commencement
of the construction of the interior finish improvements, based on Lessor's
design and bid costs for such interior finish improvements, and the remainder of
such excess costs shall be paid by Lessee within fifteen (15) days after
Lessor's notice that the item to which such excess cost relates is substantially
completed. If the total cost of the design and construction of interior finish
improvements is less than the maximum aggregate allowance of $720,000 as set
forth above, all such excess amounts above such total cost shall be applied in
reduction of the Base Rent amortized over the Primary Term of the Lease.
Variances between Lessor's advance estimate and final costs shall be settled by
the parties within thirty (30) days of substantial completion of the
Improvements.

Lessee shall have the right to draw against such allowance for
reimbursement of the fees of Lessee's architect, other design professionals, or
subcontractors. Lessor shall have the right to approve the architect, design
professionals, and subcontractors utilized by Lessee, which approval shall not
be unreasonably withheld and which shall be deemed to have been given if Lessor
has not responded within five (5) days of Lessee's written request for approval.

(iii) BID OF INTERIOR FINISH. Lessor agrees to obtain
competitive bids from a minimum of three (3) general contractors who have been
approved by Lessee in advance of the bidding for construction of the interior
finish improvements in accordance with the Final Interior Plans. Lessee's
approval shall not be unreasonably withheld, and shall be deemed to have been
given if Lessee has not responded within five (5) days of Lessor's written
request for approval.

C. FAILURE TO OCCUPY OR LESSEE DELAY. Lessor and Lessee
further agree that Lessee's obligations, privileges, covenants and agreements
contained in this Lease shall be operative and effective regardless of whether
the Premises are ever occupied by Lessee so long as Lessor has completed the
Improvements in accordance with Paragraph 1. If Lessee fails to occupy the
Premises for any reason after substantial completion of any building or
Improvements constructed in accordance with the Final Plans, or if a Lessee
Delay occurs, preventing Lessor from constructing the improvements contemplated
herein in accordance with the Final Plans therefor, substantial completion shall
be deemed to be the date on which the Improvements would have been completed in
Lessor's reasonable judgment, but for such Lessee Delay.

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<PAGE> 11

2. BASE RENT, SECURITY DEPOSIT AND OPERATING EXPENSES.

A. Lessee agrees to pay to Lessor base rent ("BASE RENT") for
the Premises, in advance, without demand, deduction or set off, except as
expressly provided in Paragraphs 1A and 19G, at the following monthly rate
during the term hereof:

<TABLE>
<CAPTION>
Monthly
Base Rent Base Rent
Months (per square foot) (aggregate)
<S> <C> <C>
1-60 $4.27 psf $56,116.34
61-120 $4.94 psf $64,921.48
</TABLE>

In the event that the actual square footage of the Premises shall be more or
less than 157,704 square feet, as built, the monthly Base Rent payable shall be
adjusted to equal one twelfth (1/12) the product of the Base Rent per square
foot stipulated above multiplied by such measured square footage determined in
accordance with Paragraph 2C. One such monthly installment shall be paid by
Lessee on the date hereof, to be applied to the first month's Base Rent, and a
like monthly installment, plus the other monthly charges set forth in Paragraph
2D below, shall be due and payable on or before the first day of each calendar
month succeeding the commencement date, except that all payments due hereunder
for any fractional calendar month shall be prorated.

B. At any time within six (6) months of the termination of the
Primary Term (as extended), Lessor shall have the right to require Lessee, upon
not less than thirty (30) days' prior written notice, to deposit with Lessor a
security deposit in the amount of one month's rental obligation, which shall be
held by Lessor, without obligation for interest, as security for the performance
of Lessee's obligations under this Lease, it being expressly understood and
agreed that this deposit is not an advance rental deposit or a measure of
Lessor's damages in case of Lessee's default. Upon each occurrence of an Event
of Default, Lessor may use all or part of the deposit to pay past due rent or
other payments due Lessor under this Lease, and the cost of any other damage,
injury, expense, or liability caused by such event or default without prejudice
to any other remedy provided herein or provided by law. On demand, Lessee shall
pay Lessor the amount that will restore the security deposit to its original
amount. The security deposit shall be deemed the property of Lessor, but any
remaining balance of such deposit shall be returned by Lessor to Lessee when
Lessee's obligations under this Lease have been fulfilled.

C. As soon as practical after the substantial completion of
the Premises, Lessor shall determine the square footage of the Premises and
shall deliver written notice to Lessee of Lessor's determination of such square
footage within ten (10) business days after such calculation is made. Lessor's
calculation of the square footage within the Premises shall be measured from
roofline (i.e., the point in space located at the intersection of the ground and
a vertical plane between such roofline and the ground) to opposite roofline
(determined as aforesaid). Upon receipt of such notice from Lessor, Lessee shall
have fifteen (15) business days within which it can measure the Premises in
order to verify the square footage amount provided by Lessor. If Lessee fails to
inspect the Premises within this fifteen (15) business day period, the Lessor's
determination of the square footage of the Premises will control. If after
Lessee's architect so measures the Premises, and provides his calculation
thereof to Lessor, he is unable to

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<PAGE> 12

reach mutual agreement with Lessor's architect as to the area of the Premises
within thirty (30) days after the date of Lessor's initial notice of Lessor's
calculation, then the two parties' architects shall select a third independent
licensed architect to measure the area of the Premises in accordance with the
terms of this Lease, whose measurements shall be binding on the parties. The
third architect's fees shall be the responsibility of the party whose architect'
s measured area is the farther from such third architect's measurements, or if
the third architect's measured area falls midway between the Lessor's and
Lessee's architects' measured areas, then the parties shall each pay one half
(1/2) of such third architect's fees.

D. Lessee agrees to pay as additional rent "OPERATING
EXPENSES" (herein so-called) for the Premises and the Option Price as set out
herein. Operating Expenses shall include (i) Taxes (hereinafter defined) payable
by Lessor pursuant to Paragraph 3A below, (ii) the cost of maintaining insurance
covering the buildings situated on the Premises, (iii) the cost of utilities
payable pursuant to Paragraph 8 below, and the cost of any common area charges
payable by Lessor in accordance with Paragraph 4 below, (iv) the Option Price in
consideration of the Expansion Option granted in RIDER 1, calculated as the
product of $.125 multiplied by the number of square feet within the land area of
the Option Tract described on RIDER 1 hereto (reduced, if at all, by land area
incorporated into Expansion Premises); and (v) any other special charges which
Lessor is entitled to collect under the terms of this Lease.

During each month of the term of this Lease, on the same day
that Base Rent is due hereunder, Lessee shall escrow with Lessor an amount equal
to 1/12 of the estimated amount of such Operating Expenses. Lessee authorizes
Lessor to use the funds deposited with Lessor under this Paragraph 2D to pay
such costs. The initial monthly escrow payments are based upon the estimated
amounts and shall be increased or decreased annually, at a minimum, to reflect
the then current projected cost of all such Operating Expenses, to be set forth
in an annual operating expense budget provided Lessee in each October or
November during the Primary Term. Lessor may revise its estimate if necessary to
reflect changes in Operating Expenses experienced by Lessor, or variances
between actual and projected Operating Expenses, but not more frequently than
every six months. In case of such a revision, Lessee's escrow payments from and
after the revision shall be adjusted to reflect the revised estimate. Lessor
shall total all Operating Expenses annually, and reconcile Lessee's
proportionate share of such expenses against Lessee's escrow payments. If the
Lessee's total escrow payments are less than Lessor's actual Operating Expenses,
Lessee shall pay the difference to Lessor within ten (10) days after demand. If
the total escrow payments of Lessee are more than Lessor's Operating Expenses,
Lessor shall, at Lessee's sole option if no Event of Default has occurred,
refund such excess to Lessee, or, if an Event of Default has occurred or if
Lessee so elects, Lessor shall retain such excess and credit it against Lessee's
future liabilities for Base Rent, Operating Expenses, or other amounts due
hereunder.

Once each year during the term of this Lease, so long as
Lessee shall not commit a material Event of Default, Lessee shall have the right
to review the books and records of the Lessor to verify the accuracy of the
Operating Expenses charged Lessee by Lessor during the preceding calendar year.
Such reviews will be conducted during the normal business hours of Lessor at the
location where Lessor keeps such books and records. These reviews will be
conducted at the sole cost and expense of Lessee unless a review determines that
the amount of Operating Expenses charged Lessee by Lessor is five percent (5%)
or more above the actual

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<PAGE> 13

amount of such Operating Expenses in which case Lessor will pay for the cost and
expense of that review.

The amount of the monthly Base Rent and the initial monthly
Operating Expenses escrow payments are as follows:

<TABLE>
<CAPTION>
Months Months
1-60 61-120

<S> <C> <C>
(1) Base Rent as set forth in Paragraph 2A $ 56,116.34 $ 64,921.48
(2) Option Price ......................... $ 0 $ *
-------------
(3) Tax Escrow ........................... $ 9,983.00 $ *
-------------
(4) Insurance Escrow ..................... $ 652.00 $ *
-------------
(5) Other ................................ $ 1,770.00 $ *
-------------

Total Monthly Rental Payment ......... $ 68,521.34 $ *
=============
</TABLE>

(The Option Price shall be subject to adjustment as provided in RIDER
1. The items marked "*" shall be determined by Lessor in accordance
with Paragraph 2D.)

3. TAXES

A. Except as expressly provided in Paragraph 26, Lessee agrees
to pay or reimburse Lessor for Lessor's payment of all taxes, assessments and
governmental charges of any kind and nature other than Lessor's income, excess
profits or franchise taxes (collectively referred to herein as "TAXES") that
accrue against the Premises, and/or the Land and/or Improvements. Lessor agrees
to cause the Land to be separately assessed by the Denton County Appraisal
District. Excepting any taxes which are levied in lieu of an income tax, if at
any time during the term of this Lease, there shall be levied, assessed or
imposed on Lessor a capital levy or other tax directly on the rents received
therefrom or any assessment, levy or charge measured by or based, in whole or in
part, upon such rents from the Premises and/or the Land and Improvements, then
all such taxes, assessments, levies or charges, or the part thereof so measured
or based, shall be deemed to be included within the term "Taxes" for the
purposes hereof. The Lessor shall have the right to employ a tax consulting
firm, subject to Lessee's prior written approval, which shall not be
unreasonably withheld or delayed, to attempt to assure a fair tax burden on the
building and grounds within the applicable taxing jurisdiction. Lessee agrees to
pay the cost of such consultant. If any Taxes can be paid in installments,
Lessor shall elect to pay such Taxes in installments, provided however, that in
such case Lessee shall pay all interest or penalties due exclusively to the
election of such installment payment plan.

B. Lessee shall be liable for all taxes levied or assessed
against any personal property or fixtures placed in the Premises. If any such
taxes are levied or assessed against Lessor or Lessor's property and (i) Lessor
pays the same or (ii) the assessed value of Lessor's property is increased by
inclusion of such personal property and fixtures and Lessor pays the increased
taxes, then, within fifteen (15) days following written demand by Lessor,
accompanied by supporting invoices, Lessee shall pay to Lessor such taxes.

-9-
<PAGE> 14

4. LESSOR'S REPAIRS AND MAINTENANCE.

A. Lessor at Lessor's cost shall be responsible for
replacement of the roof of the Premises after the roof is no longer functional
(without interim maintenance obligations). Lessor at Lessor's cost shall
maintain the foundation and the structural soundness of the exterior walls of
the Improvements in good repair, reasonable wear and tear, damage caused by
Lessee, and casualty damage excepted, and Lessor shall be liable for the cost of
such maintenance or repair, provided, however, Lessee shall within fifteen (15)
days after written demand reimburse Lessor for any damage to the same caused by
Lessee's act, negligence, fault or omission. Lessor's demand to Lessee shall
include invoices submitted to Lessor for maintenance and repair items in excess
of $2,500 per item and a statement for the balance of such maintenance and/or
repair items. The term "WALLS" as used herein shall not include windows, glass
or plate glass, doors, special storefronts or office entries, provided that to
the limited extent that a failure of the foundation or building structure shall
result in the need for repair of windows, glass or plate glass, or doors,
Lessor, at Lessor's cost, shall be responsible for maintenance and repair of
same. Lessee shall immediately give Lessor written notice of defect or need for
repairs, after which Lessor shall have reasonable opportunity to repair the same
or cure such defect. Lessor's obligation to maintain the aforementioned items
shall be limited solely to the cost of such repairs or maintenance or the curing
of any defect in the same, provided, Lessor shall be responsible for personal
injury and property damage resulting from Lessor's gross negligence.

B. Lessor shall perform the paving maintenance, landscape
replacement and maintenance, exterior painting, water and sewage line plumbing
maintenance outside the Improvements, and any other common maintenance items (to
the extent the Premises shall ever be expanded into a multiple-tenant facility)
and Lessee shall be liable for the cost and expense of such repair, replacement,
and maintenance (or Lessee's proportionate share thereof). Lessor reserves the
right to perform any obligations that are otherwise Lessees obligations in
Paragraph 5A, in which event Lessee shall promptly reimburse Lessor for the
entirety of the costs of such performance within fifteen (15) days after
Lessor's demand, accompanied by supporting invoices to the extent that any such
obligation exceeds $2,500.

C. Lessor reserves the right to alter or modify the
Improvements and/or areas associated therewith, when such alterations or
modifications are required by any governmental laws, codes, ordinances,
regulations, or any other applicable authorities, including, without limitation,
amendments to the Americans with Disabilities Act of 1990 (the "ADA"), which are
promulgated or amended effective after the commencement date of this Lease, in
which event Lessee shall be liable for such cost, except that Lessor shall be
responsible for all costs of complying with the ADA in the construction of the
Improvements undertaken pursuant to Paragraph 1 of this Lease. If such
modification is a capital modification for the general benefit of the project,
and is required regardless of Lessee's particular use of the Premises, then the
cost shall be an Operating Expense allocated over the lesser of five years or
the useful life of the modification.

D. Lessee agrees to pay the cost of (i) maintenance and/or
landscaping of any property that is a part of the Premises, (ii) maintenance
and/or landscaping of any property that is maintained or landscaped by any
property owner or community owner association to which the

-10-
<PAGE> 15

Premises are subject, (iii) operating and maintenance of any property,
facilities or services, including, but not limited to, the cost of the
monitoring, repair and maintenance of security systems and service, if any,
provided for the use or benefit of Lessee (other than the Improvements, which
shall be maintained as provided in Paragraphs 4 and 5), and (iv) a management
fee of two percent (2%) of the Base Rent and additional rent payable by Lessee
under this Lease.

All such expenses of Lessor for maintaining and operating the
Premises, including, but not limited to, the items set forth in Paragraphs 4A,
4B, 4C and 4D, shall be included as additional rental under the provisions of
Paragraph 2D. Lessor agrees that such costs do not include any (a) capital costs
for replacement of the roof, foundation, building, structure or parking lot
replacement or restoration, or (b) other work occasioned by fire, windstorm or
other casualty to the extent of net insurance proceeds received by Lessor with
respect thereto, or would have been received if Lessor had maintained insurance
Lessor is required to maintain under the terms of this Lease, (c) income and
franchise taxes of Lessor, (d) expenses incurred in leasing to or procuring of
leases, leasing commissions, advertising expenses, expenses for the renovating
of a space for new lessees, (e) interest or principal payments on any mortgage
or other indebtedness of Lessor, (f) depreciation allowance or expense, (g)
costs properly allocable to other property owned by Lessor, or (h) the cost of
the repair of Warranty Items incurred by third parties responsible under
applicable warranties.

E. To the extent that any repair or maintenance obligation
shall arise during the period in which any third-party warranty applicable to a
Warranty Item shall be in effect, the party who would otherwise have
responsibility for repair and/or maintenance of such Warranty Item shall be
responsible for pursuing the warranty claim against the third party responsible
under such warranty. Neither party to this Lease shall be responsible for any
such repair or maintenance until both parties shall mutually agree that the
third party responsible for warranting such Warranty Item is not available for
performance of such warranty obligations.

5. LESSEE'S REPAIRS AND MAINTENANCE.

A. Lessee, at its own cost and expense, shall (i) except for
Lessor's obligations under Paragraph 4A, maintain all parts of the Premises in
good condition, (ii) except for Lessor's obligations under Paragraph 4A,
promptly make all necessary repairs and replacements, including, but not limited
to, windows, glass and plate glass, exterior doors, any special office entry,
interior walls and finish work, interior doors and floor covering, utility
connections, downspouts. gutters, heating and air conditioning systems, light
bulbs and ballasts, dock boards, truck doors, dock bumpers, paving, plumbing
work and fixtures, termite and pest extermination, regular removal of trash and
debris, dedicated sewer lines, and any damage due to vandalism or malicious
mischief, (iii) keep the parking areas, driveways, truck aprons, and grounds
surrounding the Premises in a clean and sanitary condition, (iv) repair all wind
damage to glass except with respect to tornado or hurricane damage, and (v)
maintain any spur track servicing the Premises. Lessee agrees to sign a joint
maintenance agreement with any railroad company servicing the Premises if
requested by the railroad company. Lessor shall have the right to coordinate all
repairs and maintenance of any rail tracks serving or intended to serve the
Premises and, if Lessee uses or causes the use of such rail tracks, Lessee shall
reimburse Lessor

-11-
<PAGE> 16

from time to time, upon demand, for its proportionate share (based on the total
area of the Premises relative to the total area of leased space of rail users in
the building of which the Premises are a part) of the costs of such repairs and
maintenance and any other sums specified in any agreement respecting such tracks
to which Lessor is a party.

B. In the event the Premises shall constitute a portion of a
multiple occupancy building, Lessee and its employees, agents, customers,
invitees and/or licensees shall have the right to use the parking areas, if any,
as may be designated by Lessor in writing, subject to such reasonable rules and
regulations as Lessor may from time to time prescribe and subject to rights of
ingress and egress of other lessees. Lessor shall not be responsible for
enforcing Lessee's parking rights against any third parties. Lessee shall, at
its own cost and expense, keep its employees, agents, customers, invitees,
and/or licensees from parking on any streets running through or contiguous to
the building or project of which the Premises are part or any other areas as
designated by Lessor. Lessee hereby consents to the removal of any vehicle in
violation of the foregoing designated areas of parking as established by Lessor.

C. Lessee, at its own cost and expense, shall enter into a
regularly scheduled preventive maintenance/service contract with a maintenance
contractor approved by Lessor for servicing all hot water, heating and air
conditioning systems and equipment within the Premises. The service contract
must include all services suggested by the equipment manufacturer in its
operations/maintenance manual and must become effective and a copy thereof
delivered to Lessor within thirty (30) days of the date Lessee takes possession
of the Premises.

D. In the event the Premises shall constitute a portion of a
multiple-occupancy building, Lessee agrees that no washing of any type (other
than reasonable restroom or kitchen washing) will take place in the Premises
including the truck apron and parking areas.

E. Any and all security of any kind for Lessee, Lessee's
agents, employees or invitees, the Premises, or any personal property thereon
(including, without limitation, any personal property of any sublessee) shall be
the sole responsibility and obligation of Lessee, -and shall be provided by
Lessee at Lessee's sole cost and expense. Lessee acknowledges and agrees that
Lessor shall have no obligation or liability whatsoever with respect to the
same. Lessee shall indemnify and hold Lessor harmless from and against any and
all loss, cost, damage or other liability arising directly or indirectly from
security measures or the absence thereof with respect to the Premises and the
building or the project of which the Premises are a party. Alarm systems
requested by Lessee and included in the Final Plans shall be installed in the
Premises by Lessor in accordance with such Final Plans and the terms of this
Lease. Subsequently, Lessee may install additional alarm systems in the Premises
provided such installation complies with the provision of Paragraph 6 hereof;
removal of such alarm systems shall be Lessee's sole responsibility and, at
Lessee's sole cost and expense, shall be completed prior to lease termination
and all affected areas of the Premises shall be repaired and/or restored in a
good and workmanlike manner to the condition that existed prior to such
installation. Notwithstanding the foregoing, at Lessee's request, Lessor shall
contract for common security services, to whatever extent Lessee may request,
for the building or the project of which the Premises are a part, provided,
however, Lessee acknowledges and agrees that Lessor shall in no event be
obligated to provide wiring or other hardware or software to facilitate such
services (except as such items are included in the

-12-
<PAGE> 17

Final Plans) and the provision of such services shall not alter or modify Lessee
s indemnification of Lessor or the obligation of Lessee to provide its own
security as set forth herein. The cost of any security services contracted for
by Lessor shall be treated as an Operating Expense pursuant to Paragraph 2D
hereof.

6. ALTERATIONS. Lessee shall not make any alterations, additions,
partitions, or other improvements to the Premises (collectively, an
"ALTERATION") without the prior written consent of Lessor, which consent shall
not be unreasonably withheld or delayed. Lessee shall be obligated to provide
Lessor with a minimum of ten (10) business days' prior written notice requesting
approval of Lessee's contemplated Alteration. Lessor's failure to respond to
Lessee's request within ten (10) business days after Lessee's notice is given
shall be deemed to constitute an approval of the proposed Alterations. When
Lessee requests Lessor's approval of Lessee's contemplated Alteration, Lessor
shall inform Lessee whether such Alteration must be removed at the end of the
term, including any renewals, of this Lease as permitted by this Paragraph 6.
Lessee, at its own cost and expense, may erect shelves, bins, machinery and
trade fixtures as it desires as well as Alterations, which have been
specifically consented to in writing by Lessor, provided that (a) such items do
not alter the basic character of the Premises or the building and/or
improvements of which the Premises are a part, (b) such items do not overload or
damage the same, (c) such items may be removed without injury to the Premises,
and (d) the construction, erection or installation thereof complies with all
applicable governmental laws, codes, ordinances, regulations, or any other
applicable authorities, including, without limitation, the ADA, and with
Lessor's details, specifications and other requirements. Any architectural,
engineering, construction management, permits, inspections, or other cost or fee
required to assure compliance with the conditions set forth in this Paragraph 6
shall be paid by Lessee promptly within fifteen (15) days following Lessor's
written demand, accompanied by supporting invoices. All Alterations erected by
Lessee shall be and remain the property of Lessee during the term of this Lease;
provided, however, at the termination of this Lease, to the extent Lessor shall
have informed Lessee of Lessee's obligation to remove an Alteration at the end
of the Lease term, Lessor shall have the option. exercisable in Lessor's sole
discretion, to require Lessee either (i) upon request to remove, at Lessee-s
sole cost and expense, all or part of each Alteration, at which time Lessee
shall promptly restore the Improvements and Premises to their original
condition, or (ii) to keep in place the same at which time such Alterations
shall become the property of Lessor. All shelves, bins, machinery and trade
fixtures installed by Lessee shall be removed on or before the earlier to occur
of the date of termination of this Lease or vacating the Premises, at which time
Lessee shall restore the Premises to their original condition. All Alterations
and restorations shall be performed in a good and workmanlike manner so as not
to damage or alter the primary structure or structural qualities of the
buildings and other improvements situated on the Premises or of which the
Premises are a part.

7. SIGNS. Any signage Lessee desires for the Premises shall be subject
to Lessor's specifications and/or written approval, which approval shall not be
unreasonably withheld or delayed. Lessee shall repair, paint, and/or replace the
building facia surface to which its signs are attached upon vacation of the
Premises, or the removal or alteration of its signage. Lessee shall not (i) make
any changes to the exterior of the Premises, (ii) install any exterior lights,
decorations, balloons, flags, pennants, banners or painting, or (iii) erect or
install any signs, windows or door lettering, placards, decorations or
advertising media of any type which can be

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<PAGE> 18

viewed from the exterior of the Premises, without Lessor's prior written consent
which consent shall not be unreasonably withheld or delayed. All signs,
decorations, advertising media, blinds, draperies and other window treatment or
bars or other security installations visible from outside the Premises shall
conform at Lessee's expense in all respects to the criteria established by
Lessor and any applicable governmental laws, ordinances, regulations or other
requirements.

8. UTILITIES. Lessor agrees to provide normal water, electricity, and
telephone service connections to the Premises upon the commencement date hereof,
which connections, regardless of location, shall hereafter be maintained by
Lessee. Lessee shall pay for all water, gas, heat, light, power, telephone,
sewer, sprinkler charges and other utilities and services used on or at the
Premises, and any maintenance or inspection charges for utilities. Lessor shall
have the right to cause any of said services to be separately metered to Lessee,
at Lessee's expense. Lessor shall not be liable for any interruption or failure
of utility service on the Premises unless caused by Lessor's gross negligence or
willful misconduct, in which event Base Rent shall be abated for the period
commencing after the expiration of ten (10) business days following the
occurrence of such interruption or failure of utility service, within which ten
(10) business day period Lessor shall be entitled to attempt to restore such
service without rent abatement.

In the event the Premises shall constitute a portion of a
multiple-occupancy building and water is not separately metered to Lessee,
Lessee agrees that it will not use water for uses other than normal domestic
restroom and kitchen usage; and Lessee does further agree to reimburse Lessor
for the entire amount of common water costs as additional rental if, in fact,
Lessee uses water for uses other than normal domestic restroom and kitchen uses
without first obtaining Lessor's written permission. Furthermore, Lessee agrees
in such event to install at its own expense, a submeter to determine Lessee's
usage.

If the Premises shall constitute a portion of a multiple
occupancy building, Lessee agrees it will not use sewer capacity for any use
other than normal domestic restroom and kitchen use. Lessee further agrees to
notify Lessor of any other sewer use ("EXCESS SEWER USE") and also agrees to
reimburse Lessor for the costs and expenses relating to Lessee's excess sewer
use, which shall include, but is expressly herein not limited to, the cost of
acquiring additional sewer capacity to service Lessee's Lease.

9. INSURANCE.

A. Lessor shall maintain insurance covering the buildings
situated on the Premises or of which the Premises are a part, except for those
items the repair and maintenance of which are Lessee's responsibility under
Paragraph 5, in an amount not less than eighty percent (80%) of the "REPLACEMENT
COST" thereof insuring against the perils of fire, lighting, extended coverage,
vandalism, and malicious mischief. In addition, Lessor shall maintain during the
term of this Lease a policy or policies of comprehensive general liability
insurance, including personal injury and property damage, with a limit not in
excess of $1,000,000 per occurrence for personal injuries or deaths of persons
occurring in or about the Premises, the allocable premium costs of which shall
be treated as an Operating Expense pursuant to Paragraph 2D hereof.

B. Lessee, at its own expense. shall maintain during the term
of this Lease a policy or policies of worker's compensation and comprehensive
general liability insurance,

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<PAGE> 19

including personal injury and property damage, with contractual liability
endorsement in the amount of Five Hundred Thousand Dollars ($500,000.00) for
property damage and One Million Dollars ($1,000,000.00) per occurrence for
personal injuries or deaths of persons occurring in or about the Premises.
Lessee, at its own expense, also shall maintain during the term of this Lease,
fire and extended coverage insurance covering (i) the replacement cost of all
alterations, additions, partitions, and improvements installed or placed on the
Premises by Lessee or by Lessor on behalf of Lessee subsequent to the initial
construction of Improvements contemplated by Paragraph 1 of this Lease and (ii)
the replacement cost of all of Lessee's personal property contained within the
Premises and (iii) business interruption of Lessee. Said policies shall (i) name
Lessor as an additional insured and insure Lessor's contingent liability under
this Lease (except for the worker's compensation policy, which instead shall
include waiver of subrogation endorsement in favor of Lessor), (ii) be issued by
an insurance company which is reasonably acceptable to Lessor, (iii) provide
that said insurance shall not be canceled unless thirty (30) days prior written
notice shall have been given to Lessor, and (iv) provide primary coverage to
Lessor when any policy issued to Lessor provides duplicate or similar coverage,
and in such circumstance Lessor's coverage under Lessor's policy shall be deemed
excess over and above the coverage provided by Lessee's policy. Said policy or
policies or certificates thereof shall be delivered to Lessor by Lessee upon
commencement of the term of the Lease and upon each renewal of said insurance.

C. Lessee will not permit the Premises to be used for any
purpose or in any manner that would (i) void the insurance thereon, (ii)
increase the insurance risk or premium, or (iii) cause the disallowance of any
sprinkler credits, including without limitation, use of the Premises for the
receipt, storage or handling of any product, material or merchandise that is
explosive or highly flammable. If any increase in the cost of any insurance on
the Premises or the building of which the Premises are a part is caused by
Lessee's use of the Premises, or because Lessee vacates the Premises, then
Lessee shall promptly pay the amount of such increase to Lessor upon demand.

D. Anything in this Lease to the contrary notwithstanding,
Lessor and Lessee hereby waive and release each other of and from any and all
rights of recovery, claim, action or cause of action, against each other, their
agents, officers and employees, for any loss or damage that may occur to the
Premises, Improvements, or personal property (building contents) within the
building and/or Premises covered or required to be covered by the insurance to
be provided under this Lease, for any reason regardless of cause or origin. Said
mutual waivers shall be in addition to, and not in limitation or derogation of,
any other waiver or release contained in this Lease with respect to any loss or
damage to property of the parties hereto. Each party to this Lease agrees
immediately after execution of this Lease to give each insurance company, which
has issued to it policies of fire and extended coverage insurance, written
notice of the terms of the mutual waivers contained in this subparagraph, and if
necessary, to have the insurance policies properly endorsed.

10. FIRE AND CASUALTY DAMAGE.

A. If the Premises or the Improvements should be damaged or
destroyed by fire or other peril, Lessee immediately shall give written notice
to Lessor. If the Improvements

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<PAGE> 20

should be totally destroyed by any peril covered by the insurance to be provided
by Lessor under Paragraph 9A above, or if they should be so damaged thereby
that, in Lessor's estimation, rebuilding or repairs cannot be completed within
one hundred eighty (180) days after the date of such damage, Lessor shall so
notify Lessee within sixty (60) days of the occurrence of such damage, this
Lease shall terminate and the rent shall be abated during the unexpired portion
of this Lease, effective upon the date of occurrence of such damage.

B. If the Improvements should be damaged by any peril covered
by the insurance to be provided by Lessor under Paragraph 9A above, and in
Lessor's estimation, rebuilding or repairs can be substantially completed within
one hundred eighty (180) days after the date of such damage, Lessor shall so
notify Lessee within sixty (60) days of the occurrence of such damage, this
Lease shall not terminate, and Lessor shall restore the Premises to
substantially its previous condition, except that Lessor shall not be required
to rebuild, repair or replace any part of the partitions, fixtures, additions
and other improvements that may have been constructed, erected or installed in,
or about the Premises or for the benefit of, or by or for Lessee subsequent to
the initial construction of the Improvements contemplated by Paragraph I of this
Lease. If such repairs and rebuilding have not been substantially completed
within one hundred eighty (180) days after the date of such damage, Lessee, as
Lessee's exclusive remedy, may terminate this Lease by delivering written notice
of termination to Lessor in which event the rights and obligations hereunder
shall cease and terminate.

C. In order to determine whether and to what extent the
Premises are untenantable in whole or in part following any casualty damage,
Lessor and Lessee shall attempt to agree within fifteen (15) days of the date of
such damage on a licensed architect to make such determination, but if the
parties are unable to agree within such fifteen (15) day period on a single
architect, each shall thereafter appoint a licensed architect and the two
architects shall attempt to reach agreement on tenantability within thirty (30)
days after the date of such damage. If such two architects are unable to reach
an agreement within such period on the tenantability question, they shall
together appoint a third licensed architect whose decision as to tenantability
shall be binding on the parties. The cost of each party's appointed architect
shall be borne by such party and the cost of a third architect shall be divided
equally between the Lessor and Lessee. For purposes of this Paragraph 10C, if
the Premises are determined to be untenantable in whole or in part following
such damage, the rent payable hereunder during the period in which the Premises
are determined to be untenantable shall be reduced according to the square
footage of untenantable area contained in the Premises, as determined in
accordance with the foregoing procedure. As an alternative to the aforementioned
rebuilding, repairs and/or reduction of rent, Lessor may, at its sole option,
use reasonable efforts to provide a reasonably comparable facility for Lessee to
lease at the then prevailing fair market rental for either (i) the remainder of
the term of the Lease, or (ii) the period of time during which the Premises are
untenantable, which facility has been approved by Lessee which approval shall
not be unreasonably withheld or delayed.

D. Notwithstanding anything herein to the contrary, in the
event the holder of any indebtedness secured by a mortgage or deed of trust
covering the Premises requires that the insurance proceeds be applied to such
indebtedness, then Lessor shall have the right to terminate this Lease by
delivering written notice of termination to Lessee within fifteen (15) days
after such

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<PAGE> 21

requirement is made known by any such holder, whereupon all rights and
obligations hereunder shall cease and terminate.

11. LIABILITY AND INDEMNIFICATION. Except for any claims, rights of
recovery and causes of action that Lessee has released and claims covered (or
which would have been covered) by policies of insurance required to be
maintained by Lessee by this Lease, Lessor shall hold Lessee harmless and defend
Lessee against any and all claims or liability for any injury or damage to any
person in, on or about the Premises or any part thereof and/or the building of
which the Premises are a part, when such injury or damage shall be caused by the
act, neglect, fault of, or omission of any duty with respect to the same by
Lessor, its agents, servants and employees. Notwithstanding the foregoing or
anything to the contrary in this Lease, Lessor and Lessee hereby agree that in
no event shall either party be liable for any incidental or consequential
damages whatsoever, including, without limitation, any damages as a result of
any interruption of Lessee's business or any loss of income therefrom. Except
for any claims, rights of recovery and causes of action that Lessor has released
and claims covered (or which would have been covered) by policies of insurance
required to be maintained by Lessor by this Lease, Lessee shall hold Lessor
harmless from and defend Lessor against any and all claims or liability for any
injury or damage (i) to any person or property whatsoever occurring in, on or
about the Premises or any part thereof and/or of the building of which the
Premises are a part, including without limitation elevators, stairways,
passageways or hallways, the use of which Lessee may have in accordance with
this Lease, when such injury or damage shall be caused by the act, neglect,
fault of, or omission of any duty with respect to the same by Lessee, its
agents, servants, employees, or invitees, (ii) arising from the conduct of
management of any work done by the Lessee in or about the Premises, (iii)
arising from transactions of the Lessee, and (iv) all costs, counsel fees,
expenses and liabilities incurred in connection with any such claim or action or
proceeding brought thereon. The provisions of this Paragraph 11 shall survive
the expiration or termination of this Lease with respect to any claims or
liability occurring prior to such expiration or termination.

12. USE. The Premises shall be used only for the purpose of general
office use, receiving storing, shipping and selling (other than retail)
products, materials and merchandise made and/or distributed by Lessee and for
such other lawful purposes as may be incidental thereto. In the event the
Premises shall constitute a portion of a multiple-occupancy building, outside
storage, including without limitation, storage of trucks and other vehicles and
the washing thereof at any time is prohibited without Lessor's prior written
consent. With the exception of permits for construction of the Improvements
contemplated by Paragraph 1 of this Lease and the Certificate of Occupancy for
such Improvements, Lessee shall, at its own cost and expense, obtain any and all
licenses and permits necessary for such use, shall at all times maintain the
Premises in a clean, healthful and safe condition and comply with all
governmental laws, codes, ordinances, regulations or any other applicable
authorities with regard to the use, condition or occupancy of the Premises
including, without limitation, the ADA (except as otherwise provided in
Paragraph 4C). Lessee shall be responsible, at Lessee's sole cost and expense,
for the correction, prevention, and abatement of nuisances in or upon, or
connected with, the Premises. Lessee shall not permit any objectionable or
unpleasant odors, smoke, dust, gas, noise, vibrations, or pest infestations to
emanate from the Premises, nor take any other action that would constitute a
nuisance or would disturb, unreasonably interfere with, or endanger Lessor, any
other lessees of the building or

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<PAGE> 22

project of which the Premises are a part, or any adjacent property owners or
occupants. Lessee's use of the Premises shall at all times comply with the
insurance provisions in Paragraph 9C hereof.

13. INSPECTION. Lessor and Lessor's agents and representatives shall
have the right to enter the Premises at any reasonable time during business
hours, upon prior notice to Lessee except that no such notice shall be required
if Lessor believes that an emergency exists or if Lessor has cause to suspect
that hazardous substances are being stored, used, produced, handled or disposed
of in or on the Premises in violation of the terms of this Lease, or the
Premises are otherwise being used in violation of the use restrictions under
this Lease, to inspect the Premises and to make such repairs as may be required
or permitted pursuant to this Lease. During the period that is six (6) months
prior to the end of the term hereof and at any time Lessee has committed an
Event of Default, Lessor and Lessor's representatives may enter the Premises
during business hours for the purpose of showing the Premises. Lessee shall
neither prevent, prohibit, nor in any way impair such showing of the Premises.
In addition, Lessor shall have the right to erect a suitable sign on or near the
Premises stating the Premises are available no earlier than six (6) months prior
to the expiration of the term of this Lease, except that if an event of default
has occurred, Lessor can erect such sign immediately upon the occurrence of such
event of default. Lessee shall notify Lessor in writing at least thirty (30)
days prior to vacating the Premises at or about expiration of the Lease term and
shall arrange to meet with Lessor for a joint inspection of the Premises prior
to vacating. If Lessee fails to arrange for and complete such inspection within
thirty (30) days after vacating the Premises, then Lessor's inspection of the
Premises shall be deemed correct for the purpose of determining Lessee's
responsibility for repairs and restoration of the Premises.

14. ASSIGNMENT AND SUBLETTING.

A. Lessee shall not have the right to assign, sublet, transfer
or encumber this Lease, or any interest therein, without the prior written
consent of Lessor which consent shall not be unreasonably withheld or delayed,
provided that (i) Lessee has notified Lessor in writing prior to Lessee's offer,
or marketing, of the Premises to third parties; (ii) Lessee has notified Lessor
in writing no later than fourteen (14) days in advance of the proposed
subleasing or assignment, and furnished such financial statements and other
information about the proposed sublessee or assignee as Lessor may reasonably
request; (iii) the proposed sublessee's or assignee's tangible net worth
(excluding good will and all other intangible items) equals or exceeds the
Lessee's tangible net worth; and (iv) the proposed sublessee or assignee
confirms its willingness to assume the obligations of Lessee under this Lease by
written agreement in form and substance satisfactory to Lessor. It is
specifically provided that if Lessor's mortgagee declines to approve any
requested assignment, sublet, transfer or encumbrance of this Lease or any
interest therein, for any reason or for no reason, such action shall cause
Lessor's declination of the requested action to be deemed reasonable. Any
attempted assignment, subletting, transfer or encumbrance by Lessee in violation
of the terms and covenants of this Paragraph shall be void. Notwithstanding the
foregoing, Lessee shall have the right to assign this Lease to any affiliate (as
such term is defined in the Securities Act of 1933) provided that such
assignment is in form satisfactory to Lessor and that such affiliate agrees to
and performs all obligations of Lessee under this Lease. If Lessor fails to
respond to Lessee's request to assign, sublet, transfer or encumber this Lease
or any interest therein which request conforms with the provisions of this
Paragraph 14A within fourteen (14) days after

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<PAGE> 23

Lessor's receipt of such request, Lessee's request will be deemed to have been
approved by Lessor. Any mergers, consolidations, reorganizations, sales of stock
or assets by or of the Lessee shall not be deemed to be an assignment for the
purposes of this Paragraph 14. Any assignee, sublessee or transferee of Lessee's
interest in this Lease (all such assignees, sublessees and transferees being
hereinafter referred to as "TRANSFEREES"), by assuming Lessee's obligations
hereunder, shall assume liability to Lessor for all amounts paid to persons
other than Lessor by such Transferees in contravention of this Paragraph. No
assignment, subletting, or other transfer, whether consented to by Lessor or not
or permitted hereunder shall relieve Lessee of its liability hereunder. If an
Event of Default occurs while the Premises or any part thereof are assigned or
sublet, then Lessor, in addition to any other remedies herein provided, or
provided by law, may collect directly from such Transferee all rents payable to
the Lessee and apply such rent against any sums due Lessor hereunder. No such
collection shall be construed to constitute a novation or a release of Lessee
from the further performance of Lessee's obligations hereunder.

B. If this Lease is assigned to any person or entity pursuant
to the provision of the Bankruptcy Code, 11 U.S.C. 101 et. seq., (the
"BANKRUPTCY CODE"), any and all monies or other consideration payable or
otherwise to be delivered in connection with such assignment shall be paid or
delivered to Lessor, shall be and remain the exclusive property of Lessor and
shall not constitute property of Lessee or of the estate of Lessee within the
meaning of the Bankruptcy Code. Any and all monies or other consideration
constituting Lessor's property under the preceding sentence not paid or
delivered to Lessor shall be held in trust for the benefit of Lessor and be
promptly paid or delivered to Lessor.

C. Any person or entity to which this Lease is assigned
pursuant to the provisions of the Bankruptcy Code shall be deemed, without
further act or deed, to have assumed all of the obligations arising under this
Lease on and after the date of such assignment. Any such assignee shall upon
demand execute and deliver to Lessor an instrument confirming such assumption.

D. Upon occurrence of an assignment or sublease, whether
consented or approved by Lessor or mandated by judicial intervention, Lessee
hereby assigns, transfers, and conveys all rents or other sums received by
Lessee under any such assignment or sublease which are in excess of rents and
other sums payable by Lessee under this Lease and agrees to pay such amounts to
Lessor within ten (10) days after receipt.

15. CONDEMNATION. If the whole or any substantial part as determined by
Lessor of the Premises should be taken for any public or quasi-public use under
governmental law, ordinance or regulation, or by right of eminent domain, or by
private purchase in lieu thereof and the taking prevents or materially
interferes with the use of the Premises for the purpose for which they were
leased to Lessee, this Lease shall terminate and the rent shall be abated during
the unexpired portion of this Lease, effective on the date of such taking. If
less than a substantial part, as determined by Lessor, of the Premises is taken
for any public or quasipublic use under any governmental law, ordinance or
regulation, or by right of eminent domain, or by private purchase in lieu
thereof, this Lease shall not terminate, but the rent payable hereunder during
the unexpired portion of this Lease shall be reduced to such extent as may be
fair and reasonable under all of the circumstances. All compensation awarded in
connection with or as a result of any of the foregoing

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<PAGE> 24

proceedings shall be the property of Lessor and Lessee hereby assigns any
interest in any such award to Lessor; provided, however, Lessor shall have no
interest in any award made to Lessee for loss of business or goodwill or for the
taking of Lessee's fixtures and improvements, if a separate award for such items
is made to Lessee, and Lessor shall not accept any awards which deny Lessee the
right to bring an action against any party, other than Lessor, for any losses
which Lessee suffers as a result of such taking or condemnation action.

16. HOLDING OVER. At the termination of this Lease by its expiration or
otherwise, Lessee immediately shall deliver possession to Lessor with all
repairs and maintenance required herein to be performed by Lessee completed. If,
for any reason, Lessee retains possession of the Premises after the expiration
or termination of this Lease, unless the parties hereto otherwise agree in
writing, such possession shall be subject to termination by either Lessor or
Lessee at any time upon not less than ten (10) days advance written notice, and
all of the other terms and provisions of this Lease shall be applicable during
such period, except that Lessee shall pay Lessor from time to time, upon demand,
as rental for the period of such possession, an amount equal to one hundred and
seventy-five percent (175%) of the rent in effect on the termination date,
computed on a daily basis for each day of such period. No holding over by
Lessee, whether with or without consent of Lessor shall operate to extend this
Lease except as otherwise expressly provided. The preceding provisions of this
Paragraph 16 shall not be construed as consent for Lessee to retain possession
of the Premises in the absence of written consent thereto by Lessor.

17. QUIET ENJOYMENT. Lessor covenants that on or before the
commencement date it will have good title to the Premises, free and clear of all
liens and encumbrances, excepting only the lien for current taxes not yet due,
such mortgage or mortgages as are permitted by the terms of this Lease, zoning
ordinances and other building and fire ordinances and governmental regulations
relating to the use of such property, and easements, restrictions and other
conditions of record. Lessor represents that it has the authority to enter into
this Lease and that so long as Lessee pays all amounts due hereunder and
performs all other covenants and agreements herein set forth, Lessee shall
peaceably and quietly have, hold and enjoy the Premises for the term hereof
without hindrance or molestation from Lessor or persons claiming through Lessor
or otherwise, subject to the terms and provisions of this Lease. With respect to
any mortgages permitted by this Lease, Lessor shall cause to be executed and
delivered to Lessee a subordination and non-disturbance agreement which shall be
executed by Lessee provided that Lessee shall agree to attornment provisions and
other commercially reasonable terms, as Lessor's mortgagee may require in
connection with such agreement.

18. EVENTS OF DEFAULT. The following events (herein individually
referred to as "EVENT OF DEFAULT" if any applicable cure period shall expire
without cure of the default in question) each shall be deemed to be defaults by
Lessee under this Lease:

A. Lessee shall fail to pay any installment of Base Rent or
any additional rents herein reserved when due, or any other payment or
reimbursement to Lessor required herein when due, and such failure shall
continue for a period of ten (10) days from the date Lessor gives Lessee written
notice of Lessee's late payment.

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<PAGE> 25

B. The Lessee shall (i) become insolvent; (ii) admit in
writing its inability to pay its debts; (iii) make a general assignment for the
benefit of creditors; (iv) commence any case, proceeding or other action seeking
to have an order for relief entered on its behalf as a debtor or to adjudicate
it as bankrupt or insolvent, or seeking reorganization, arrangement, adjustment,
liquidation, dissolution or composition of it or its debts under any law
relating to bankruptcy, insolvency, reorganization or relief of debtors or
seeking appointment of a receiver, trustee, custodian or other similar official
for it or for all or of any substantial part of its property; or (v) take any
action to authorize any of the actions set forth above in this Paragraph.

C. Any case, proceeding or other action against the Lessee
shall be commenced seeking (i) to have an order for relief entered against it as
a debtor or to adjudicate it as bankrupt or insolvent; (ii) reorganization,
arrangement, adjustment, liquidation, dissolution or composition of it or its
debts under any law relating to bankruptcy, insolvency, reorganization or relief
of debtors (iii) appointment of a receiver, trustee, custodian or other similar
official for it or for all or any substantial part of its property, and such
case, proceeding or other action (a) results in the entry of a final
non-appealable order for relief against it which it is not fully stayed within
seven (7) business days after the entry thereof or (b) shall remain undismissed
for a period of seventy-five (75) days.

D. Without a minimum of fifteen (15) days' advance written
notice to Lessor, Lessee shall (i) vacate all or a substantial portion of the
Premises or (ii) fail to continuously operate its business at the Premises for
the permitted use set forth herein, whether or not Lessee is in default of the
rental payments due under this Lease.

E. Lessee shall fail to discharge, by cash payment or through
bonding, any lien placed upon the Premises in violation of Paragraph 21 hereof
within twenty (20) days after any such lien or encumbrance is filed against the
Premises.

F. Lessee shall fail to comply with any term, provision or
covenant of this Lease (other than those listed in this Paragraph 18), and shall
not cure such failure within thirty (30) days after written notice thereof to
Lessee, which cure period shall be extended without the written approval of
Lessor, for a reasonable period, not to exceed an additional forty-five (45)
days beyond the initial thirty (30) day cure period, if Lessee's failure is not
reasonably susceptible of cure within thirty (30) days, and Lessee is diligently
and continuously pursuing such cure to completion.

19. REMEDIES.

A. Upon each occurrence of an Event of Default, Lessor shall
have the option to pursue any one or more of the following remedies without any
notice or demand:

(1) Terminate this Lease; and/or

(2) Enter upon and take possession of the Premises
without terminating this Lease; and/or

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<PAGE> 26

(3) Alter all locks and other security devices at the
Premises with or without terminating this Lease, and pursue,
at Lessor's option, one or more remedies pursuant to this
Lease, Lessee hereby specifically waiving any state or federal
law to the contrary;

and in any such event Lessee immediately shall surrender the Premises to Lessor,
and if Lessee fails so to do, Lessor, without waiving any other remedy it may
have, may enter upon and take possession of the Premises and expel or remove
Lessee and any other person who may be occupying such Premises or any part
thereof, without being liable for prosecution or any claim of damages therefor,
except for any personal injury or property damage caused by Lessor's gross
negligence.

B. If Lessor terminates this Lease, at Lessor's option, Lessee
shall be liable for and shall pay to Lessor, the sum of all rental and other
payments owed to Lessor hereunder accrued to the date of such termination, plus,
as liquidated damages, an amount equal to the present value (using the current
"prime" interest rate of Texas Commerce Bank, N.A., or should such financial
institution no longer exist, a comparable financial institution) of (1) the
total rental and other payments owed hereunder for the remaining portion of the
Lease term, calculated as if such term expired on the date set forth in
Paragraph 1, less (2) the then fair market rental of the Premises for such
period.

C. If Lessor repossesses the Premises without terminating the
Lease, Lessee, at Lessor's option, shall be liable for and shall pay Lessor on
demand all rental and other payments owed to Lessor hereunder, accrued to the
date of such repossession, plus all amounts required to be paid by Lessee to
Lessor until the date of expiration of the term as stated in Paragraph 1,
diminished by all amounts received by Lessor through reletting of the Premises
during such remaining term (but only to the extent of the rent herein reserved).
Actions to collect amounts due by Lessee to Lessor under this subparagraph may
be brought from time to time, on one or more occasions, without the necessity of
Lessor's waiting until expiration of the Lease term.

D. Upon an Event of Default. in addition to any sum provided
to be paid herein, Lessee also shall be liable for and shall pay to Lessor (i)
brokers' fees incurred by Lessor in connection with reletting the whole or any
part of the Premises; (ii) the costs of removing and storing Lessee's or other
occupant's property; (iii) the costs of repairing, altering, remodeling or
otherwise putting the Premises into as good condition as that in which it was
originally delivered to Lessee; (iv) all reasonable expenses incurred by Lessor
in enforcing or defending Lessor's rights and/or remedies. If either party
hereto institutes any action or proceeding to enforce any provision hereof by
reason of any alleged breach of any provision of this Lease, the prevailing
party shall be entitled to receive from the losing party all reasonable
attorneys' fees and all court costs in connection with such proceeding.

E. In the event Lessee fails to make any payment due hereunder
within ten (10) days of the date when payment is due, to help defray the
additional cost to Lessor for processing such late payments, Lessee shall pay to
Lessor on demand a late charge in an amount equal to five percent (5%) of such
installment; and the failure to pay such late charges within ten (10) days after
demand therefor shall be an additional Event of Default hereunder. The provision

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<PAGE> 27

for such late charge shall be in addition to all of Lessor's other rights and
remedies hereunder or at law and shall not be construed as liquidated damages or
as limiting Lessor's remedies in any manner.

F. Exercise by Lessor of any one or more remedies hereunder
granted or otherwise available shall not be deemed to be an acceptance of
surrender of the Premises by Lessor, whether by agreement or by operation of
law, it being understood that such surrender can be effected only by the written
agreement of Lessor and Lessee. Lessee and Lessor further agree that forbearance
by Lessor to enforce its rights pursuant to the Lease at law or in equity, shall
not be a waiver of Lessor's right to enforce one or more of its rights in
connection with any subsequent default.

G. Subject to the terms of Paragraph 20, if Lessor shall
default in any of its obligations under Paragraphs 4, 8, or 9 of this Lease and
such failure shall continue beyond the expiration of any cure period provided
for such default or, in the absence of a stated cure period for such default,
for thirty (30) days after written notice from Lessee specifying the
circumstances of such default (unless such failure is not reasonably capable of
being cured within thirty (30) days and Lessor has not begun to cure such
failure within said thirty (30) day period and to pursue such cure with due
diligence), then Lessee may, at its option, cure the default at Lessor's
expense. Lessee shall have the right to offset its reasonable out-of-pocket
costs incurred in curing any default by Lessor in accordance with the terms of
this Paragraph 1 9G, provided, however, that if Lessor shall have notified
Lessee that Lessor contests Lessee's determination that Lessor has defaulted and
thereafter, Lessee shall have first obtained a declaration of Lessor's default
and an award of such costs through Binding Arbitration proceedings. Lessee shall
be entitled to perform the work or take such actions in accordance with the
applicable terms and conditions of this Lease, if any, as may be reasonably
necessary to cure the Lessor's default. Notwithstanding the foregoing notice and
time periods, in the event of an emergency and a default materially prejudicial
to Lessee, Lessee need only give such notice as is reasonable under the
circumstances. The term "LESSOR" shall mean only the owner, for the time being
of the Premises, and in the event of the transfer by such owner of its interest
in the Premises, such owner shall thereupon be released and discharged from all
covenants and obligations of the Lessor thereafter accruing, but such covenants
and obligations shall be binding during the Lease term upon each new owner for
the duration of such owner's ownership. Notwithstanding any other provision
hereof, Lessor shall not have any personal liability hereunder. In the event of
any breach or default by Lessor in any term or provision of this Lease, Lessee
agrees to look solely to the equity or interest then owned by Lessor in the
Premises or of the building of which the Premises are a part, or casualty
insurance proceeds on account of damage to the Premises not applied to
rebuilding or restoration of the Premises or subject to a lien or security
interest; however, in no event, shall any deficiency judgment or any money
judgment of any kind be sought or obtained against any Lessor. Upon the sale or
other disposition of Lessor's interest in the Premises, Lessor shall not be
relieved of any preexisting obligations created herein, but such liability shall
under no circumstances exceed the value of the Premises at the time of such sale
or other disposition.

H. If Lessor repossesses the Premises pursuant to the
authority herein granted, then Lessor shall have the right to (i) keep in place
and use or (ii) remove and store all of the furniture, fixtures and equipment at
the Premises, including that which is owned by or leased to

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<PAGE> 28

Lessee at all times prior to any foreclosure thereon by Lessor or repossession
thereof by any Lessor thereof or third party having a lien thereon. Lessor also
shall have the right to relinquish possession of all or any portion of such
furniture, fixtures, equipment and other property to any person ("CLAIMANT") who
presents to Lessor a copy of any instrument represented by Claimant to have been
executed by Lessee (or any predecessor of Lessee) granting Claimant the right
under various circumstances to take possession of such furniture, fixtures,
equipment or other property, without the necessity on the part of Lessor to
inquire into the authenticity or legality of said instrument. The rights of
Lessor herein stated shall be in addition to any and all other rights that
Lessor has or may hereafter have at law or in equity; and Lessee stipulates and
agrees that the rights herein granted Lessor are commercially reasonable.

I. Notwithstanding anything in this Lease to the contrary, all
amounts payable by Lessee to or on behalf of Lessor under this Lease, whether or
not expressly denominated as rent, shall constitute rent.

J. This is a contract under which applicable law excuses
Lessor from accepting performance from (or rendering performance to) any person
or entity other than Lessee.

20. MORTGAGES.

A. Lessee accepts this Lease subject and subordinate to any
mortgages and/or deeds of trust now or at any time hereafter constituting a lien
or charge upon the Premises or the Improvements; provided, however, that if the
mortgagee, trustee, or holder of any such mortgage or deed of trust elects to
have Lessee's interest in this Lease superior to any such instrument, then by
notice to Lessee from such mortgagee, trustee or holder, this Lease shall be
deemed superior to such lien, whether this Lease was executed before or after
said mortgage or deed of trust. In the event any mortgage and/or deed of trust
is filed against the Premises, Lessor shall cause such mortgagee, trustee or
holder of any such mortgage or deed of trust to execute a subordination and
non-disturbance agreement which Lessee shall execute, provided that Lessee shall
agree to attornment provisions and other commercially reasonable terms, as
Lessor's mortgagee may require in connection with such agreement. Lessee, at any
time hereafter on demand, shall execute any instruments, releases or other
documents that may be required by any mortgagee for the purpose of subjecting
and subordinating this Lease to the lien of any such mortgage.

B. At any time when the holder of an outstanding mortgage,
deed of trust or other lien covering Lessor s interest in the Premises has given
Lessee written notice of its interest in this Lease, Lessee may not exercise any
remedies for default by Lessor hereunder unless and until the holder of the
indebtedness secured by such mortgage, deed of trust or other lien shall have
received written notice of such default and the same time period afforded Lessor
to cure such default shall thereafter have elapsed without the default having
been cured. Opportunity to cure extended to Lessor's mortgagee may be coincident
with the cure period referred to paragraph 19G for defaults by Lessor.

21. MECHANIC'S LIENS. Lessee has no authority, express or implied, to
create or place any lien or encumbrance of any kind or nature whatsoever upon,
or in any manner to bind the interest of Lessor or Lessee in the Premises or to
charge the rentals payable hereunder for any claim in favor of any person
dealing with Lessee, including those who may furnish materials or

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<PAGE> 29

perform labor for any construction or repairs. Lessee covenants and agrees that
it will pay or cause to be paid all sums legally due and payable by it on
account of any labor performed or materials furnished in connection with any
work performed on the Premises and that it will save and hold Lessor harmless
from any and all loss, cost or expense based on or arising out of asserted
claims or liens against the leasehold estate or against the right, title and
interest of the Lessor in the Premises or under the terms of this Lease. Lessee
agrees to give Lessor immediate written notice of the placing of any lien or
encumbrance against the Premises. Lessee shall be entitled to contest any
claims, liens or any other type of encumbrances asserted against the leasehold
estate or the Lessee's and/or Lessor's interest in the Premises or this Lease so
long as Lessee deposits with Lessor on terms agreeable to Lessor an amount equal
to one hundred and fifty percent (150%) of the amount of the asserted claim,
lien or encumbrance.

22. LESSOR'S LIEN.

A. Prior to a monetary Event of Default by Lessee, Lessor
shall not require Lessee to grant any contractual lien or security interest in
Lessee's personal property located at the Premises. At any time subsequent to a
monetary Event of Default by Lessee, Lessor shall have the right to require
Lessee, upon not less than fifteen (15) days' prior written notice, to grant to
Lessor, in addition to any statutory lien for rent in Lessor's favor, a
continuing security interest for all rentals and other sums of money becoming
due hereunder from Lessee, upon all goods, wares, equipment, fixtures,
furniture, inventory, and other personal property of Lessee now or hereafter
situated on the Premises, and such property shall not be removed therefrom
without the consent of Lessor until all arrearages in rent as well as any and
all other sums of money then due to Lessor hereunder shall first have been paid
and discharged. In the event any of the foregoing described property is removed
from the Premises in violation of the covenant in the preceding sentence, the
security interest shall continue in such property and all proceeds and products,
regardless of location. Upon a default hereunder by Lessee in addition to all
other rights and remedies, Lessor shall have all rights and remedies under the
Uniform Commercial Code, including without limitation, the right to sell the
property described in this Paragraph at public or private sale upon five (5)
days notice by Lessor to Lessee. Lessee hereby agrees to execute such other
instruments, necessary or desirable under applicable law to perfect the security
interest created. Lessor and Lessee agree that this Lease and security agreement
shall, after the conditions for creation of a security interest are satisfied,
serve as a financing statement and that a copy, photographic or other
reproduction of this portion of this Lease may be filed of record by Lessor and
have the same force and effect as the original. This security agreement and
financing statement will also cover fixtures located at the Premises subject to
this Lease and legally described in EXHIBIT A and will be filed for record in
the real estate records.

B. Notwithstanding Paragraph A, Lessor agrees that it will
subordinate its security interest and Lessor's lien to the security interest of
Lessee's supplier or institutional financial source for as long as the rental
account of Lessee under this Lease is current, provided that the subordination
must be limited to a specified transaction, identified debt limit, and specified
items of the fixtures. equipment or inventory involved in the transaction.

23. HAZARDOUS MATERIALS. The term "SUBSTANCES", as used in this Lease
shall mean pollutants, contaminants, toxic or hazardous wastes, or any other
substances, the use,

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<PAGE> 30

storage, handling, disposal, transportation or removal of which is regulated,
restricted, prohibited or penalized by any "ENVIRONMENTAL LAW", which term shall
mean any federal, state or local law, ordinance or other statute of a
governmental or quasi-governmental authority relating to pollution or protection
of health or the environment and shall specifically include, but not be limited
to, any "HAZARDOUS SUBSTANCE" as that term is defined under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 and any
amendments or successors in function thereto. Lessee hereby agrees that (i) no
activity will be conducted on the Premises that will produce any Substance,
except for such activities that are part of the ordinary course for Lessee's
business activities (the "PERMITTED ACTIVITIES") provided said Permitted
Activities are conducted in accordance with all Environmental Laws and have been
approved in advance in writing by Lessor (which approval Lessor may grant or
withhold in its sole discretion); Lessee shall be responsible for obtaining any
required permits and paying any fees and providing any testing required by any
governmental agency; (ii) the Premises will not be used in any manner for the
storage of any Substances except for the temporary storage of such materials
that are used in the ordinary course of Lessee's business provided such
Substances are properly stored in a manner and location meeting all
Environmental Laws and approved in advance in writing by Lessor (which approval
Lessor may grant or withhold in its sole discretion); Lessee shall be
responsible for obtaining any required permits and paying any fees and providing
any testing required by any governmental agency; (iii) no portion of the
Premises will be used as a landfill or a dump; (iv) Lessee will not install any
underground or aboveground tank of any type; (v) Lessee will not cause any
surface or subsurface conditions to come into existence at the Premises, or
aggravate surface or subsurface conditions, that constitute, or with the passage
of time, may constitute a public or private nuisance; (vi) Lessee will not
permit any Substances to be brought onto the Premises, except in accordance with
the terms and conditions hereof, and if so brought or found located thereon, the
same shall be immediately removed, and properly disposed, and all required
cleanup procedures shall be diligently undertaken pursuant to all Environmental
Laws; and (vii) except for compliance obligations resulting from any conditions
identified in the Phase I environmental report dated June, 1996, conducted on
the Premises prior to Lessee taking possession of the Premises, or from the
migration of Hazardous Substances onto the Premises from or through adjoining
property, which Lessee or any of Lessee's licensees, invitees, agents,
employees. assigns, subtenants, or independent contractors does not cause or
aggravate, Lessee shall in all regards comply with Environmental Laws,
including, without limitation. meeting any necessary financial responsibility
requirements. Prior to any Substance being brought upon or into the Premises,
whether Lessor's written permission is required or not, Lessee will provide to
Lessor any applicable material safety data sheets regarding said Substance as
well as a written description of the amount of such Substance to be brought upon
or into the Premises and the common and recognized chemical name of such
Substance. Lessee shall bear responsibility for insuring that all record
keeping, reporting and remediation responsibilities of Lessee under
Environmental Laws relative to Lessee's, or Lessee's licensees', invitees',
agents', employees assigns', subtenants', or independent contractors', use of or
activity on the Premises. are met and Lessee assumes all such responsibility and
liability for such legal compliance. Subject to the notification provisions set
forth in Paragraph 13 of this Lease, Lessor or Lessor's representative shall
have the right, but not the obligation. to enter the Premises for, among other
purposes, the purposes of inspecting the storage, use and disposal of any
Substances and to review compliance with all Environmental Laws. Should it be
determined, in the exercise of Lessor's reasonable judgment, that any Substances
are being improperly stored, used, or disposed of, then Lessee shall

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<PAGE> 31

immediately take such corrective action as required by applicable Environmental
Laws, Lessee will provide Lessor written notification of the release or disposal
of any Substance either within the Premises or outside of Lessee's Premises and
will also provide Lessor written notice of any pending or threatened litigation
concerning the breach or purported breach of any Environmental Laws. If at any
time during or after the term of the Lease, the Premises are found to be
contaminated by Substances or subject to said conditions, arising from or as a
result of Lessee's negligence (whether in whole or in part) or the use at the
Premises of any Substances by Lessee or any of Lessee's licensees, invitees,
agents, employees, assigns, subtenants, or independent contractors or other
activities on the Premises by Lessee or any of Lessee's licensees, invitees
agents, employees, assigns, subtenants, or independent contractors, Lessee shall
diligently institute proper and thorough investigation, risk assessment, and
cleanup procedures in accordance with Environmental Laws at Lessee's sole cost,
and Lessee agrees to indemnify and hold Lessor harmless from all claims,
demands, actions, liabilities, costs, expenses, damages, fines, reimbursement,
restitution, response costs, cleanup costs, and obligations (including
investigative responses and attorney's fees) of any nature resulting therefrom,
except to the extent that Lessee may establish that such contamination of the
Premises migrated onto the Premises from or through adjoining properties, which
Lessee or any of Lessee's licensees, invitees, agents, employees, assigns,
subtenants, or independent contractors did not cause or aggravate. The foregoing
indemnification and the responsibilities of Lessee shall apply to Lessee
regardless of whether they arise from any Permitted Activity or from any
Substances, the use of which Lessor approved, and shall survive the termination
or expiration of this Lease. Lessor shall be under no obligation to expend any
sums or to seek reimbursement to enforce the indemnification obligations of
Lessee hereunder.

Permitted Materials: None.

Lessee acknowledges and agrees that it shall not be unreasonable for
Lessor to withhold its consent to any proposed assignment, subletting, or
transfer of Lessee's interest in this Lease if (i) the anticipated use of the
Premises by the proposed assignee, subtenant, or transferee (collectively, a
"TRANSFEREE") involves the generation, storage, use, treatment, or disposal of
Substances; (ii) the proposed Transferee has been required by any prior lessor,
lender, or governmental authority to make remedial action in connection with
Substances contaminating a property, if the contamination resulted from such
Transferee's actions or use of the property in question; or (iii) the proposed
Transferee is subject to an enforcement order issued by any governmental
authority in connection with the use, disposal, or storage of a Substance.

24. MISCELLANEOUS.

A. Words of any gender used in this Lease shall be held and
construed to include any other gender, and words in the singular number shall be
held the plural, unless the context otherwise requires. The captions inserted in
this Lease are for convenience only and in no way define, limit or otherwise
describe the scope or intent of this Lease, or any provision hereof, or in any
way affect the interpretation of this Lease.

B. The terms, provisions and covenants and conditions
contained in this Lease shall apply to, inure to the benefit of, and be binding
upon the parties hereto and upon their respective heirs, executors, personal
representatives, legal representatives, successors and assigns,

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<PAGE> 32

except as otherwise herein expressly provided. Lessor shall have the right to
transfer and assign, in whole or in part, its rights and obligations in the
building and property that are the subject to this Lease. Each party agrees to
furnish to the other, promptly upon demand, a corporate resolution, proof of due
authorization by partners, or other appropriate documentation evidencing the due
authorization of such party to enter into this Lease.

C. Lessor shall not be held responsible for delays in the
performance of its obligations hereunder when caused by material shortages, acts
of God or labor disputes. Lessee shall not be held responsible for delays in the
performance of its building repair obligations set forth in Paragraph 5A of this
Lease when caused by material shortages, acts of God or labor disputes.

D. Lessee agrees, from time to time, within five (5) days
after request of Lessor, to deliver to Lessor, or Lessor's designee, a
Certificate of Occupancy and an estoppel certificate stating that this Lease is
in full force and effect, the date to which rent has been paid, the unexpired
term of this Lease and such other factual matters pertaining to this Lease as
may be requested by Lessor. It is understood and agreed that Lessee's obligation
to furnish such estoppel certificates in a timely fashion is a material
inducement for Lessor's execution of this Lease. Lessor agrees from time to
time, within five (5) days after request of Lessee, to deliver to Lessee, or
Lessee's designee, an estoppel certificate stating that this Lease is in full
force and effect, the date to which rent has been paid, the unexpired term of
this Lease and such other factual matters pertaining to this Lease as may be
requested by Lessee, provided such estoppel certificate is for the benefit of a
subtenant or assignee of Lessee's interest under this Lease approved by Lessor
in accordance with the terms of this Lease. It is understood and agreed that
Lessor's obligation to furnish such estoppel certificates in a timely fashion is
a material inducement for Lessee's execution of this Lease.

E. This Lease constitutes the entire understanding and
agreement of the Lessor and Lessee with respect to the subject matter of this
Lease, and contains all of the covenants and agreements of Lessor and Lessee
with respect thereto. Lessor and Lessee each acknowledge that no
representations, inducements, promises or agreements, oral or written, have been
made by Lessor or Lessee, or anyone acting on behalf of Lessor or Lessee, which
are not contained herein, and any prior agreements, promises, negotiations, or
representations not expressly set forth in this Lease are of no force or effect.
This Lease may not be altered, changed or amended except by an instrument in
writing signed by both parties hereto.

F. All obligations of Lessee hereunder not fully performed as
of the expiration or earlier termination of the term of this Lease shall survive
the expiration or earlier termination of the term hereof, including without
limitation, all payment obligations with respect to Base Rent and Operating
Expenses as of the expiration or earlier termination of the term of this Lease
and all obligations concerning the condition and repair of the Premises. Upon
the expiration or earlier termination of the term hereof, and prior to Lessee
vacating the Premises, Lessee shall restore the Premises to good condition and
repair, reasonable wear and tear excluded, subject to Paragraph 6. Prior to
Lessee vacating the Premises, Lessee shall make all repairs as specified in
Paragraph 5 hereof, including but not limited to any repairs necessary so that
the heating and air conditioning systems are in good working order. Upon
expiration or earlier termination hereof, the Premises

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<PAGE> 33

shall be delivered to Lessor in broom clean condition. If any and all repairs or
restoration required of Lessee hereunder are not completed by the expiration or
earlier termination hereof, Lessor may cause the same to be completed and the
costs shall be paid by Lessee (including a fifteen percent ( 15%) service charge
for arranging for and coordinating such work).

Lessee shall also, prior to vacating the Premises, pay to
Lessor the amount, as estimated by Lessor, of Lessee's obligation hereunder for
all Operating Expenses including, without limitation, taxes, insurance premiums
and common area charges for that portion of the year in which the Lease expires
or terminates that the Lease was in effect. All such amounts shall be used and
held by Lessor for payment of such obligations of Lessee hereunder, with Lessee
being liable for any additional costs therefor upon demand by Lessor, or with
any excess to be returned to Lessee in accordance with Paragraph 2D after all
such obligations have been determined and satisfied as the case may be. Any
security deposit held by Lessor may, at Lessor's option, be credited against the
amount payable by Lessee under this Paragraph or otherwise handled in accordance
with Paragraph 2B hereof.

G. If any clause or provision of this Lease is illegal,
invalid or unenforceable under the present or future laws effective during the
term of this Lease, then and in that event, it is the intention of the parties
hereto that the remainder of this Lease shall not be affected thereby, and it is
also the intention of the parties to this Lease that in lieu of each clause or
provision of this Lease that is illegal, invalid or unenforceable, there be
added, as a part of this Lease, a clause or provision as similar in terms to
such illegal, invalid or unenforceable clause or provision as may be possible
and be legal, valid and enforceable.

H. All references in this Lease to "THE DATE HEREOF" or
similar references shall be deemed to refer to the last date, in point of time,
on which all parties hereto have executed this Lease.

I. Lessee represents and warrants that it has dealt with no
broker, agent or other person in connection with this transaction or that no
broker, agent or other person brought about this transaction, other than Robert
W. Rice. Broker, and Todd G. Awe TAG Realty (collectively, the "BROKERS"), and
Lessee agrees to indemnify and hold Lessor harmless from and against any claims
by any other broker, agent or other person claiming a commission or other form
of compensation by virtue of having dealt with Lessee with regard to this
leasing transaction. Lessor agrees to compensate the Brokers in accordance with
the terms of separate agreements.

J. If and when included within the term "LESSOR", as used in
this instrument, there is more than one person, firm or corporation, all shall
jointly arrange among themselves for their joint execution of a notice
specifying some individual at some specific address for the receipt of notices
and payments to Lessor. If and when included within the term "LESSEE", as used
in this instrument, there is more than one person, firm or corporation, all
shall jointly arrange among themselves for their joint execution of a notice
specifying some individual at some specific address within the continental
United States for the receipt of notices and payments to Lessee. All parties
included within the terms "LESSOR" and "LESSEE", respectively shall be bound by
notices given in accordance with the provisions of Paragraph 25 hereof to the
same effect as if each had received such notice.

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<PAGE> 34

K. Except as expressly provided in Paragraph 26, Lessor and
Lessee expressly agree that there are and shall be no implied warranties of
merchantability, habitability, fitness for a particular purpose or any other
kind arising out of this Lease Agreement and that all express or implied
warranties in connection therewith are expressly disclaimed.

L. This Lease Agreement shall be construed under the laws of
the State of Texas.

M. Time is of the essence; and all due dates, time schedules,
and conditions precedent to exercising a right shall be strictly adhered to
without delay except where otherwise expressly provided.

N. As used herein, the term "BINDING ARBITRATION" shall mean
an arbitration proceeding before a single arbitrator appointed under the
American Arbitration Association rules for construction industry disputes (in
the case of any dispute arising under Paragraph I or Rider I related to
construction practices) or for commercial disputes (in the case of any other
dispute submitted to arbitration hereunder). The Binding Arbitration shall be
conducted under the relevant rules of the American Arbitration Association on an
expedited basis, unless the parties shall mutually agree otherwise, and shall
take place in Dallas, Texas. The arbitrator shall have the discretion to award
attorneys' fees and arbitration costs to either party based on facts in
evidence, but in the absence of such an award, each party shall pay its own
attorneys' fees and arbitration costs shall be paid in equal shares by the
parties.

25. NOTICES. Each provision of this instrument or of any applicable
governmental laws, ordinances, regulations and other requirements with reference
to the sending, mailing or delivering of notice or the making of any payment by
Lessor to Lessee or with reference to the sending, mailing or delivering of any
notice or the making of any payment by Lessee to Lessor shall be deemed to be
complied with when and if the following steps are taken:

A. All Rent and other payments required to be made by Lessee
to Lessor hereunder shall be payable to Lessor at the address for Lessor set
forth below or at such other address as Lessor may specify from time to time by
written notice delivered in accordance herewith. Lessee's obligation to pay rent
and any other amounts to Lessor under the terms of this Lease shall not be
deemed satisfied until such rent and other amounts have been actually received
by Lessor, or otherwise satisfied by offset as provided in Paragraphs 1A and
19G. In addition to Base Rent due hereunder, all sums of money and all payments
due Lessor hereunder shall be deemed to be additional rental owed to Lessor.

B. All payments required to be made by Lessor to Lessee
hereunder shall be payable to Lessee at the address set forth below, or at such
other address within the continental United States as Lessee may specify from
time to time by written notice delivered in accordance herewith.

C. Any written notice or document required or permitted to be
delivered hereunder shall be deemed to be delivered whether actually received or
not when deposited in the United States Mail, postage prepaid, Certified or
Registered Mail, addressed to the parties hereto

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<PAGE> 35

at the respective addresses set out below or at such other address as they have
theretofore specified by written notice delivered in accordance herewith.

26. ADDITIONAL PROVISIONS.

A. See RIDERS 1 AND 2 attached hereto and incorporated herein
by reference for all purposes.

B. Lessor will use best efforts to receive property tax
abatements and/or rebates from the City of Carrollton, Denton County, and the
school district in which the Premises are located, any and all of which, if
obtained, will be passed to Lessee.

C. Provided Lessee is not in default at the time such
rent installment falls due, the Base Rent obligation for the 13th month, and one
half the Base Rent obligation for the 25th month, following the commencement
date shall be abated.

D. The Land area and configuration shall be subject to
alteration at such time as the Lessee approves the Final Plans for the Premises,
and the boundaries of the Land included within the Premises shall be adjusted to
the tract boundaries determined by the Lessor's architect to comply with zoning
and subdivision ordinances applicable to the Premises at the time such Final
Plans are approved by Lessee. Lessee agrees to execute an amendment of this
Lease coincident with its approval of the Final Plans memorializing the
boundaries of the Land in accordance with the terms of this Lease.

E. Any assessments by a governmental authority for the
widening of International Parkway shall be excluded from Taxes which are subject
to reimbursement by Lessee under this Lease.

F. Lessor represents and warrants that as of the date hereof
and as of the commencement date hereof, (a) the Premises have adequate legal
access to abutting public highways, streets, and roads; (b) Lessor does not have
knowledge of any pending or threatened governmental or private proceedings which
would impair or result in the termination of access from the Premises to
abutting public highways, streets, and roads; (c) as of the commencement date,
there will be available adequate water, electrical, sewage, and gas utility
service required for the intended use of the Premises; (d) Lessor has no
knowledge of any pending or deferred special assessment affecting the Premises;
and (e) there are no special taxes or assessments which are proposed, adopted,
or currently a lien against the Premises

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<PAGE> 36

27. ATTACHMENTS.

The following are attached to this Lease and shall constitute
a part hereof:

EXHIBIT A - Land

EXHIBIT B - Site Plan and Floor Plan
Representative Elevations
Base Building Standard Specifications
Base Building Lessee-Specific Specifications

RIDER l - Option for Expansion of Premises

SCHEDULE R1 - Option Price Multiplier

RIDER 2 - Option for Renewal of Term

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<PAGE> 37

EXECUTED BY LESSOR, this 23rd day of August, 1996.

Attest/Witness CB MIDWAY INTERNATIONAL
PARTNERS, LTD., a Texas limited
partnership

By: 13BCO, Inc., a Texas corporation,
general partner

/s/ Jill M. McDonald By: /s/ Barbara A. Erhart
- ---------------------------------- ---------------------------------------
Name: Barbara A. Erhart
----------------------------------
Name: Jill M. McDonald Title: Vice President
--------------------------- ---------------------------------

ADDRESS:
4800 W. Texas Commerce Bank Tower
2200 Ross Avenue
Dallas, Texas 75201

"LESSOR AND SECURED PARTY"

EXECUTED BY LESSEE, this 23rd day of August, 1996.
Attest/Witness GADZOOKS, INC.
a Texas corporation

/s/ T. Michelle Peters By: /s/ Jerry Szczepanski
- ---------------------------------- ---------------------------------------
Name: Jerry Szczepanski
----------------------------------
Name: T. Michelle Peters Title: Chairman of the Board and Chief
--------------------------- ---------------------------------

ADDRESS:
4801 Spring Valley Road, Suite 108B
Dallas, Texas 75244

"LESSEE AND DEBTOR"

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<PAGE> 38

RIDER 1

TO STANDARD INDUSTRIAL LEASE AGREEMENT
BY AND BETWEEN
CB MIDWAY INTERNATIONAL PARTNERS, LTD., AS LESSOR,
AND
GADZOOKS, INC., AS LESSEE

OPTION FOR EXPANSION OF PREMISES

The Lessor hereby grants to Lessee the right and option to lease
expanded premises on the following terms:

1. For purposes of this Rider, the following definitions shall apply:

A. "EXPANSION IMPROVEMENTS" shall mean the improvements to be
constructed adjacent to the Improvements under the terms of this Rider.

B. "EXPANSION OPTION" shall mean the right and option granted
by Lessor to Lessee under the terms of this Rider.

C. "EXPANSION PREMISES" shall mean the additional land out of
the Option Tract required by applicable governmental authorities as a
building site for the Expansion Improvements, together with the
Expansion Improvements.

D. "EXPANSION RENT" shall mean the additional Base Rent
payable under the terms of this Rider over the Expansion Term for
rental of the Expansion Premises (excluding Base Rent for the original
Premises, which shall be adjusted as provided in Paragraph 5 of this
Rider).

E. "EXPANSION TERM" shall mean the ten (10) year period
commencing upon Substantial Completion of the Expanded Improvements and
continuing through the last day of the calendar month ten (10) years
after the date of such Substantial Completion.

F. "OPTION TRACT" shall mean that portion of the tract of land
described on Exhibit A attached to this Lease containing 349,549 square
feet out of which Lessor shall determine the land area and
configuration to be included within the Expansion Premises.

G. "10-YEAR MORTGAGE CONSTANT" shall mean the mortgage
constant at the time of Lessee's notice of exercise of the Expansion
Option associated with mortgage loans made available by the following
institutional lenders (or the successors of any such lenders) for loans
with loan terms of ten (10) years or more for properties similar to the
Premises, in Lessor's judgment, amortized over periods of no more than
twenty-five (25) years: Metropolitan Life Insurance Company; Prudential
Life Insurance Company; and The Principal Financial Group.

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<PAGE> 39

H. "TOTAL EXPANSION COSTS" shall mean all costs and fees
reasonably or necessarily incurred or actually payable by Lessor, or
otherwise requested or authorized by Lessee, in designing,
constructing, financing, and otherwise providing the Expansion Premises
to Lessee. Total Expansion Costs shall include (without implied
limitation) (i) the agreed land cost for the site of the Expansion
Premises in accordance with Schedule R1 attached to this Rider; (ii)
the cost of designing, engineering, and constructing the shell
Expansion Improvements in accordance with plans and specifications
approved by Lessee and accepted by Lessor; (iii) the cost of designing
and constructing the interior finishes (if any) to the Expansion
Improvements in accordance with plans and specifications approved by
Lessee and accepted by Lessor; (iv) loan fees, interest and other
financing costs payable in connection with items (ii) and (iii); (v)
commission costs of Lessor equal to an aggregate of 6.75% of the
Expansion Rent (4.5% collectively for Robert W. Rice, Broker, and Todd
G.Awe/ TAG Realty, plus 2.25% for Trammell Crow Company); and (vi) a
development fee equal to 4% of items (ii) and (iii).

2. The Expansion Option may be exercised at any time during the Primary
Term upon written notice to Lessor. The Lessee's notice shall identify the
square footage proposed by Lessee for the Expansion Improvements.

3. Within thirty (30) days after Lessee's notice of the exercise of the
Expansion Option, or as soon thereafter as is practicable, Lessor shall
calculate the adjusted Base Rent and Expansion Rent to become payable during the
Expansion Term and furnish Lessee with the calculation. If Lessee shall not
approve Lessor's Expansion Rent calculation, Lessee shall so notify Lessor
within ten (10) days of receipt thereof and Lessee's exercise of the Expansion
Option shall be deemed to be revoked and terminated for all purposes. If Lessee
shall approve Lessor's Expansion Rent calculation, Lessee shall so notify Lessor
within ten ( 10) days of receipt thereof and Lessor shall prepare for Lessee's
execution a restated lease agreement incorporating the adjusted Base Rent, the
Expansion Rent, a site plan and preliminary design plans for the Expansion
Premises and Expansion Improvements, the Expansion Term, and other terms set
forth in this Rider, and otherwise based on the terms of the Lease to which
Lessor and Lessee are then subject.

4. The Lease term shall be extended to be co-terminus with the
Expansion Term. The Expansion Rent payable over the initial five (5) years of
the Expansion Term shall be calculated by multiplying (a) the Total Expansion
Costs times (b) the sum of the 10-Year Mortgage Constant plus three hundred
(300) basis points, and dividing the product by (c) .98, and adding to the
resulting quotient $.05 per square foot of building area in the Expansion
Improvements, as determined in accordance with the terms of the Lease. The
Expansion Rent payable over the second five (5) years of the Expansion Term
shall equal the product of the Expansion Rent initially payable, multiplied by
1.15.

5. From and after Substantial Completion of the Expansion Improvements,
the Base Rent for rental of the original Premises (prior to construction of, and
excluding, the Expansion Premises) shall be: (a) prior to expiration of the
original ten (10) year Primary Term, without extension based on the Lessee's
exercise of the Expansion Option, the Base Rent payable in accordance with
Paragraph 2A of the Lease; and (b) during the extended portion of the Primary

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<PAGE> 40

Term subsequent to expiration of the original ten (10) year Primary Term (as
provided in Paragraph 1E of this Rider 1), a sum escalated annually, on each
anniversary of the first day of the month after the month in which Substantial
Completion of the Expansion Improvements occurs, equal to the product of 1.03
multiplied by the Base Rent payable in the immediately preceding twelve (12)
month period. The first escalation of the Base Rent shall occur effective as of
the first day of the month after the later to occur of (a) the expiration of the
original Primary Term of the Lease, and (b) the month in which Substantial
Completion of the Expansion Improvements occurs.

6. Lessee shall have the right to determine the square footage within
the Expansion Improvements, provided that such area shall be no smaller than
80,000 square feet and no larger than 162,000 square feet without the prior
written consent of Lessor. For purposes of calculating the Total Expansion
Costs, the land incorporated into the Expansion Premises shall be the minimum
land area required by zoning and subdivision ordinances then applicable to the
Expansion Premises, shall not be greater than two (2) times the square footage
of the Expansion Improvements, and shall be configured out of the Option Tract
as determined by Lessor in Lessor's sole and absolute discretion

7. The provisions of Paragraph I of the Lease shall govern the
planning, design and construction of the Expansion Improvements and the Lessee's
acceptance thereof. The adjusted Base Rent for the original Premises and the
Expansion Rent shall commence to accrue upon the Substantial Completion of such
Expansion Improvements and shall be payable as provided in Paragraph 2 of the
Lease. At the same time, Operating Expenses payable by Lessee shall be increased
in accordance with the increased building area within the Expansion Premises.

8. Prior to exercise of the Expansion Option, the Lessee shall have the
right to cancel the Expansion Option periodically as of any anniversary date of
the commencement date of the Lease upon a minimum of thirty (30) days advance
written notice. Time is of the essence in connection with such cancellation
notice. So long as the Expansion Option shall continue, the option price
referred to in Paragraph 2C of the Lease shall be payable as a portion of the
Operating Expenses due under the Lease. After cancellation, the Operating
Expenses payable in the last five (5) years of the Primary Term (or the
remainder thereof following the cancellation of the Expansion Option) shall be
reduced by the amount of the option price, as provided in Paragraph 2D of the
Lease.

9. If Lessee exercises its Expansion Option and the land area which
Lessor determines to be required within the Expansion Premises is less than the
aggregate area within the Option Tract, the Expansion Option shall be preserved
with respect to the remainder of the Option Tract and may be exercised by Lessee
from time to time, subject to the terms of this Rider (and the Lease). The
annual Option Price referred to in Paragraph 2C of the Lease shall be reduced to
the product of the square footage of remaining land area within the Option
Tract, after a portion thereof is utilized for the Lessee's initial expansion,
multiplied by $.125. The monthly installment of the Option Price payable by
Lessee shall be reduced accordingly.

-3-
<PAGE> 41

SCHEDULE R1

TO STANDARD INDUSTRIAL LOGO AGREEMENT
BY AND BETWEEN
CB MIDWAY INTERNATIONAL PARTNERS, LTD., AS LESSOR,
AND
GADZOOKS, INC., AS LESSEE

The area and configuration of land used for the Expansion Premises shall not be
greater than two (2) times the square footage of the Expansion Improvements. The
land cost per square foot (p.s.f.) includable in the land cost item of Total
Expansion Costs shall be based on the following schedule:

<TABLE>
<CAPTION>
Option Exercise at
Months Land Cost P.S.F.
------ ----------------
<S> <C>
1-12 $2.50
13-24 $2.75
25-36 $3.00
37-48 $3.25
49-60 $3.50
61-72 $3.625
73-84 $3.75
85-96 $3.875
97-108 $4.00
109-120 $4.125
</TABLE>

-1-
<PAGE> 42

RIDER 2

TO STANDARD INDUSTRIAL LEASE AGREEMENT

BY AND BETWEEN

CB MIDWAY INTERNATIONAL PARTNERS, LTD., AS LESSOR,

AND

GADZOOKS, INC., AS LESSEE

Option for Renewal of Term

Lessor hereby grants to Lessee the right and option to extend the term
of this Lease for two (2) consecutive terms (each referred to herein as a
"Renewal Term") of five (5) years each on the following terms:

1. For purposes of this Rider, the following definitions shall apply:

A. "COMPARABLE BUILDINGS" shall mean office/warehouses of a
comparable design, age, size, and construction method to the
Improvements, with amenities and deferred maintenance (if any)
reasonably comparable to that of the Improvements, and with similar
functionality and market appeal, in the same market area.

B. "RENEWAL OPTION" shall mean the right and option to renew
the Lease term in accordance with the terms and conditions of this
Rider 2.

2. The renewal option shall be exercised by Lessee by delivering
written notice of the exercise thereof to Lessor at least six (6) months prior
to the beginning of the Renewal Term provided that at the time such notice shall
be given and at the commencement of the Renewal Term, Lessee shall not be in
default under this Lease, after taking into account all applicable cure periods.
and this Lease shall then be in full force and effect. Time is of the essence in
the exercise of the Renewal Option. Upon delivery of such notice and subject to
the conditions set forth in the preceding sentence. this Lease shall be extended
upon the same terms, covenants and conditions as provided in this Lease, except
as otherwise provided in this Rider 2.

3. The first Renewal Term shall begin on the day following expiration
of the primary ten (10) year term hereof, or the Expansion Term, if later, and
terminate on the last day of the month during which the fifth anniversary of the
commencement of such Renewal Term occurs. The second Renewal Term shall begin on
the day following expiration of the first Renewal Term.

-1-
<PAGE> 43

4. The Base Rent payable for each Renewal Term shall be the prevailing
market rental payable by lessees for space in Comparable Buildings as of the
date of Lessee's exercise of the Renewal Option (the "Market Rent"), as
determined by Lessor. Lessor shall notify Lessee of its determination of the
Market Rent within thirty (30) days after Lessee's exercise of the Renewal
Option. If Lessee accepts such determination, Lessee shall notify Lessor within
fifteen ( 15) days and the parties shall promptly execute an amendment of the
Lease confirming Base Rent for the Renewal Term. If Lessee does not accept such
determination, Lessee shall notify Lessor within fifteen (15) days and Lessee's
exercise of the Renewal Option shall be deemed to be void and of no further
force or effect. The Renewal Option shall terminate effective as of the date of
Lessee's notice of nonacceptance.

5. Lessor shall not be liable or responsible for payment of any
interior finish allowances or other incentive payment set forth in this Lease
upon the commencement of any Renewal Term. Lessee shall be entitled to a maximum
of two (2) Renewal Terms. Lessor shall take account of such factors in its
determination of Market Rent.

-2-
<PAGE> 44

[PICTURE]

-3-
<PAGE> 45

EXHIBIT A

TO STANDARD INDUSTRIAL LEASE AGREEMENT
BY AND BETWEEN
CB MIDWAY INTERNATIONAL PARTNERS, LTD., AS LESSOR,
AND GADZOOKS, INC., AS LESSEE

LEGAL DESCRIPTION OF LAND (BOUNDARY DESCRIPTION AND BOUNDARY SKETCH)

-1-
<PAGE> 46

EXHIBIT A

LEGAL DESCRIPTION
15.828 ACRE TRACT

BEING a tract of land in the D. Andrew Survey, Abstract No. 1455, and the G.
Syms Survey, Abstract No. 1200, situated in the City of Carrollton, Denton
County, Texas and being part of a 46,406 acre tract of land conveyed to CB
Midway/Parkway Investors, Ltd. by the deed recorded in Denton County Clerk's
File No. 94-R0025237 of the Real Property Records of Denton County, Texas, and
being more particularly described as follows:

COMMENCING at a point in the intersection of the east right-of-way line of Marsh
Lane (100' right-of-way) with the northerly right-of-way line of A.T. & S.F.
Railroad (150' right-of-way) for the west corner of a tract of land described in
the deed to Bent Tree Bible Fellowship (B.T.B.F.), recorded in Denton County
Clerk's File No. 94-0074327 of the Real Property Records of Denton County, Texas
and the beginning of a curve to the left, having a central angle of 07 degrees
35 minutes 42 seconds, a radius of 5654.70 feet and a chord bearing and distance
of South 45 degrees 42 minutes 31 seconds East, 749.03 feet;

THENCE, Southeasterly along said curve to the left and along the north line of
said A.T. & S.F. Railroad right-of-way, an arc distance of 749.57 feet to the
POINT OF BEGINNING;

THENCE, leaving the northerly right-of-way line of said A.T. & S.F. Railroad and
with the south line of the B.T.B.F. tract, North 61 degrees 46 minutes 54
seconds East, a distance of 1193.69 feet to a point in the southwesterly
right-of-way line of International Parkway (100' right-of-way) for the southeast
corner of said B.T.B.F. tract and a point on a curve to the left, having a
central angle of 20 degrees 01 minutes 24 seconds, a radius of 1843.46 feet and
a chord bearing and distance of South 38 degrees 13 minutes 48 seconds East,
640.97 feet;

THENCE southeasterly with the southwest right-of-way line of said International
Parkway and said curve, an arc distance of 644.24 feet to a point for a corner;

THENCE, South 61 degrees 46 minutes 54 seconds West, departing said southwest
right-of-way line of International Parkway, a distance of 1013.29 feet to a
point on a circular curve to the right having a central angle of 07 degrees 03
minutes 02 seconds, a radius 5654.70 feet, and whose chord bears North 53
degrees 01 minutes 53 seconds West a distance of 695.41 feet, said point being
in the northeastern right-of-way line of said A.T. & S.F. Railroad;

THENCE, Northwesterly, along the northeastern right-of-way line of said A.T. &
S.F. Railroad, a distance of 695.85 feet to the POINT OF BEGINNING AND
CONTAINING 689,482 square feet or 15.828 acres of land more or less.

-1-
<PAGE> 47

[PLAT]

-2-
<PAGE> 48

EXHIBIT B

TO STANDARD INDUSTRIAL LEASE AGREEMENT
BY AND BETWEEN
CB MIDWAY INTERNATIONAL PARTNERS, LTD. AS LESSOR,
AND
GADZOOKS, INC., AS LESSEE

The following materials are attached to this Lease and incorporated herein by
reference for all purposes:

1. Architectural site plan and floor plan prepared by Good Fulton
& Farrell Architects for Gadzooks, Inc. (Sheet nos. A0.01,
A2.01, and A2.02).

2. Building elevation (northeast).

3. Based Building Standard Specifications:

a. Standard Shell Building Specifications/Dallas, Texas
prepared by the Billingsley Company (July 1996
version), consisting of pages TOC -- 1 to 05200-3.

b. Tenant Construction Guide prepared by Billingsley
Property Services, Inc. (November 13, 1992 version),
consisting of pages 1-41 and attached exhibits.

4. Base Building Lessee-Specific Specifications:

Tenant-Specific Building Specifications prepared by Pritchard
Associates, Inc. (8/22/96).

-1-
<PAGE> 49

[PLAT]

-2-
<PAGE> 50

[FLOOR PLAN -- FIRST FLOOR]

-3-
<PAGE> 51

[FLOOR PLAN -- SECOND FLOOR]

-4-
<PAGE> 52

TENANT - SPECIFIC BUILDING SPECIFICATIONS

<TABLE>
<CAPTION>
============================================ ==================================
ITEM GADZOOKS
============================================ ==================================
<S> <C>
Bay Size 40' x 44'
- -------------------------------------------- ----------------------------------
Dock Seals 16
- -------------------------------------------- ----------------------------------
Dock Doors 16 Insulated Doors
- -------------------------------------------- ----------------------------------
Floor Flatness FF25 FL20
- -------------------------------------------- ----------------------------------
Floor Flatness (30,000 sf)* FF35 FL50
- -------------------------------------------- ----------------------------------
Fire Protection ESFR
- -------------------------------------------- ----------------------------------
Elevator Yes
- -------------------------------------------- ----------------------------------
Truck Court All Concrete
- -------------------------------------------- ----------------------------------
Warehouse Lighting (160) 400 watt Metal Halide
- -------------------------------------------- ----------------------------------
Office Mezzanine 15,000 sf
- -------------------------------------------- ----------------------------------
Floor Seal Lipidolith
- -------------------------------------------- ----------------------------------
Warehouse HVAC 1 ton 400 sf
- -------------------------------------------- ----------------------------------
Roof Deck Insulation R - 10
- -------------------------------------------- ----------------------------------
Patio Area Yes
- -------------------------------------------- ----------------------------------
Clear Height 24' minimum
- -------------------------------------------- ----------------------------------
1 Ramped and Drive-In Door* 12' x 14'
- -------------------------------------------- ----------------------------------
Leave Out Wall Panel For Trash Compactor
- -------------------------------------------- ----------------------------------
Dock Boards/Leverlers* 16
- -------------------------------------------- ----------------------------------
</TABLE>

* These items are not considered part of the base building to be provided
by landlord. These items will be bid as part of the base building and
the cost, if Tenant decides to proceed with the item, will be paid by
Tenant.

-5-

<PAGE> 1

EXHIBIT 13

GADZOOKS, INC.

SELECTED
FINANCIAL DATA

<TABLE>
<CAPTION>
($ in thousands, except operating data and per share amounts) Fiscal Year Ended
- -----------------------------------------------------------------------------------------------------------------
January 31, February 1, January 27, January 28, January 29,
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ 171,639 $ 128,388 $ 84,602 $ 56,463 $ 38,239
Cost of goods sold 120,309 87,418 58,015 38,379 25,699
--------- --------- --------- --------- ---------
Gross profit 51,330 40,970 26,587 18,084 12,540
Selling, general and
administrative expenses 38,773 29,212 19,794 14,452 10,315
Provision for closing outlet stores -- -- -- 250 --
--------- --------- --------- --------- ---------
Operating income 12,557 11,758 6,793 3,382 2,225
Interest income (expense), net 706 945 (179) (240) (81)
--------- --------- --------- --------- ---------
Income before income taxes 13,263 12,703 6,614 3,142 2,144
Provision for income taxes 4,975 4,712 2,538 1,201 817
--------- --------- --------- --------- ---------
Net income $ 8,288 $ 7,991 $ 4,076 $ 1,941 $ 1,327
========= ========= ========= ========= =========

Net income per share
Basic $ 0.95 $ 0.94 $ 0.67 $ 0.34 $ 0.27
Diluted $ 0.91 $ 0.87 $ 0.60 $ 0.32 $ 0.24
Average shares outstanding
Basic 8,683 8,525 6,095 5,671 5,000
Diluted 9,100 9,143 6,742 5,976 5,506

SELECTED OPERATING DATA:
Comparable store sales increase(1) 1.8% 6.1% 14.7% 8.4% 3.5%
Number of stores at year end 250 183 126 90 65
Average net sales per store $ 794,437 $ 814,838 $ 776,807 $ 698,108 $ 680,651
Average net sales per square foot $ 341 $ 356 $ 343 $ 306 $ 306
Total square footage at end of period 585,092 421,572 284,953 204,711 148,338
Operating income percentage 7.3% 9.2% 8.0% 6.0% 5.8%
Capital expenditures (in 000s) $ 12,624 $ 6,864 $ 5,959 $ 3,445 $ 2,426

BALANCE SHEET DATA:
Working capital $ 34,878 $ 34,333 $ 20,368 $ 4,262 $ 2,014
Total assets 84,321 64,747 45,611 19,836 13,471
Total debt -- -- 178 3,026 972
Redeemable preferred stock and
cumulative dividends -- -- -- 10,631 6,856
Shareholders' equity (deficit) 58,480 49,063 30,765 (2,204) (1,436)
</TABLE>

(1)A store becomes comparable after it has been open for 14 full fiscal months.

thirteen
<PAGE> 2

GADZOOKS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

Gadzooks is a rapidly growing, mall-based specialty retailer of casual apparel
and related accessories for young men and women, principally between the ages of
13 and 19. The Company opened its first store in 1983, and at fiscal year-end
1997, operated 250 stores in 30 states throughout the Southwest, Midwest,
Southeast, Mid-Atlantic and Northeast regions of the United States. The Company
has been on a rapid expansion program, opening 39 new stores in fiscal 1995, 57
new stores in fiscal 1996, and 67 new stores in fiscal 1997.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
Fiscal Year
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold, including buying, distribution
and occupancy costs 70.1 68.1 68.6
-------- -------- --------
Gross profit 29.9 31.9 31.4
Selling, general and administrative expenses 22.6 22.7 23.4
-------- -------- --------
Operating income 7.3 9.2 8.0
Interest income (expense), net 0.4 0.7 (0.2)
-------- -------- --------
Income before income taxes 7.7 9.9 7.8
Provision for income taxes 2.9 3.7 3.0
-------- -------- --------
Net income 4.8% 6.2% 4.8%
======== ======== ========

Number of stores open at end of period 250 183 126
</TABLE>

FISCAL 1997 COMPARED TO FISCAL 1996

Net sales increased approximately $43.2 million, or 33.6%, to $171.6 million
during fiscal 1997 from $128.4 million in fiscal 1996. Net sales of the 67 new
stores opened during fiscal 1997 and for those stores not yet qualifying as
comparable stores contributed $41.1 million to the increase in sales. Comparable
store sales increased 1.8% in fiscal 1997 and contributed

fourteen
<PAGE> 3

GADZOOKS, INC.

$2.1 million to the increase in sales. The increase in comparable sales was
primarily due to strong sales in the young men's category. A store becomes
comparable after it has been open for 14 full fiscal months. Fiscal 1996 was a
53 week period. The fifty-third week contributed $1.9 million to net sales in
fiscal 1996.

Gross profit increased approximately $10.3 million to $51.3 million in fiscal
1997 from $41.0 million in fiscal 1996. As a percentage of sales, gross profit
decreased to 29.9% in fiscal 1997 from 31.9% in fiscal 1996. The decrease in
gross profit resulted primarily from substantial markdowns taken during the
second quarter of fiscal 1997 in the junior apparel and accessories categories.
Store occupancy costs increased by approximately one half of one percent
primarily as a result of lower sales in the second quarter.

Selling, general and administrative expenses increased approximately $9.6
million to $38.8 million during fiscal 1997 from $29.2 million in fiscal 1996,
but decreased as a percentage of sales to 22.6% in fiscal 1997 from 22.7% in
fiscal 1996. The slight decrease as a percentage of sales was primarily due to
the leveraging of corporate overhead expenses and lower management bonuses.

Operating income increased approximately $0.8 million to $12.6 million during
fiscal 1997 from $11.8 million in fiscal 1996. As a percentage of sales,
operating income decreased to 7.3% in fiscal 1997 from 9.2% in fiscal 1996.

Net interest income decreased approximately $0.2 million to $0.7 million during
fiscal 1997 from $0.9 million in fiscal 1996. The Company's interest income
decreased due to the use of short-term cash investments to fund the Company's
continuing store expansion program.

Income tax expense was $5.0 million for fiscal 1997, compared to $4.7 million in
fiscal 1996. The effective income tax rate in fiscal 1997 was 37.5%, compared to
37.1% in fiscal 1996. The increase in the Company's effective income tax rate
was primarily attributable to the Company's expansion into states with higher
state income tax rates.

FISCAL 1996 COMPARED TO FISCAL 1995

Net sales increased approximately $43.8 million, or 51.8%, to $128.4 million
during fiscal 1996 from $84.6 million in fiscal 1995. Net sales of the 57 new
stores opened during fiscal 1996 and for those stores not yet qualifying as
comparable stores contributed $39.0 million to the increase in sales. Comparable
store sales increased 6.1% in fiscal 1996 and contributed $4.7 million to the
increase in sales. The increase in comparable store sales was primarily due to
continuous improvements in merchandise assortments supported by strong sales in
the junior and young men's categories. A store becomes comparable after it has
been open for 14 full fiscal months. Fiscal 1996 was a 53 week period. The
fifty-third week contributed $1.9 million to the increase in net sales.

fifteen
<PAGE> 4

GADZOOKS, INC.

Gross profit increased approximately $14.4 million to $41.0 million in fiscal
1996 from $26.6 million in fiscal 1995. As a percentage of sales, gross profit
increased to 31.9% in fiscal 1996 from 31.4% in fiscal 1995 due to slightly
higher merchandise margins and a decrease in buying and distribution costs as a
percentage of sales resulting from the Company's larger store base.

Selling, general and administrative expenses increased approximately $9.4
million to $29.2 million during fiscal 1996 from $19.8 million in fiscal 1995,
but decreased as a percentage of sales to 22.7% in fiscal 1996 from 23.4% in
fiscal 1995. The decrease as a percentage of sales was due to the leveraging of
certain store and corporate overhead expenses as a percentage of sales,
primarily as a result of the comparable store sales increases achieved during
the year and the Company's larger store base.

Operating income increased approximately $5.0 million to $11.8 million during
fiscal 1996 from $6.8 million in fiscal 1995. As a percentage of sales,
operating income increased to 9.2% in fiscal 1996 from 8.0% in fiscal 1995.

Net interest income increased approximately $1.1 million to $0.9 million during
fiscal 1996 from $0.2 million net interest expense in fiscal 1995. The Company's
interest income increased due to temporary investments of cash available from
the two public stock offerings completed in October 1995 and January 1996.

Income tax expense was $4.7 million for fiscal 1996, compared to $2.5 million in
fiscal 1995. The effective income tax rate in fiscal 1996 was 37.1%, compared to
38.4% in fiscal 1995. The lower effective income tax rate for fiscal 1996
compared to fiscal 1995 was primarily attributable to higher amounts of
nontaxable interest income in fiscal 1996.

QUARTERLY RESULTS AND SEASONALITY

The Company's business is also subject to seasonal influences, with slightly
higher sales during the Christmas holiday, back-to-school, and spring break
seasons. The Christmas holiday season remains the Company's single most
important selling season. The Company believes, however, that the significance
of the back-to-school season (which affects operating results in the second and
third quarters) and spring break season (which affects operating results in the
first quarter) reduces somewhat the Company's dependence on the Christmas
holiday selling season. As is the case with many apparel retailers, the
Company's net sales and net income are typically lower in the first quarter.

sixteen

<PAGE> 5

GADZOOKS, INC.

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

<TABLE>
<CAPTION>
(in thousands except operating and per share data) Fiscal 1997 Fiscal 1996
- -----------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of income data:
Net sales $ 34,070 $ 36,780 $ 41,268 $ 59,521 $ 23,486 $ 28,504 $ 31,171 $ 45,227
Gross profit 10,127 9,022 12,639 19,542 6,947 8,870 9,834 15,320
Operating income 1,893 141 2,869 7,654 961 2,447 2,789 5,561
Net income 1,324 171 1,920 4,873 738 1,647 1,918 3,689
Net income
per share
Basic $ 0.15 $ 0.02 $ 0.22 $ 0.56 $ 0.09 $ 0.20 $ 0.23 $ 0.43
Diluted $ 0.15 $ 0.02 $ 0.21 $ 0.54 $ 0.08 $ 0.18 $ 0.21 $ 0.41
Average shares
outstanding
Basic 8,592 8,669 8,730 8,739 8,439 8,446 8,519 8,584
Diluted 9,124 9,110 9,064 9,102 9,030 9,116 9,119 9,083
Selected operating data:
Stores open at
end of period 197 221 232 250 146 160 174 183
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

General. During the last three fiscal years, the Company's primary uses of cash
have been to finance new store openings and purchase merchandise inventories. In
addition, $3.1 million was spent in fiscal 1997 on the new distribution center
and corporate headquarters. The Company has satisfied its cash requirements
principally from cash flow from operations and proceeds from the sale of equity
securities.

Cash Flows. During fiscal 1997, 1996 and 1995, cash flows from operating
activities were $7.6 million, $5.6 million, and $4.0 million, respectively. The
increases in operating cash flow were primarily the result of increases in net
income over the last three fiscal years.

Cash used in investing activities approximated $9.4 million, $19.3 million and
$6.0 million for fiscal 1997, 1996 and 1995, respectively. The Company spent
$12.6 million on capital expenditures during fiscal 1997, of which $8.5 million
was used to open new or remodel

seventeen
<PAGE> 6

GADZOOKS, INC.

existing stores, and $4.1 million was used to build-out and furnish the new
corporate headquarters and distribution center as well as to upgrade information
systems. The Company opened 67, 57, and 39 new stores in fiscal 1997, 1996 and
1995, respectively.

Net cash flow provided by financing activities totalled $1.1 million, $10.3
million and $15.4 million for fiscal 1997, 1996 and 1995, respectively. During
fiscal 1997, the Company received $0.4 million from the exercise of employee
stock options as well as $0.7 million of related tax benefit. During fiscal
1996, the Company received $9.1 million from a public equity offering and $1.2
million as a tax benefit from the exercise of employee stock options. During
fiscal 1995, the Company received $20.1 million from its initial public offering
and $1.6 million from borrowings on a bank term loan. The Company used $4.4
million for payment on the bank term loan and capital lease obligations and $2.1
million for payment of cash dividends to holders of preferred stock.

Credit Facility. The Company currently has a loan agreement ("Credit Facility")
with Wells Fargo Bank which provides for an unsecured revolving line of credit
of $10.0 million which bears interest at the lesser of the Prime Rate or 1.95%
above LIBOR. The Credit Facility also provides for the issuance of letters of
credit under the revolving line that are generally used in connection with
international merchandise purchases. At January 31, 1998, no amounts were
outstanding under the Credit Facility. The Credit Facility matures on June 5,
1998. The Company intends to renew the Credit Facility upon maturity.

The Credit Facility also subjects the Company to various restrictions on the
incurrence of additional indebtedness, acquisitions, loans to officers and stock
repurchases. The covenants require the Company to maintain a certain minimum
current ratio, minimum tangible net worth, minimum working capital, and coverage
ratios each month.

Capital Expenditures. The Company anticipates that it will spend approximately
$12.0 million on capital expenditures in fiscal 1998, of which $9.4 million will
be used to open 70 to 75 new stores and to remodel five to seven existing
stores. During fiscal 1997, the Company spent $8.2 million in capital
expenditures to open 67 new stores and remodel four existing stores and $0.3
million for other store-related capital purchases. The Company's average capital
expenditures to construct a new store during fiscal 1997, including leasehold
improvements and furniture and fixtures, averaged approximately $186,000
(approximately $116,000 net of landlord construction allowances).

The Company anticipates that its cash requirements for initial inventories in
stores expected to open in fiscal 1998 will be approximately $5.0 million. The
cost of initial inventory for a new store is approximately $100,000; however,
the immediate cash requirement for inventory is partially financed through the
Company's payable terms with its vendors.

Pre-opening costs range from $9,000 to $13,000 for travel, hiring, training and
other miscellaneous costs associated with the setup of a new store prior to its
opening for business. Pre-opening costs are expensed in the period when the
store opens. The actual

eighteen

<PAGE> 7

GADZOOKS, INC.

costs that the Company will incur in opening new stores cannot be predicted with
precision because such costs will vary based upon, among other things,
geographic location, the size of the store, and the extent of the build-out
required at the selected site.

The Company spent $3.1 million to install additional merchandise handling
equipment at its new distribution center and to finish-out the new corporate
headquarters in the first half of fiscal 1997. The Company also upgraded and
enhanced its computer systems for certain planning and allocation and general
corporate functions in the last half of fiscal 1997 which resulted in additional
capital expenditures of approximately $1.0 million.

The Company believes that its existing cash balances, cash generated from
operations, and funds available under the Credit Facility will be sufficient to
satisfy its cash requirements through fiscal 1998.

YEAR 2000

The Company's business depends in part upon its ability to store, retrieve,
process and manage significant databases and, periodically, to expand and
upgrade its information processing capabilities. The Company recognizes the need
to ensure that its operations will not be adversely impacted by Year 2000
software failures. The Company has reviewed and continues to review, on a
regular basis, its computer equipment and software systems with regard to Year
2000 problems. To a lesser extent, the Company is also relying on its computer
equipment and software suppliers' ability to ensure that all products provided
by them are Year 2000 compliant. The Company has formulated a plan and
methodology for addressing Year 2000 problems and is currently implementing such
plan. The cost of implementing this plan is not expected to have a material
impact on the Company's results of operations or financial position.

INFLATION

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

nineteen
<PAGE> 8

GADZOOKS, INC.

BALANCE
SHEETS

<TABLE>
<CAPTION>
--------------------------------
January 31, February 1,
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents $ 9,755,083 $ 10,347,728
Short-term investments 9,157,209 12,419,847
Accounts receivable 2,815,444 1,283,910
Inventory 35,763,833 23,211,036
Other current assets 1,426,539 1,329,034
-------------- --------------
58,918,108 48,591,555
-------------- --------------
Leaseholds, fixtures and equipment, net 25,403,044 16,155,772
-------------- --------------
$ 84,321,152 $ 64,747,327
============== ==============

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 16,721,808 $ 7,654,123
Accrued payroll and benefits 2,111,284 3,135,152
Other current liabilities 2,712,060 2,355,099
Income taxes payable 2,494,855 1,114,662
-------------- --------------
24,040,007 14,259,036
-------------- --------------
Accrued rent 1,800,730 1,425,060
Commitments and contingencies (Note 7)
Shareholders' equity:
Preferred stock, $1.00 par value, 1,000,000 shares
authorized, none issued -- --
Common stock, $.01 par value, 25,000,000 shares
authorized, 8,754,577 and 8,584,440 shares issued
and outstanding, respectively 87,546 85,844
Additional paid-in capital 40,868,605 39,741,021
Retained earnings 17,524,264 9,236,366
-------------- --------------
58,480,415 49,063,231
-------------- --------------
$ 84,321,152 $ 64,747,327
============== ==============
</TABLE>

The accompanying notes are an integral part of these financial statements.

twenty

<PAGE> 9

GADZOOKS, INC.

STATEMENTS OF
INCOME

<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------
January 31, February 1, January 27,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 171,639,147 $ 128,388,380 $ 84,601,819

Costs and expenses:
Cost of goods sold, including buying,
distribution and occupancy costs 120,308,942 87,417,930 58,015,483
Selling, general and administrative expenses 38,773,576 29,212,565 19,793,831
------------- ------------- -------------
159,082,518 116,630,495 77,809,314
------------- ------------- -------------
Operating income 12,556,629 11,757,885 6,792,505

Interest expense (52,313) (26,367) (347,480)
Interest income 758,580 971,382 168,641
------------- ------------- -------------
Income before income taxes 13,262,896 12,702,900 6,613,666
Provision for income taxes 4,974,998 4,711,500 2,538,000
------------- ------------- -------------
Net income $ 8,287,898 $ 7,991,400 $ 4,075,666
============= ============= =============

Net income per share
Basic $ 0.95 $ 0.94 $ 0.67
============= ============= =============
Diluted $ 0.91 $ 0.87 $ 0.60
============= ============= =============

Average shares outstanding
Basic 8,682,582 8,525,322 6,094,838
============= ============= =============
Diluted 9,100,027 9,142,921 6,742,416
============= ============= =============
</TABLE>

The accompanying notes are an integral part of these financial statements.

twenty-one
<PAGE> 10

GADZOOKS, INC.

STATEMENTS OF
SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
Common Stock Additional Retained
Shares Dollars Paid-In Capital Earnings Total
------------ ------------ --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 28, 1995 1,005,291 $ 10,053 $ 21,614 $ (2,235,429) $ (2,203,762)
Issuance of common stock,
net of underwriting
commissions and expenses 1,687,050 16,871 20,167,697 -- 20,184,568
Conversion of preferred stock 2,527,589 25,275 9,074,726 -- 9,100,001
Accrued preferred stock dividends (500,554) (500,554)
Tax benefit from exercise of
stock options 203,745 -- 203,745
Other (94,717) (94,717)
Net income 4,075,666 4,075,666
------------ ------------ ------------ ------------ ------------

BALANCE, JANUARY 27, 1996 5,219,930 52,199 29,467,782 1,244,966 30,764,947
Issuance of common stock,
net of underwriting
commissions and expenses 400,000 4,000 9,012,586 -- 9,016,586
Stock issued under option plans 131,284 1,313 80,985 -- 82,298
Three-for-two common stock
split effected in the form of
a 50% stock dividend 2,833,226 28,332 (28,332) -- --
Tax benefit from exercise
of stock options 1,208,000 -- 1,208,000
Net income 7,991,400 7,991,400
------------ ------------ ------------ ------------ ------------

BALANCE, FEBRUARY 1, 1997 8,584,440 85,844 39,741,021 9,236,366 49,063,231
Stock issued under option plans 170,137 1,702 407,647 -- 409,349
Tax benefit from exercise
of stock options 719,937 -- 719,937
Net income 8,287,898 8,287,898
------------ ------------ ------------ ------------ ------------

BALANCE, JANUARY 31, 1998 8,754,577 $ 87,546 $ 40,868,605 $ 17,524,264 $ 58,480,415
============ ============ ============ ============ ============
</TABLE>

The accompanying notes are an integral part of these financial statements.

twenty-two
<PAGE> 11

GADZOOKS, INC.

STATEMENTS OF
CASH FLOWS

<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------
January 31, February 1, January 27,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 8,287,898 $ 7,991,400 $ 4,075,666
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 3,376,442 2,227,401 1,461,265
Deferred income taxes 3,587 (347,500) (117,287)
Changes in operating assets and liabilities:
Accounts receivable (1,531,534) (793,141) (162,751)
Inventory (12,552,797) (4,503,951) (6,974,472)
Other assets (101,092) 179,639 (611,328)
Accounts payable 9,067,685 (840,884) 3,625,800
Accrued payroll and benefits (1,023,868) 1,267,495 769,352
Income taxes payable 1,380,193 (206,107) 657,311
Other liabilities 732,631 662,595 1,232,423
------------ ------------ ------------
Net cash provided by operating activities 7,639,145 5,636,947 3,955,979
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures, net (12,623,714) (6,864,184) (5,958,770)
Purchases of short-term investments (18,177,257) (14,129,847) --
Proceeds from redemption of short-term investments 21,439,895 1,710,000 --
------------ ------------ ------------
Net cash used in investing activities (9,361,076) (19,284,031) (5,958,770)
------------ ------------ ------------
Cash flows from financing activities:
Principal payments on long-term obligations -- (44,716) (4,419,729)
Proceeds from term note -- -- 1,572,000
Issuance of common stock, net 409,349 9,098,884 20,184,567
Payment of preferred stock dividends -- -- (2,126,554)
Tax benefit from exercise of stock options 719,937 1,208,000 203,745
------------ ------------ ------------
Net cash provided by financing activities 1,129,286 10,262,168 15,414,029
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (592,645) (3,384,916) 13,411,238
Cash and cash equivalents at beginning of period 10,347,728 13,732,644 321,406
------------ ------------ ------------
Cash and cash equivalents at end of period $ 9,755,083 $ 10,347,728 $ 13,732,644
============ ============ ============
Cash paid during the year for:
Interest $ 50,240 $ 20,106 $ 332,099
Income taxes 2,849,664 4,057,107 1,794,233
Noncash activities:
Accrual of preferred stock dividends -- -- 500,554
</TABLE>

The accompanying notes are an integral part of these financial statements.

twenty-three
<PAGE> 12

GADZOOKS, INC.

NOTES
TO FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND NATURE OF THE COMPANY

Gadzooks, Inc. (the "Company") is a mall-based, specialty retailer of casual
apparel and related accessories for young men and women principally between the
ages of 13 and 19. At January 31, 1998, the Company had 250 company-owned
stores in operation throughout the Southwest, Midwest, Southeast, Mid-Atlantic
and Northeast regions of the United States.

The Company's fiscal year ends on the Saturday nearest January 31. All
references in these financial statements to fiscal years are to the calendar
year in which the fiscal year begins. Fiscal years 1997, 1996, and 1995
represent the 52 or 53 week periods ended January 31, 1998, February 1, 1997
and January 27, 1996, respectively. Fiscal 1996 was a 53 week period.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash on hand and marketable securities with
original maturities of three months or less.

SHORT-TERM INVESTMENTS

Short-term investments consist of highly liquid investments with original
maturities between three and twelve months. Management determines the proper
classifications of investments at the time of purchase and reevaluates such
designations as of each balance sheet date. At January 31, 1998, all securities
are classified as held-to-maturity based on the Company's positive intent and
ability to hold the securities to maturity. These securities are carried at
amortized cost, which approximates fair market value.

INVENTORY

Inventories are valued at the lower of average cost or market.

LEASEHOLDS, FIXTURES AND EQUIPMENT

Leaseholds, fixtures and equipment are stated at cost. Depreciation of fixtures
and equipment is based upon the estimated useful lives of the assets, generally
from five to ten years, computed on the straight-line method. Amortization of
leasehold improvements is computed on the straight-line method over estimated
useful lives or lease terms, if shorter. The Company reviews its long-lived
assets for impairment whenever events or changes in circumstances indicate the
respective carrying amounts may not be recoverable.

twenty-four

<PAGE> 13

GADZOOKS, INC.

REVENUE RECOGNITION

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

ADVERTISING

Advertising costs are expensed when incurred.

STORE PRE-OPENING COSTS

Costs incurred with the setup of a new store prior to its opening for business
are expensed in the month when the store opens.

INCOME TAXES

Deferred income taxes are provided on the liability method. Under this method,
deferred tax assets and liabilities are recognized based on differences between
the financial statement and the tax bases of assets and liabilities using
presently enacted tax rates.

EARNINGS PER SHARE AND STOCK SPLITS

Earnings per share are computed by dividing net income by the weighted average
number of shares outstanding during each period after giving effect to (i) a
three-for-two stock split declared by the Board of Directors in May 1996, (ii) a
3.15 to 1 reverse stock split declared by the Board of Directors in July 1995,
(iii) the conversion of all redeemable preferred stock into shares of common
stock and (iv) dilutive potential common shares resulting from stock options.
The three-for-two stock split and the 3.15 to 1 reverse stock split
have been given retroactive effect in the financial statements. See Note 11 for
new earnings per share accounting standard adopted in fiscal 1997.

USE OF ESTIMATES

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at January 31, 1998 and February
1, 1997 and the reported amounts of revenues and expenses during each of the
three years in the period ended January 31, 1998. Actual results could differ
from these estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

All financial instruments classified as current are recorded at cost, which
approximates fair value due to the short maturity of these instruments.

twenty-five

<PAGE> 14

NOTE 3 - COMMON STOCK OFFERINGS

On October 5, 1995, the Company completed an initial public offering of
1,587,000 shares of common stock that provided net proceeds of $20,662,740. The
offering required the automatic conversion of all outstanding shares of the
Company's mandatorily redeemable preferred stock into 2,527,589 shares of common
stock. Cumulative accrued preferred stock dividends of $2,005,041 and $121,512
for Class A and Class B Preferred Stock, respectively, were paid in cash out of
the proceeds of the offering. At the completion of the offering, the Company
filed restated articles of incorporation authorizing 1,000,000 shares of
undesignated preferred stock and canceling all other classes of preferred stock.

On January 31, 1996, the Company completed a secondary offering of 600,000
shares of its common stock (after giving effect to the three-for-two stock split
described in Note 2). The Company's portion of the net proceeds, after deducting
expenses associated with the offering, totaled $9,016,586.

NOTE 4 - SHORT-TERM INVESTMENTS

The amortized cost and estimated fair market value of investments are as
follows:

<TABLE>
<CAPTION>
January 31, 1998
--------------------------------------------------------
Gross Gross Fair
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Commercial paper $ 4,439,188 $ 463 $ 42 $ 4,439,609
Tax exempt securities backed 12,868,021 396 3,160 12,865,257
by municipal bonds
----------- ----------- ----------- -----------
Less cash equivalents 8,150,000 -- -- 8,150,000
----------- ----------- ----------- -----------
Total investment securities $ 9,157,209 $ 859 $ 3,202 $ 9,154,866
=========== =========== =========== ===========
</TABLE>

<TABLE>
<CAPTION>
February 1, 1997
--------------------------------------------------------
Gross Gross Fair
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Commercial paper $ 5,129,733 $ 3,167 $ -- $ 5,132,900
Tax exempt securities backed 12,846,114 6,735 2,030 12,850,819
by municipal bonds
Repurchase agreements 1,270,000 -- -- 1,270,000
Other debt securities 900,000 -- 567 899,433
----------- ----------- ----------- -----------
Less cash equivalents 7,726,000 -- -- 7,726,000
----------- ----------- ----------- -----------
Total investment securities $12,419,847 $ 9,902 $ 2,597 $12,427,152
=========== =========== =========== ===========
</TABLE>

Investments classified as held-to-maturity at January 31, 1998 and February 1,
1997 have various maturity dates that do not exceed one year.

twenty-six
<PAGE> 15

NOTE 5 - LEASEHOLDS, FIXTURES AND EQUIPMENT

Leaseholds, fixtures and equipment are summarized as follows:

<TABLE>
<CAPTION>
-----------------------------
January 31, February 1,
1998 1997
------------ ------------
<S> <C> <C>
Leasehold improvements $ 22,233,244 $ 15,164,836
Fixtures and equipment 12,490,384 7,014,643
------------ ------------
34,723,628 22,179,479
Less accumulated depreciation (9,320,584) (6,023,707)
------------ ------------
$ 25,403,044 $ 16,155,772
============ ============
</TABLE>

NOTE 6 - LONG-TERM OBLIGATIONS

On January 30, 1997, the Company entered into a credit agreement with Wells
Fargo Bank that provides for an unsecured revolving line of credit in the amount
of $10 million. The line also provides for the issuance of letters of credit.
The revolving line bears interest at the lesser of the Prime Rate or 1.95% above
LIBOR. Any amount borrowed under the revolving line of credit becomes due June
5, 1998. The Company intends to renew the Credit Facility upon maturity. As of
January 31, 1998, no amounts were outstanding on the revolving line of credit.

The bank credit facility subjects the Company to various restrictions on the
incurrence of additional indebtedness, acquisitions, loans to officers, and
stock repurchases. The covenants also require the Company to maintain a certain
minimum current ratio, minimum tangible net worth, minimum working capital and
coverage ratios each month. The Company pays commitment fees of 0.50% on the
unused portion of the revolving line of credit.

NOTE 7 - LEASES

The Company leases store, office, and warehouse space under non-cancelable
leases with terms that generally range from five to ten years. Most of the store
leases provide for additional rentals based on a percentage of store sales and
specify rental increases over the term of the lease. Total rent expense under
these operating leases was $13,822,868, $9,602,618, and $6,326,046, for fiscal
years 1997, 1996 and 1995, respectively. Accrued

twenty-seven
<PAGE> 16
rent of $1,800,730 as of January 31, 1998, and $1,425,060 as of February 1, 1997
has been provided to account for rent expenses on a straight-line basis. Future
minimum lease payments under non-cancelable operating leases as of January 31,
1998 are as follows:

<TABLE>
<CAPTION>
Fiscal year
-----------------
<S> <C>
1998 $ 15,171,362
1999 15,051,409
2000 14,892,654
2001 14,841,006
2002 14,582,834
Thereafter 50,187,865
-----------------
Total minimum lease payments $ 124,727,130
=================
</TABLE>

NOTE 8 - INCOME TAXES

The provision for federal and state income taxes consisted of the following:

<TABLE>
<CAPTION>
Fiscal
------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Current tax expense $ 4,971,411 $ 5,037,623 $ 2,654,146
Deferred tax expense (benefit) 3,587 (326,123) (116,146)
----------- ----------- -----------
$ 4,974,998 $ 4,711,500 $ 2,538,000
=========== =========== ===========
</TABLE>

The following table reconciles the provision for income taxes to the amount
computed by applying the U. S. statutory federal tax rate of 34% to pre-tax
income:

<TABLE>
<CAPTION>
Fiscal
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Tax provision at the federal corporate rate $4,509,385 $4,318,986 $2,248,646
State income taxes, net of related federal benefit 564,420 418,449 211,564
Other, net (98,807) (25,935) 77,790
---------- ---------- ----------
Provision for income taxes $4,974,998 $4,711,500 $2,538,000
========== ========== ==========
</TABLE>

twenty-eight
<PAGE> 17

Deferred tax assets (liabilities) are comprised of the following:

<TABLE>
<CAPTION>
----------- -----------
January 31, February 1,
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accruals not currently deductible $ 825,436 $ 631,240
Depreciation 219,383 427,442
----------- -----------
1,044,819 1,058,682

Deferred tax liabilities:
Capital leases (174,946) (174,946)
Other (81,701) (91,977)
----------- -----------
(256,647) (266,923)
----------- -----------
$ 788,172 $ 791,759
=========== ===========
</TABLE>

At January 31, 1998 and February 1, 1997, $743,735 and $502,211, respectively,
of net current deferred tax assets were classified as other current assets. The
early disposition of certain qualified stock options in fiscal 1997 and 1996
resulted in income tax benefits to the Company of $719,937 and $1,208,000,
respectively, which was credited to additional paid-in capital. The income tax
benefit is the tax effect of the difference between the market price on the date
of exercise and the option price.

NOTE 9 - EMPLOYEE BENEFIT PLANS

Effective January 1, 1995, the Company established the Gadzooks, Inc. Employees'
Savings Plan (the "401(k) Plan"). The 401(k) Plan is open to substantially all
employees who have been employed for one year and who work at least 1,000 hours
per year. Under the 401(k) Plan, a participant may contribute up to 15% of
earnings with the Company matching 50% of the employee's first 4% (5% effective
January 1998) contribution. Employee and Company contributions are paid to a
corporate trustee and invested in various funds at the discretion of the
participant. Company contributions made to participants' accounts become 100%
vested on the fifth anniversary of the employee's participation in the Plan. For
the years ended January 31, 1998, February 1, 1997 and January 27, 1996, the
Company contributed $108,814, $88,150 and $67,171, respectively, in matching
contributions to the 401(k) Plan.

twenty-nine

<PAGE> 18
NOTE 10 - STOCK OPTION PLANS

The Company has three incentive and nonstatutory stock option plans. The
"Employee Plan" for employees and consultants was adopted in February 1992; the
"Key Employee Plan" for key employees was adopted in September 1994; and the
"Nonemployee Director Plan" for the Company's outside directors was adopted in
August 1995. Under these plans, options are granted to purchase common stock at
a price no less than fair market value at the grant date. For options granted
prior to the initial public offering, the board of directors considered various
factors in determining fair market value including, among other things, the
rights and preferences of holders of other securities issued by the Company, the
financial position and results of operations of the Company, and the liquidity
of the Company's common stock. Subsequent to the initial public offering, all
shares have been granted at the closing price of the Company's common stock
traded on The Nasdaq Stock Market on the date of grant. Options have vesting
periods of generally three to five years from date of grant and may be exercised
at any time once they become vested, but not more than 10 years from date of
grant.

During fiscal 1995, the plans were amended to adjust the maximum aggregate
number of shares that may be optioned and sold under the plans to 900,000 shares
for the Employee Plan and 272,651 shares for the Key Employee Plan. The maximum
aggregate number of shares that may be optioned and sold under the Nonemployee
Director Plan is 30,000 shares. Options to purchase 50,000 shares at $21.38 were
granted in January 1998 contingent upon shareholders' approval of an amendment
to the maximum number of options that may be granted pursuant to the Employee
Plan. Those options are not reflected in the two following tables.

The following table includes option information for the Employee Plan, Key
Employee Plan, and Nonemployee Director Plan:

<TABLE>
<CAPTION>
Fiscal
-----------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 655,289 $ 6.23 675,946 $ 2.13 867,474 $ 1.79
Granted 275,182 23.46 139,115 19.70 141,787 4.48
Exercised (170,137) 2.41 (154,418) 0.53 (150,117) 1.11
Canceled (61,974) 17.95 (5,354) 10.22 (183,198) 3.13
-------- -------- -------- -------- -------- --------
Outstanding at end of year 698,360 $ 13.00 655,289 $ 6.23 675,946 $ 2.13
-------- -------- -------- -------- -------- --------

Available for grant at end of year 29,472 242,830 378,858
-------- -------- -------- -------- -------- --------
</TABLE>

thirty

<PAGE> 19

GADZOOKS, INC.

The following table summarizes information about stock options outstanding at
January 31, 1998:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------- ---------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 1-31-98 Life Price at 1-31-98 Price
--------------- ---------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.21-- $ 1.05 106,228 6 years $ 0.56 63,240 $ 0.48
3.15-- 5.78 223,583 6 years 3.97 86,988 3.87
10.50-- 18.50 150,742 9 years 17.89 20,300 18.01
20.00-- 25.00 177,475 9 years 23.98 400 22.50
28.13-- 33.25 40,332 9 years 29.21 4,328 29.36
------------------- -------- -------- ------ -------- -------
0.21-- 33.25 698,360 175,256
</TABLE>

During 1996, the Company adopted the disclosure-only provision of SFAS No. 123,
"Accounting for Stock-Based Compensation," which generally establishes financial
accounting and reporting standards for stock-based employee compensation plans.
As permitted, the Company measures and records compensation expense in
accordance with current practices as prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and provides disclosure about pro
forma compensation expense. Such adoption did not result in a charge to earnings
in the Company's financial statements. If the Company had elected to recognize
compensation expense based on the fair value of options granted at the grant
date as prescribed by SFAS No. 123, net income and earnings per share would have
been reduced to the pro forma amounts indicated in the following table:

<TABLE>
<CAPTION>
Fiscal
------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Net income - as reported $ 8,287,898 $ 7,991,400
Net income - pro forma 7,347,426 7,654,272
Diluted earnings per share - as reported .91 .87
Diluted earnings per share - pro forma .81 .84
</TABLE>

The fair value of each option grant is estimated as of the date of grant using
the Black-Scholes Multiple Option pricing model with the following
weighted-average assumptions used for grants:

<TABLE>
<CAPTION>
Fiscal
---------------------
1997 1996
-------- --------
<S> <C> <C>
Expected volatility 79% 70%
Risk-free interest rate 5.6% 6.4%
Expected lives 4.2 years 3.6 years
Dividend yield 0% 0%
</TABLE>

The weighted average fair value of options granted is $14.14 and $9.52 per share
for fiscal 1997 and 1996, respectively.

thirty-one
<PAGE> 20

NOTE 11 - EARNINGS PER SHARE

In February 1997, the Financial Accounting Standards Board issued SFAS 128,
"Earnings Per Share", to simplify the calculation of earnings per share for
publicly held companies. SFAS 128 is effective for 1997 and requires the Company
to report both basic earnings per share, which is based on the weighted average
number of common shares outstanding, and diluted earnings per share, which is
based on the weighted number of common shares outstanding and all dilutive
potential common shares outstanding. All prior years' earnings per share data in
this report have been recalculated to reflect the provisions of SFAS 128. The
following table outlines the Company's earnings per share calculations:

<TABLE>
<CAPTION>
Fiscal
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income $8,287,898 $7,991,400 $4,075,666
---------- ---------- ----------
Weighted average common shares outstanding (basic) 8,682,582 8,525,322 6,094,838
Effect of dilutive securities:
Options 417,445 617,599 647,578
---------- ---------- ----------
Weighted average common and dilutive
potential shares outstanding (diluted) 9,100,027 9,142,921 6,742,416
---------- ---------- ----------
Earnings per share:
Basic $ 0.95 $ 0.94 $ 0.67
---------- ---------- ----------
Diluted $ 0.91 $ 0.87 $ 0.60
---------- ---------- ----------
</TABLE>

The treasury stock method is used to determine dilutive potential common shares
outstanding related to stock options. Options which, based on their exercise
price, would be anti-dilutive are not considered in the treasury stock method
calculation. Options excluded from the earnings per share calculation due to
their anti-dilutive nature are summarized in the table below:

<TABLE>
<CAPTION>
Fiscal
-------------------------------------------------
1997 1996 1995
-------------------------------------------------
<S> <C> <C> <C>
Outstanding at end of year 40,332 22,500 --
Range of exercise prices $ 28.13-$33.25 $ 29.00-$33.25 --
Weighted average exercise price $29.21 $29.62 --
</TABLE>

thirty-two

<PAGE> 21

GADZOOKS, INC.

REPORT OF
INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of Gadzooks, Inc.

In our opinion, the accompanying balance sheets and the related statements of
income, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Gadzooks, Inc. at January 31, 1998
and February 1, 1997, and results of its operations and its cash flows for each
of the three years in the period ended January 31, 1998 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

/s/ PRICE WATERHOUSE LLP

Dallas, Texas
March 6, 1998

thirty-three

<PAGE> 1

Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Nos. 33-98038, 333-12097, and 333-50639) of Gadzooks,
Inc. of our report dated March 6, 1998 appearing on page 33 of the Annual
Report to Shareholders which is incorporated in this Annual Report on Form
10-K.

/s/ Price Waterhouse LLP
Dallas, Texas
April 22, 1998

<ARTICLE> 5

<S> <C>
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<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-2-1997
<PERIOD-END> JAN-31-1998
<CASH> 9,755
<SECURITIES> 9,157
<RECEIVABLES> 2,815
<ALLOWANCES> 0
<INVENTORY> 35,764
<CURRENT-ASSETS> 1,427
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<DEPRECIATION> 9,321
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<CURRENT-LIABILITIES> 24,040
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0
0
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<SALES> 171,639
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