UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended ~~April~~July 1, 2006


o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file number: 001-32320

BUILD-A-BEAR WORKSHOP, INC.

(Exact Name of Registrant as Specified in Its Charter)


Delaware
(State or Other Jurisdiction of Incorporation or		~~43-1883836~~
Organization)		43-1883836 (I.R.S. Employer Identification No.)

1954 Innerbelt Business Center Drive		63114
St. Louis, Missouri		~~63114~~(Zip Code)
(Address of Principal Executive Offices)		~~(Zip Code)~~

(314) 423-8000
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


~~Yes~~þ		YesþNoo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):


~~Large accelerated filer~~o		~~Accelerated filer~~þ		Large accelerated filero Accelerated filerþNon-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


~~Yes~~o		YesoNoþ

As of ~~May 5,~~August 8, 2006, there were ~~20,445,940~~20,463,467 issued and outstanding shares of the registrant’s common stock.

BUILD-A-BEAR WORKSHOP, INC.
INDEX TO FORM 10-Q


			Page
Part I	Financial Information			3

	Item 1.	Financial Statements (Unaudited)		3

		Condensed Consolidated Balance Sheets		3
		Condensed Consolidated Statements of Operations		4
		Condensed Consolidated Statements of Cash Flows		5
		Notes to Condensed Consolidated Financial Statements		6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		1214

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		2226

	Item 4.	Controls and Procedures		2226

Part II	Other Information			24

	Item 1A.	Risk Factors		2428
	Item 2.4.	~~Unregistered Sales~~Submission of ~~Equity Securities and Use~~Matters to a Vote of ~~Proceeds~~Security Holders		2428
	Item 6.	Exhibits		2429

	Signatures			25
~~Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Bear~~
~~Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Bear~~
~~Section 1350~~302 Certification of Chief Executive Bear
~~Section 1350~~302 Crtification of Chief Financial Bear
906 Certification of Chief Executive Bear
906 Certification Chief Financial Bear

PART I-FINANCIAL INFORMATION

Item 1. Financial Statements.

BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except share and per share data)


		April 1,			December 31,			July 1,			December 31,
		2006			2005			2006			2005
ASSETS	ASSETS
Current assets:
Cash and cash equivalents		$	43,398		$	90,950		$	10,554		$	90,950
Inventories			43,591			40,157			48,005			40,157
Receivables			7,297			6,629			10,781			6,629
Prepaid expenses and other current assets			7,344			6,839			14,174			6,839
Deferred tax assets			3,347			3,232			3,636			3,232

Total current assets			104,977			147,807			87,150			147,807
Cash in escrow			36,893			—

Property and equipment, net			95,194			89,973			117,504			89,973
Note receivable from franchisee			4,517			4,518			—			4,518
Goodwill									31,098			—
Other intangible assets, net			1,340			1,454			3,301			1,454
Other assets, net			2,443			2,356			3,715			2,356

Total Assets		$	245,364		$	246,108		$	242,768		$	246,108


LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	32,265		$	34,996		$	30,821		$	34,996
Accrued expenses			12,371			15,792			5,712			15,792
Gift cards and customer deposits			16,116			22,865			15,201			22,865
Deferred revenue			7,795			7,508			8,362			7,508

Total current liabilities			68,547			81,161			60,096			81,161


Deferred franchise revenue			2,740			2,306			2,764			2,306
Deferred rent			33,116			30,687			34,399			30,687
Other liabilities			550			586			529			586
Deferred tax liabilities			278			1,011			426			1,011

Stockholders’ equity:
Preferred stock, par value $0.01, Shares authorized: 15,000,000; No shares issued or outstanding at April 1, 2006 and December 31, 2005			—			—
Common stock, par value $0.01, Shares authorized: 50,000,000; Issued and outstanding: 20,411,233 and 20,120,655 shares, respectively			204			201
Preferred stock, par value $0.01, Shares authorized: 15,000,000; No shares issued or outstanding at July 1, 2006 and December 31, 2005									—			—
Common stock, par value $0.01, Shares authorized: 50,000,000; Issued and outstanding: 20,461,167 and 20,120,655 shares, respectively									205			201
Additional paid-in capital			85,246			85,259			86,595			85,259
Treasury stock, at cost. 7,673 and 0 shares, respectively			(211	)		—
Other comprehensive income									(137	)
Retained earnings			55,046			46,700			58,045			46,700
Note receivable from officer			(152	)		(151	)		(154	)		(151	)
Unearned compensation			—			(1,652	)		—			(1,652	)

Total stockholders’ equity			140,133			130,357			144,554			130,357

Total Liabilities and Stockholders’ Equity		$	245,364		$	246,108		$	242,768		$	246,108

See accompanying notes to condensed consolidated financial statements.

BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except share and per share data)


	Thirteen weeks ended						Thirteen weeks ended						Twenty-six weeks ended
	April 1, 2006			April 2, 2005			July 1, 2006			July 2, 2005			July 1, 2006			July 2, 2005
Revenues:
Net retail sales	$	97,730		$	85,723		$	92,962		$	73,279		$	190,692		$	159,002
Franchise fees		690			306			636			334			1,326			640
Licensing revenue		211			30			59			86			270			116

Total revenues		98,631			86,059			93,657			73,699			192,288			159,758


Costs and expenses:
Cost of merchandise sold		49,860			42,397			52,190			38,778			102,050			81,558
Selling, general and administrative		35,451			29,845			34,783			27,728			70,234			57,190
Store preopening		615			1,188			1,582			1,929			2,197			3,117
Interest expense (income), net		(866	)		(368	)		(299	)		(378	)		(1,165	)		(746	)

Total costs and expenses		85,060			73,062			88,256			68,057			173,316			141,119


Income before income taxes		13,571			12,997			5,401			5,642			18,972			18,639
Income tax expense		5,225			5,029			2,402			2,147			7,627			7,176

Net income	$	8,346		$	7,968		$	2,999		$	3,495		$	11,345		$	11,463


Earnings per common share:
Basic	$	0.42		$	0.41		$	0.15		$	0.18		$	0.56		$	0.59

Diluted	$	0.41		$	0.40		$	0.15		$	0.17		$	0.56		$	0.57


Shares used in computing common per share amounts:
Basic		20,078,876			19,274,625			20,152,761			19,801,598			20,115,818			19,538,111
Diluted		20,401,378			20,123,927			20,447,945			20,223,601			20,424,661			20,173,764

See accompanying notes to condensed consolidated financial statements.

BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)


	Thirteen weeks ended						Twenty-six weeks ended
	April 1, 2006			April 2, 2005			July 1, 2006			July 2, 2005
Cash flows from operating activities:
Net income	$	8,346		$	7,968		$	11,345		$	11,463
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,782			4,165			10,869			8,517
Deferred taxes		(847	)		(686	)		(2,009	)		1,224
Tax benefit from stock option exercises		(405	)		2,095			(685	)		2,095
Loss (gain) on disposal of property and equipment		(13	)		112
Loss on disposal of property and equipment								65			209
Stock-based compensation	��	493			61			1,262			215
Change in assets and liabilities:
Inventories		(3,435	)		(28	)		(4,566	)		(5,015	)
Receivables		(667	)		319			(3,466	)		(945	)
Prepaid expenses and other assets		(504	)		289			(3,928	)		(3,173	)
Accounts payable		(2,731	)		(3,884	)		(5,772	)		(8,562	)
Accrued expenses and other liabilities		(6,772	)		(5,240	)		(14,286	)		(13,109	)

Net cash provided by (used in) operating activities		(1,753	)		5,171
Net cash used in operating activities								(11,171	)		(7,081	)

Cash flows from investing activities:
Purchases of property and equipment		(9,662	)		(5,501	)		(31,353	)		(16,067	)
Purchases of other assets		(301	)		(270	)		(1,466	)		(565	)
Escrow deposit		(36,893	)		—
Purchase of business, net of cash acquired								(38,320	)		—

Net cash used in investing activities		(46,856	)		(5,771	)		(71,139	)		(16,632	)

Cash flows from financing activities:
Exercise of employee stock options and employee stock purchases		652			2,237			1,162			2,702
Collection of note receivable from officer		—			1,645			—			1,645
Tax benefit from stock option exercises		405			—			685			—

Net cash provided by financing activities		1,057			3,882			1,847			4,347

Net increase (decrease) in cash and cash equivalents		(47,552	)		3,282
Effect of exchange rates on cash								67			—

Net decrease in cash and cash equivalents								(80,396	)		(19,366	)
Cash and cash equivalents, beginning of period		90,950			67,327			90,950			67,327

Cash and cash equivalents, end of period	$	43,398		$	70,609		$	10,554		$	47,961


Noncash transactions:
Return of common stock in lieu of tax withholdings and option exercises	$	211		$	2,210		$	211		$	2,210

See accompanying notes to condensed consolidated financial statements.

~~BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

1. Basis of Presentation

The condensed consolidated financial statements included herein are unaudited and have been prepared by Build-A-Bear Workshop, Inc. and its subsidiaries (the “Company”) pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet of the Company as of December 31, 2005 was derived from the Company’s audited consolidated balance sheet as of that date. All other condensed consolidated financial statements contained herein are unaudited and reflect all adjustments which are, in the opinion of management, necessary to summarize fairly the financial position of the Company and the results of the Company’s operations and cash flows for the periods presented. All of these adjustments are of a normal recurring nature. All significant intercompany balances and transactions have been eliminated in consolidation. Because of the seasonal nature of the Company’s operations, results of operations of any single reporting period should not be considered as indicative of results for a full year. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2005 included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2006.

Certain reclassifications were made to prior period financial statements to be consistent with the current fiscal period presentation.

2. Business Acquisition

The Company has not completed its assessment of the U.K. Acquisition assets and liabilities. Until that assessment is complete, the allocation of the purchase price is preliminary and may be subject to revisions.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

Current assets $ 7,856
Property and equipment 6,351
Goodwill 28,090
Intangibles 1,824

Total assets acquired 44,121

Current liabilities assumed (7,228 )
Loan previously advanced 4,517

Total purchase price $ 41,410

The following unaudited pro forma summary presents the Company’s revenue, net income, basic earnings per share and diluted earnings per share as if the U.K. Acquisition had occurred on January 2, 2005 (in thousands):

Thirteen Weeks Ended Twenty-Six Weeks Ended
July 1, 2006 July 2, 2005 July 1, 2006 July 2, 2005
Revenue $ 93,657 $ 81,807 $ 201,421 $ 178,288

Net Income 2,999 382 9,059 6,721

Basic earnings per common share: $ 0.15 $ 0.02 $ 0.45 $ 0.34

Diluted earnings per common share: $ 0.15 $ 0.02 $ 0.44 $ 0.33

Pro forma adjustments have been made to reflect depreciation and amortization using estimated asset values recognized after applying purchase accounting adjustments.

This pro forma information is presented for informational purposes only and is not necessarily indicative of actual results had the acquisition been effected at the beginning of the respective periods presented, and is not necessarily indicative of future results.

3. Goodwill

In connection with our U.K. Acquisition, we acquired goodwill. This asset was recorded in accordance with SFAS No. 141, “Business Combinations” and is reported as a component of the Company’s retail segment. The following table summarizes the Company’s goodwill (in thousands):

U.K. Acquisition $ 28,090
Acquisition costs 1,005
Severance costs 729

29,824

Effect of foreign currency translation 1,274

Goodwill, as of July 1, 2006 $ 31,098

4. Stock-based Compensation

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),Share-Based Payment(SFAS 123R). SFAS 123R requires companies to recognize the cost of awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant and eliminates the choice to account for employee stock options under Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees(APB 25). The Company adopted SFAS 123R effective January 1, 2006 using the modified prospective method and, as such, results for prior periods have not been restated. Under this method, in addition to reflecting compensation expense for new share-based awards, expense is also recognized to reflect the remaining service period of awards that had been included in pro forma disclosures in prior periods. Prior to January 1, 2006, the fair value of restricted stock awards was expensed by the Company over the vesting period, while compensation expense for

stock options was recognized over the vesting period only to the extent that the grant date market price of the stock exceeded the exercise price of the options.

For the thirteen weeks ended ~~April~~July 1, 2006, selling, general and administrative expense includes ~~$0.5~~$0.8 million ($~~0.3~~0.4 million after tax) of stock-based compensation expense which had a $0.02 impact on both basic and diluted earnings per share. Of this amount, $0.1 million ($~~81,000~~82,000 after tax) is attributable to the Company’s adoption of SFAS 123R. This incremental expense from the adoption of SFAS 123R did not impact basic or diluted earnings per share. The additional stock-based compensation expense not related to the adoption of SFAS 123R was related to the vesting of restricted stock awards.

As of ~~April~~July 1, 2006, there was ~~$6.5~~$5.9 million of total unrecognized compensation expense related to nonvested restricted stock awards and options which is expected to be recognized over a weighted-average period of ~~3.4~~3.25 years.

~~BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value method of SFAS No. 123,Accounting for Stock-Based Compensation (SFAS 123), prior to January 1, ~~2006:~~2006 (in thousands except per share amounts):


	Thirteen			Thirteen			Twenty-Six
	Weeks Ended			Weeks Ended			Weeks Ended
	April 2, 2005			July 2, 2005			July 2, 2005
Net income:
As reported	$	7,968		$	3,495		$	11,463
Add stock-based employee compensation expense recorded, net of related tax effects		38			94			132
Deduct stock-based employee compensation expense under fair value-based method, net of related tax effects		(452	)		(499	)		(951	)

Pro Forma	$	7,554		$	3,090		$	10,644


Basic earnings per common share:
As reported	$	0.41		$	0.18		$	0.59

Pro forma	$	0.39		$	0.16		$	0.54


Diluted earnings per common share:
As reported	$	0.40		$	0.17		$	0.57

Pro forma	$	0.38		$	0.15		$	0.53

The fair value of each option was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for the thirteen and twenty-six weeks ended ~~April~~July 2, 2005: (a) dividend yield of 0%; (b) expected volatility of 50%; (c) risk-free interest rate of 3.5%; and (d) a weighted average expected life of 6.3 years. The weighted average grant date fair value of options granted in the thirteen and twenty-six weeks ended ~~April~~July 2, 2005 was $18.21 ~~per share.~~in both periods. There were no new options granted in the thirteen or twenty-six weeks ended ~~April~~July 1, 2006. The pro forma disclosures above utilize the accelerated expense attribution method under FASB Interpretation No. 28,Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans – An Interpretation of APB Opinions No. 15 and 25. Upon adoption of SFAS 123R, the Company made a policy decision that the straight-line expense attribution method would be utilized for all future stock-based compensation awards with graded vesting.

Prior to the adoption of SFAS 123R, the Company presented the benefit of all tax deductions resulting from the exercise of stock options and restricted stock awards as operating cash flows in the consolidated

statements of cash flows. SFAS 123R requires the benefits of tax deductions in excess of grant-date fair value be reported as a financing cash flow, rather than as an operating cash flow. Excess tax benefits of ~~$0.4~~$0.7 million, which were classified as a financing cash inflow in the ~~first quarter of~~twenty-six weeks ended July 1, 2006, would have been classified as an operating cash inflow if the Company had not adopted SFAS 123R.

3.5. Stock Incentive Plans

On April 3, 2000, the Company adopted the 2000 Stock Option Plan. In 2003, the Company adopted the Build-A-Bear Workshop, Inc. 2002 Stock Incentive Plan, and, in 2004, the Company adopted the Build-A-Bear Workshop, Inc. 2004 Stock Incentive Plan (collectively, the Plans).

Under the Plans, as amended, up to 3,700,000 shares of common stock were reserved and may be granted to employees and nonemployees of the Company. The Plans allow for the grant of incentive stock

~~BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

options, nonqualified stock options, and restricted stock. Options granted under the Plans expire no later than 10 years from the date of the grant. The exercise price of each incentive stock option shall not be less than 100% of the fair value of the stock subject to the option on the date the option is granted. The exercise price of the nonqualified options shall be determined from time to time by the compensation committee of the board of directors (the Committee). The vesting provision of individual awards is at the discretion of the Committee and generally ranges from one to four years.

(a) Stock Options

The following table is a summary of the balances and activity for the Plans related to stock options for the ~~thirteen~~twenty-six weeks ended ~~April~~July 1, 2006:


					Weighted		Aggregate						Weighted		Aggregate
			Weighted		Average		Intrinsic				Weighted		Average		Intrinsic
	Number of		Average		Remaining		Value		Number of		Average		Remaining		Value
	Shares		Exercise Price		Contractual Term		(in thousands)		Shares		Exercise Price		Contractual Term		(in thousands)
Outstanding, December 31, 2005		768,623	$	14.06						768,623	$	14.06
Granted		—		—						—		—
Exercised		80,476		6.82						124,876		6.88
Forfeited		2,236		34.65						3,482		29.10

Outstanding, April 1, 2006		685,911	$	14.84		6.8	$	10,844
Outstanding, July 1, 2006										640,265	$	15.38		6.6	$	3,927


Options Exercisable As Of:
April 1, 2006		649,911	$	14.35		6.7	$	10,593
July 1, 2006										640,265	$	14.88		6.4	$	4,005

The total intrinsic value of options exercised in the ~~thirteen~~twenty-six weeks ended ~~April~~July 1, 2006 and ~~April~~July 2, 2005 was approximately ~~$1.8~~$2.8 million and ~~$7.2~~$7.6 million, respectively. The Company generally issues new shares to satisfy option exercises.

(b) Restricted Stock

The following table is a summary of the balances and activity for the Plans related to restricted stock granted as compensation to employees and directors for the ~~thirteen~~twenty-six weeks ended ~~April~~July 1, 2006:


			Weighted				Weighted
			Average Grant				Average Grant
	Number of		Date Fair Value		Number of		Date Fair Value
	Shares		per Award		Shares		per Award
Outstanding, December 31, 2005		82,946	$	32.37		82,946	$	32.37
Granted		202,361		29.13		204,761		29.14
Vested		12,966		34.68		12,966		34.69
Canceled or expired		—		—		128		29.14

Outstanding, April 1, 2006		272,341	$	29.86
Outstanding, July 1, 2006						274,613	$	29.86

The total fair value of shares vested during the ~~thirteen~~twenty-six weeks ended ~~April~~July 1, 2006 was $0.4 million. No shares vested during the ~~thirteen~~twenty-six weeks ended ~~April~~July 2, 2005.

~~BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

In addition to the restricted stock noted above, there were 20,491 shares of contractually restricted stock outstanding as of ~~April~~July 1, 2006 which were issued to an officer of the Company in exchange for a nonrecourse promissory note totaling $124,995 on September 19, 2001. The note bears interest at a rate of 4.82% per annum. Both principal and interest are due in September 2006.

(c) Associate Stock Purchase Plan

In October 2004, the Company adopted an Associate Stock Purchase Plan (ASPP). Under the ASPP, substantially all full-time employees are given the right to purchase shares of the Company’s common stock, subject to certain limitations, at 85% of the lesser of the fair market value on the purchase date or the beginning of each purchase period. Up to 1,000,000 shares of the Company’s common stock are available for issuance under the ASPP. The employees of the Company purchased ~~7,741~~10,807 shares ~~of common stock from the Company~~ at ~~$25.12~~$18.51 per share through the ASPP during the thirteen weeks ended ~~April~~July 1, 2006. The employees purchased 18,551 shares at $21.26 per share through the ASPP during the twenty-six weeks ended July 1, 2006. The expense recorded related to the ASPP during the thirteen and twenty-six weeks ended ~~April~~July 1, 2006 was determined using the Black-Scholes option pricing model and the provisions of FASB Technical Bulletin 97-1,Accounting under Statement 123 for Certain Employee Stock Purchase Plans with a Look-Back Option(FTB 97-1), as amended by SFAS 123R. The assumptions used in the option pricing model for the thirteen and twenty-six weeks ended ~~April~~July 1, 2006 were: (a) dividend yield of 0%; (b) volatility of 20%; (c) risk-free interest rate of 6.0%; and (d) an expected life of 0.25 years. Prior to the adoption of SFAS 123R, the ASPP was considered noncompensatory and no expense was recorded in the consolidated statement of operations.

4.6. Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except share and per share data):


	Thirteen weeks ended				Thirteen weeks ended				Twenty-six weeks ended
	April 1, 2006		April 2, 2005		July 1, 2006		July 2, 2005		July 1, 2006		July 2, 2005
Net income allocated to common stockholders	$	8,346	$	7,968	$	2,999	$	3,495	$	11,345	$	11,463

Weighted average number of common shares outstanding		20,078,876		19,274,625		20,152,761		19,801,598		20,115,818		19,538,111

Effect of dilutive securities:
Stock options		283,843		613,719		246,087		406,860		264,965		510,290
Restricted stock		38,659		235,583		49,097		15,143		43,878		125,363

Weighted average number of common shares — dilutive		20,401,378		20,123,927		20,447,945		20,223,601		20,424,661		20,173,764


Earnings per share:
Basic:	$	0.42	$	0.41	$	0.15	$	0.18	$	0.56	$	0.59

Diluted	$	0.41	$	0.40	$	0.15	$	0.17	$	0.56	$	0.57

In calculating diluted earnings per share for the thirteen and twenty-six weeks ended ~~April~~July 1, 2006, options to purchase ~~206,324~~205,948 shares of common stock were outstanding as of the end of the period, but were not included in the computation of diluted earnings per share due to their anti-dilutive effect. An additional ~~202,361~~204,761 shares of restricted common stock were outstanding at the end of the period, but excluded from the calculation of diluted earnings per share due to their anti-dilutive effect under the provisions of Statement of Financial Accounting Standards No. 128,Earnings per Share.

~~BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~

In calculating diluted earnings per share for the thirteen and twenty-six weeks ended ~~April~~July 2, 2005, options to purchase ~~177,292~~180,796 shares of common stock were outstanding as of the end of the period, but were not included in the computation of diluted earnings per share due to their anti-dilutive effect. An additional 51,750 shares of restricted common stock were excluded from the calculation of diluted earnings per share because their vesting was contingent on achieving a specified net income level that had not been met as of ~~April~~July 2, 2005. The specified net income level was subsequently achieved during fiscal 2005.

5.7. Comprehensive Income

Comprehensive income for the thirteen weeks ended July 1, 2006 and July 2, 2005 was $3.0 million and $3.5 million, respectively, and for the twenty-six week period ended July 1, 2006 and July 2, 2005 was $7.6 million and $7.2 million, respectively. The difference between comprehensive income and net income resulted from foreign currency translation adjustments.

8. Property and Equipment

Property and equipment consist of the following (in thousands):


	April 1,		December 31,		July 1,		December 31,
	2006		2005		2006		2005
Leasehold improvements	$	99,173	$	98,991	$	110,272	$	98,991
Furniture and fixtures		20,486		19,727		24,493		19,727
Computer hardware		12,844		12,655		13,698		12,655
Computer software		7,564		7,250		10,917		7,250
Construction in progress		13,168		5,853		20,871		5,853

		153,235		144,476		180,251		144,476
Less accumulated depreciation		58,041		54,503		62,747		54,503

	$	95,194	$	89,973	$	117,504	$	89,973

6.9. Segment Information

The Company’s operations are conducted through three reportable segments consisting of retail operations, international franchising and licensing and entertainment. The retail operations segment includes the operating activities of the stores in the United States, Canada, the United Kingdom and ~~Canada~~Ireland, and other retail delivery operations, including the Company’s web store and non-mall locations such as baseball ballparks. The international franchising segment includes the licensing activities of the Company’s franchise agreements with locations outside of the United States, Canada, the United Kingdom and ~~Canada.~~Ireland. The licensing and entertainment segment has been established to market the naming and branding rights of the Company’s intellectual properties for third party use. These operating segments represent the basis on which the Company’s chief operating decision-maker regularly evaluates the business in assessing performance, determining the allocation of resources and the pursuit of future growth opportunities. The operating segments have discrete sources of revenue, different capital structures and have different cost structures. The reporting segments follow the same accounting policies used for the Company’s consolidated financial statements.

Following is a summary of the financial information for the Company’s reporting segments (in thousands):

1012

~~BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(Unaudited)~~


			International			Licensing &						International			Licensing &
	Retail		Franchising			Entertainment		Total		Retail		Franchising			Entertainment		Total
Thirteen weeks ended April 1, 2006
Thirteen weeks ended July 1, 2006
Net sales to external customers	$	97,730	$	690		$	211	$	98,631	$	92,962	$	636		$	59	$	93,657
Net income before income taxes		13,170		271			130		13,571		5,174		217			10		5,401
Total assets		236,472		7,718			1,174		245,364
Capital expenditures		9,660		2			—		9,662		21,668		23			—		21,691
Depreciation and amortization		4,634		146			2		4,782		5,871		214			2		6,087
Thirteen weeks ended April 2, 2005

Thirteen weeks ended July 2, 2005
Net sales to external customers		85,723		306			30		86,059		73,279		334			86		73,699
Net income (loss) before income taxes		13,110		(134	)		21		12,997		5,799		(157	)		—		5,642
Total assets		189,431		3,450			663		193,544
Capital expenditures		5,471		30			—		5,501		10,590		—			—		10,590
Depreciation and amortization		4,031		134			—		4,165		4,212		140			—		4,352

Twenty-six weeks ended July 1, 2006
Net sales to external customers										$	190,692	$	1,327		$	269	$	192,288
Net income before income taxes											18,344		488			140		18,972
Capital expenditures											31,327		26			—		31,353
Depreciation and amortization											10,505		359			4		10,868

Twenty-six weeks ended July 2, 2005
Net sales to external customers											159,002		640			116		159,758
Net income (loss) before income taxes											18,909		(291	)		21		18,639
Capital expenditures											16,061		30			—		16,091
Depreciation and amortization											8,243		274			—		8,517

Total Assets as of:
July 1, 2006										$	239,450	$	2,126		$	1,192	$	242,768
July 2, 2005											181,795		4,601			747		187,143

The Company’s reportable segments are primarily determined by the types of products and services that they offer. Each reportable segment may operate in many geographic areas. The Company attributes revenues to geographic areas based on the location of the customer or franchisee. The Company attributes long-lived assets to geographic areas based on the physical location of the assets. The following schedule provides a summary of the Company’s revenue from external customers and long-lived assets attributed to the Company’s country of domicile (United States) and foreign countries (in thousands):

United States Canada Other Total
Thirteen weeks ended April 1, 2006
Net sales to external customers $ 93,144 $ 4,797 $ 690 $ 98,631
Property and equipment, net 91,849 3,323 22 95,194
Thirteen weeks ended April 2, 2005
Net sales to external customers 83,253 2,500 306 86,059
Property and equipment, net 75,030 2,291 — 77,321

~~7. Subsequent Events~~

On April 2, 2006, the Company acquired all of the outstanding shares of The Bear Factory Limited, a stuffed animal retailer in the United Kingdom, and Amsbra Limited (Amsbra), the Company’s U.K. franchisee. The total cash purchase price of the two entities was approximately $41.4 million, exclusive of the professional fees incurred as a part of the transaction. Included within the approximate purchase price is the forgiveness of the $4.4 million note receivable from Amsbra and all related accrued interest.

The $36.9 million of cash in escrow included on the condensed consolidated balance sheet as of April 1, 2006 was an advance payment related to this acquisition. The cash in escrow was classified as non-current since the assets being acquired were primarily long-term in nature. The escrowed funds were disbursed on April 2, 2006 in conjunction with the closing of the transactions noted above.

North United Kingdom
America & Ireland Other Total
Thirteen weeks ended July 1, 2006
Net sales to external customers $ 85,521 $ 7,500 $ 636 $ 93,657
Property and equipment, net 108,768 8,716 20 117,504
Thirteen weeks ended July 2, 2005
Net sales to external customers 73,365 53 281 73,699
Property and equipment, net 83,730 — — 83,730

Twenty-six weeks ended July 1, 2006
Net sales to external customers $ 183,461 $ 7,500 $ 1,327 $ 192,288
Property and equipment, net 108,768 8,716 20 117,504
Twenty-six weeks ended July 2, 2005
Net sales to external customers 159,118 127 513 159,758
Property and equipment, net 83,730 — — 83,730

1113

10. Subsequent Events

On July 3, 2006, the Company entered into an amendment to its line of credit with U.S. Bank National Association. The amendment provides for a seasonal overline on the line of credit to be in effect from July 1 to December 31 of each year, during which the line availability will increase from $15 million to $30 million. In addition, the funded debt ratio covenant was reduced from 2:1 to 1.5:1, and the pricing was amended from prime minus 0.5% to the Company’s option of prime minus 1.0% or LIBOR plus 1.5%. Also, the negative pledge on all the Company’s assets contained in the credit agreement was amended to a “double” negative pledge, whereby the Company agrees not to offer a negative pledge on any of its assets to other parties. The credit agreement amendment was effective June 30, 2006.

11. New Accounting Pronouncements

In March 2006, the Emerging Issues Task Force (“EITF”) issued EITF Issue 06-3,“How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).” A consensus was reached that entities may adopt a policy of presenting sales taxes in the income statement on either a gross or net basis. If taxes are significant, an entity should disclose its policy of presenting taxes and the amounts of taxes. The guidance is effective for periods beginning after December 15, 2006. We present company sales net of sales taxes. This issue will not impact the method for recording these sales taxes in our consolidated financial statements.

In July 2006, the FASB issued FASB Interpretation No. (“FIN”) 48,“Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 is effective for fiscal years beginning after December 15, 2006. We are evaluating the impact the adoption of FIN 48 will have on our consolidated financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. These risks and uncertainties include, without limitation, those detailed under the caption “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange Commission, and the following: we may be unable to generate comparable store sales growth; our marketing initiatives may not be effective in generating sufficient levels of brand awareness and guest traffic; we may be unable to open new stores or may be unable to effectively manage our growth; we may be unable to effectively manage our international franchises or laws relating to those franchises may change; we may be unable to successfully integrate The Bear Factory and Amsbra or operate those companies and stores in a profitable manner; we may be unable to generate interest in and demand for our interactive retail experience, or to identify and respond to consumer preferences in a timely fashion; customer traffic may decrease in the shopping malls where we are located, on which we depend to attract guests to our stores; general economic conditions may deteriorate, which could lead to disproportionately reduced consumer demand for our products, which represent relatively discretionary spending; our market share could be adversely affected by a significant, or increased, number of competitors; we may lose key personnel, be unable to hire qualified additional personnel, or experience turnover of our management team; the ability of our principal vendors to deliver merchandise may be disrupted; the availability and costs of our products could be adversely affected by risks associated with international manufacturing and trade; high petroleum products prices could increase our inventory transportation costs and adversely affect our profitability; we may be unable to construct and open our new distribution center ~~in a~~ timely ~~manner~~ or on

budget or operate it in an efficient and effective manner; third parties that manage our warehousing and distribution functions may perform poorly; fluctuations in our quarterly results of operations could cause the price of our common stock to substantially decline; we may fail to renew, register or otherwise protect our trademarks or other intellectual property; we may have disputes with, or be sued by, third parties for infringement or misappropriation of their proprietary rights; we may be unable to renew or replace our store leases, or enter into leases for new stores on favorable terms or in favorable locations, or may violate the terms of our current leases; we may suffer negative publicity or be sued due to violations of labor laws or unethical practices by manufacturers of our merchandise; and we may improperly obtain or be unable to protect information from our guests in violation of privacy or security laws or expectations.

These risks, uncertainties and other factors may adversely affect our business, growth, financial condition or profitability, or subject us to potential liability, and cause our actual results, performance or achievements to be materially different from those expressed or implied by our forward-looking statements. We do not undertake any obligation or plan to update these forward-looking statements, even though our situation may change.

Overview

We are the leading, and only ~~national,~~global company providing a “make your own stuffed animal” interactive entertainment experience under the Build-A-Bear Workshop brand, in which our guests stuff, fluff, dress, accessorize and name their own teddy bears and other stuffed animals. Our concept, which we developed for mall-based retailing, capitalizes on what we believe is the relatively untapped demand for experience-based shopping as well as the widespread appeal of stuffed animals. The Build-A-Bear Workshop experience appeals to a broad range of age groups and demographics, including children, teens, their parents and grandparents. As of ~~April~~July 1, 2006, we operated ~~202~~216 stores in 4344 states and Canada, 40 stores in the United Kingdom and Ireland, and had 3022 franchised stores operating internationally under the Build-A-Bear Workshop brand. In addition to our stores, we market our products and build our brand through our website, which simulates our interactive shopping experience, as well as locations in Major League Baseball^® ballparks, a location in a zoo and our presence at event-based locations through our mobile store.

On April 2, 2006, the Company acquired all of the outstanding shares of The Bear Factory Limited (Bear Factory), a stuffed animal retailer in the United Kingdom, and Amsbra Limited (Amsbra), the Company’s U.K. franchisee (U.K. Acquisition). The results of the U.K. Acquisition operations have been included in the consolidated financial statements since that date. In conjunction with those transactions, we obtained 40 retail locations in the United Kingdom and Ireland. Approximately four of those locations are expected to close during fiscal 2006. Of those four locations, two are closing due to overlapping store locations in the Amsbra and Bear Factory portfolios, and the other two locations to be closed are concessions within department stores which is a format that we have chosen not to continue. We expect to convert and rebrand 25 Bear Factory stores to Build-A-Bear Workshop stores in time for the 2006 holiday season resulting in a unified company brand throughout the U.K. and Ireland. During the store conversion and rebranding process, stores are temporarily closed on average for 22 days while many of the costs to operate the stores continue. Therefore, the company expects the acquisition to be dilutive to earnings during fiscal 2006. The Company expects to improve sales performance and adopt best practices in the areas of merchandising, marketing, purchasing and store operations, across the acquired store base, and to realize earnings accretion from the acquisition in fiscal 2007.

We operate in three reportable segments (retail operations, international franchising and licensing and entertainment) that share the same infrastructure, including management, systems, merchandising and marketing, and generate revenues as follows:

•		United States, Canada, the United Kingdom and ~~Canadian~~Ireland retail stores, a webstore and seasonal, event-based locations;

•		International stores operated under franchise agreements; and

•		License arrangements with third parties which manufacture and sell to other retailers merchandise carrying the Build-A-Bear Workshop brand.

Selected financial data attributable to each segment for the thirteen and twenty-six weeks ended ~~April~~July 1, 2006 and ~~April~~July 2, 2005 are set forth in the notes to our condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q.

Store contribution, for our consolidated operations, was 25.1% for the twenty-six weeks ended July 1, 2006 and 27.7% for the ~~thirteen~~twenty-six weeks ended ~~April 1, 2006 and 29.3% for the thirteen weeks ended April~~July 2, 2005 and ~~total company~~consolidated net income as a percentage of total revenues was ~~8.5%~~5.9% for the ~~thirteen~~twenty-six weeks ended ~~April~~July 1, 2006 and ~~9.3%~~7.2% for the ~~thirteen~~twenty-six weeks ended ~~April~~July 2, 2005. See “— Non-GAAP Financial Measures” for a definition of store contribution and a reconciliation of store contribution to net income. We believe the decrease in our store contribution over the prior year was primarily due to the decline in comparable store sales and a decrease in our gross margin. Due to the discretionary nature of our products, we believe that comparable store sales are being impacted by the more difficult economic conditions being experienced by consumers. The decrease in gross margin was anticipated and resulted from higher occupancy costs as ~~outlined in~~a percentage of net retail sales at the ~~“Results of Operations” section below. Despite this decrease, we~~U.K. stores. We have maintained what we believe to be a high store contribution level through the creation of economies of scale which allow us to decrease the cost of our product on a per unit basis and continued expense management through labor planning and the monitoring of store supplies and other expenses.

We use comparable store sales as a key performance measure for our business. The percentage increase (decrease) in comparable store sales for the periods presented below is as follows:

Thirteen Weeks Ended
April 1, 2006 April 2, 2005

(3.8)% 5.4%

Thirteen Weeks Ended
July 1, 2006 July 2, 2005
(4.4)% (6.9)%

Twenty-Six Weeks Ended
July 1, 2006 July 2, 2005
(4.1)% (0.6)%

Comparable store sales decreased by ~~3.8%~~4.4% in the thirteen weeks ended ~~April~~July 1, 2006 compared to the thirteen weeks ended ~~April~~July 2, 2005. ~~We believe these changes from~~For the ~~prior year results can be attributed primarily~~twenty-six weeks ended July 1, 2006, comparable store sales declined by 4.1%. Due to the ~~shift in~~discretionary nature of our products, we believe that comparable store sales are being impacted by the ~~Easter holiday from the first quarter of fiscal 2005 to the second quarter of fiscal 2006.~~more difficult macro economic conditions being experienced by consumers.
13

Expansion and Growth Potential

~~U.S. and Canadian~~Retail Stores:

The table below sets forth the number of Build-A-Bear Workshop stores in the United States, Canada, the United Kingdom and ~~Canada~~Ireland, for the periods presented:


	Thirteen weeks ended				Twenty-six weeks ended
	April 1, 2006		April 2, 2005		July 1, 2006		July 2, 2005
Beginning of period		200		170		200		170
UK acquisition						40		—
Opened		2		3		16		16
Closed		—		—		—		—

End of period		202		173		256		186

During fiscal 2006, we anticipate opening approximately 3031 Build-A-Bear Workshop stores in the United States and ~~Canada.~~Canada, and approximately three stores in the United Kingdom. We believe there is a market potential for approximately 350 Build-A-Bear Workshop stores in the United States and ~~Canada.~~Canada and approximately 70 to 75 stores in the United Kingdom and Ireland. In fiscal 2003, we began testing in certain markets our initial brand expansion initiative, our proprietary “Friends 2B Made” line of make-your-own dolls and related products. There ~~was one~~were two Friends 2B Made ~~location~~locations opened in the thirteen weeks ended ~~April~~July 1, 2006. As of ~~April~~July 1, 2006, there were ~~six~~a total of eight Friends 2B Made locations, all of which were located in or adjacent to Build-A-Bear Workshop stores. These Friends 2B Made stores are not considered new stores but rather expansions of Build-A-Bear Workshop stores. During fiscal 2006 we anticipate opening one additional Friends 2B Made store that will be separate from a Build-A-Bear Workshop store. The Friends 2B Made merchandise is also offered from a separate display fixture in select Build-A-Bear Workshop stores.

On April 2, 2006, we acquired Amsbra Limited (Amsbra), our franchisee in the United Kingdom, and The Bear Factory Limited (Bear Factory), a stuffed animal retailer in the United Kingdom. In conjunction with those transactions, we obtained 40 retail locations in the United Kingdom and Ireland. Approximately four of those locations are expected to close during fiscal 2006. Of those four locations, two are closing due to overlapping store locations in the Amsbra and Bear Factory portfolios, and the other two locations to be closed are concessions within department stores which is a format that we have chosen not to continue. We also anticipate opening an additional three to five Build-A-Bear Workshop stores in the United Kingdom during fiscal 2006.

Non-Store Locations:

In fiscal 2004, we began offering merchandise in seasonal, event-based locations such as Major League ~~Baseball~~^®Baseball® ballparks, as well as at temporary locations such as at the NBA All-Star Jam Session. We expect to expand our future presence at select seasonal, event-based locations contingent on their availability. In the thirteen weeks ended ~~April~~July 1, 2006, we opened one additional location within a Major League ~~Baseball~~^®Baseball® ballpark to bring our total number of ~~such~~ballpark locations to ~~four~~five as of ~~April~~July 1, 2006. We also opened our first store within a zoo during the ~~thirteen~~twenty-six weeks ended ~~April~~July 1, 2006.

International Franchise Revenue:

Our first franchised location opened in November 2003. The number of international, franchised stores for the periods presented below can be summarized as follows:


	Thirteen weeks ended				Twenty-six weeks ended
	April 1, 2006		April 2, 2005		July 1, 2006			July 2, 2005
Beginning of period		30		12		30			12
U.K. Acquisition						(11	)		—
Opened		—		—		3			4
Closed		—		—		—			—

End of period		30		12		22			16

As of ~~April~~July 1, 2006, we had 13 master franchise agreements, which typically grant franchise rights for a particular country or countries, ~~with 13 franchisees~~ covering 15 countries. We anticipate signing additional master franchise agreements in the future. We expect our current and future franchisees to open up10 to 2012 stores in fiscal 2006. Our outlook for new international store openings in fiscal 2006 has declined slightly primarily due to the availability of appropriate real estate locations. We believe there is a market potential for approximately 300 franchised stores outside of the United States, Canada, ~~and~~ the United ~~Kingdom.~~Kingdom and Ireland.

On April 2, 2006, we acquired Amsbra Limited (Amsbra), our franchisee in the United Kingdom, and The Bear Factory Limited, a stuffed animal retailer in the United ~~Kingdom.~~Kingdom (U.K. Acquisition). Amsbra

owned all 11 ~~of the~~ franchised Build-A-Bear Workshop stores ~~located~~ in the United Kingdom. Upon completion of the transaction, all of the franchised locations in the United Kingdom became company owned stores.

Results of Operations

The following table sets forth, for the periods indicated, selected statement of operation data expressed as a percentage of total revenues, except where otherwise indicated. Percentages will not total due to the cost of merchandise sold being expressed as a percentage of net retail sales and rounding:


							Thirteen weeks ended						Twenty-six weeks ended
	Thirteen weeks ended						July 1,			July 2,			July 1,			July 2,
	April 1, 2006			April 2, 2005			2006			2005			2006			2005
Revenues:
Net retail sales		99.1	%		99.6	%		99.2			99.4			99.2			99.5
Franchise fees		0.7			0.4			0.7			0.5			0.7			0.4
Licensing revenue		0.2			0.0			0.1			0.1			0.1			0.1

Total revenues		100.0			100.0			100.0			100.0			100.0			100.0

Costs and expenses

Costs and expenses:
Cost of merchandise sold (1)		51.0			49.5			56.1			52.9			53.5			51.3
Selling, general and administrative		35.9			34.7			37.1			37.6			36.5			35.8
Store preopening		0.6			1.4			1.7			2.6			1.1			2.0
Interest expense (income), net		(0.9	)		(0.4	)		(0.3	)		(0.5	)		(0.6	)		(0.5	)

Total costs and expenses		86.2			84.9			94.2			92.3			90.1			88.3


Income before income taxes		13.8			15.1			5.8			7.7			9.9			11.7
Income tax expense		5.3			5.8			2.6			2.9			4.0			4.5

Net income		8.5	%		9.3	%		3.2			4.8			5.9			7.2


Gross margin (%) (2)		49.0	%		50.5	%
Gross Margin % (2)								43.9	%		47.1	%		46.5	%		48.7	%


(1)		Cost of merchandise sold is expressed as a percentage of net retail sales.

(2)		Gross margin represents net retail sales less cost of merchandise sold. Gross margin percentage represents gross margin divided by net retail sales.

Thirteen weeks ended ~~April~~July 1, 2006 compared to thirteen weeks ended ~~April~~July 2, 2005

Total revenues.Net retail sales increased to ~~$97.7~~$93.0 million for the thirteen weeks ended ~~April~~July 1, 2006 from ~~$85.7~~$73.3 million for the thirteen weeks ended ~~April~~July 2, 2005, an increase of ~~$12.0~~$19.7 million, or ~~14.0%~~26.9%. Net retail sales for new stores contributed a ~~$15.2~~$13.0 million increase in net retail sales. U.K. Acquisition sales contributed $7.5 million and sales from non-store locations and non-comparable stores contributed a $1.8 million increase in net retail sales. Sales over the Internet increased by $0.4 million, or ~~16.6%~~32.3%. Comparable store sales decreased $3.0 million, or ~~3.8%, and sales from non-store locations and non-comparable stores resulted in a $0.6 million decrease in net retail sales. The decrease in~~4.4%. Due to the discretionary nature of our products, we believe that comparable store sales ~~was primarily due to~~are being impacted by the ~~shift in the Easter holiday from the first quarter of fiscal 2005 to the second quarter of fiscal 2006.~~more difficult macro economic conditions being experienced by consumers.

Revenue from franchise fees increased to ~~$0.7~~$0.6 million for the thirteen weeks ended ~~April~~July 1, 2006 from $0.3 million for the thirteen weeks ended ~~April~~July 2, 2005, an increase of ~~$0.4~~$0.3 million. This increase was primarily due to the addition of new ~~franchisees~~franchise agreements and new franchised stores ~~since~~opened in the ~~prior year period. Licensing revenue increased to $0.2 million for the thirteen weeks ended April 1, 2006 from $30,000 for the thirteen weeks ended April 2, 2005.~~past year.

Gross margin.Gross margin increased to ~~$47.9~~$40.8 million for the thirteen weeks ended ~~April~~July 1, 2006 from ~~$43.3~~$34.5 million for the thirteen weeks ended ~~April~~July 2, 2005, an increase of ~~$4.6~~$6.3 million, or ~~10.5%~~18.3%. As a

percentage of net retail sales, gross margin decreased to ~~49.0%~~43.9% for the thirteen weeks ended ~~April~~July 1, 2006 from ~~50.5%~~47.1% for the thirteen weeks ended ~~April~~July 2, 2005, a decrease of ~~1.5%~~3.2%. This decrease was anticipated and resulted from higher occupancy costs as a percentage of net retail sales in the U.K. Gross margin as a percentage of net retail sales for stores in the United States and Canada, improved slightly to 47.1% for the thirteen weeks ended July 1, 2006 from 46.8% for the thirteen weeks ended July 2, 2005. This increase resulted primarily ~~due to~~from improved merchandise margin, which offset higher shipping and transportation costs resulting from rising oil and petroleum prices and higher occupancy costs as a percentage of net retail sales due to declines in comparable store sales, which led to a 0.7% decrease in gross margin as a percentage of net retail sales. In addition, higher shipping and transportation costs as a result of rising oil and petroleum prices accounted for a 0.4% decrease in gross margin as a percentage of net retail sales.

Selling, general and administrative.Selling, general and administrative expenses were ~~$35.5~~$34.8 million for the thirteen weeks ended ~~April~~July 1, 2006 as compared to ~~$29.8~~$27.7 million for the thirteen weeks ended ~~April~~July 2, 2005, an increase of ~~$5.7~~$7.1 million, or ~~18.8%~~25.6%. As a percentage of total revenues, selling, general and administrative expenses ~~increased~~decreased to ~~35.9%~~37.1% for the thirteen weeks ended ~~April~~July 1, 2006 as compared to ~~34.7%~~37.6% for the thirteen weeks ended ~~April~~July 2, 2005, ~~an increase~~a decrease of ~~1.2%~~0.5%. The dollar increase was primarily due to higher selling, general and administrative costs associated with the U.K. Acquisition, and having 2970 more stores in operation at ~~April~~July 1, 2006 as compared to ~~April~~July 2, ~~2005, as well as higher central office expenses required to support a larger store base.~~2005. The ~~increase~~decrease in selling, general and administrative expenses as a percent of revenue was primarily due to ~~increased stock-based compensation~~the leveraging of store payroll and ~~higher performance-based bonus expense. The increased stock-based compensation caused selling,~~central office general and administrative expenses, ~~to increase by 0.4%~~primarily management payroll, over a larger revenue base. The central office management payroll reduction as a percent of ~~total revenues. The higher~~revenues resulted primarily from a reduction in performance-based bonus expense, ~~also led to a 0.4%~~partially offset by an increase in selling, general and administrative expenses as a percent of total revenues. In addition, store payroll costs increased by 0.3% as a percent of total revenues as a result of the decline in comparable store sales.stock-based compensation expense.

Store preopening.Store preopening expense was ~~$0.6~~$1.6 million for the thirteen weeks ended ~~April~~July 1, 2006 as compared to ~~$1.2~~$1.9 million for the thirteen weeks ended ~~April~~July 2, 2005. Approximately $0.6 million of this decrease was due to preopening costs in the prior year related to our flagship store in New York City, which opened in July ~~2005. Two new stores were opened in the thirteen weeks ended April 1, 2006 and three new stores were opened in the thirteen weeks ended April 2,~~ 2005. Preopening expenses include expenses for stores that opened in the current period as well as some expenses incurred for stores that will be opened in future periods.

Interest expense (income), net.Interest income, net of interest expense, was ~~$0.9~~$0.3 million for the thirteen weeks ended ~~April~~July 1, 2006 as compared to $0.4 million for the thirteen weeks ended ~~April~~July 2, 2005. This decrease was due to lower cash balances in the fiscal 2006 second quarter as compared to the second fiscal 2005 second quarter.

Provision for income taxes.The provision for income taxes was $2.4 million for the thirteen weeks ended July 1, 2006 as compared to $2.1 million for the thirteen weeks ended July 2, 2005. The effective tax rate was 44.5% for the thirteen weeks ended July 1, 2006 compared to 38.1% for the thirteen weeks ended July 2, 2005. The higher effective tax rate in the current period resulted from the impact of the U.K. Acquisition and the inability to record a benefit for net operating losses anticipated to be generated by the U.K. operations in the current year. We expect the effective tax rate for full year 2006 to approximate 40% compared to 38.5% in fiscal year 2005.

Twenty-six weeks ended July 1, 2006 compared to twenty-six weeks ended July 2, 2005

Total revenues.Net retail sales increased to $190.7 million for the twenty-six weeks ended July 1, 2006 from $159.0 million for the twenty-six weeks ended July 2, 2005, an increase of $31.7 million, or 19.9%. Net retail sales for new stores contributed a $28.2 million increase in net retail sales. U.K. Acquisition sales contributed $7.5 million and sales from non-store locations and non-comparable stores contributed a $1.3 million increase in net retail sales. Sales over the Internet increased by $0.8 million, or 22.5%. Comparable store sales decreased $6.1 million, or 4.1%. We believe that comparable store sales are being impacted by the more difficult macro economic conditions being experienced by consumers.

Revenue from franchise fees increased to $1.3 million for the twenty-six weeks ended July 1, 2006 from $0.6 million for the twenty-six weeks ended July 2, 2005, an increase of $0.7 million. This increase was primarily due to the addition of new franchisee agreements and new franchised stores opened in the

past year. Licensing revenue increase to $0.3 million for the twenty-six weeks ended July 1, 2006 from $0.1 million for the twenty-six weeks ended July 2, 2005.

Gross margin.Gross margin increased to $88.6 million for the twenty-six weeks ended July 1, 2006 from $77.8 million for the twenty-six weeks ended July 2, 2005, an increase of $10.8 million, or 13.9%. As a percentage of net retail sales, gross margin decreased to 46.5% for the twenty-six weeks ended July 1, 2006 from 48.7% for the twenty-six weeks ended July 2, 2005, a decrease of 2.2%. This decrease was anticipated and resulted primarily from higher occupancy costs as a percentage of net retail sales in the U.K. Higher occupancy costs in the U.S. and Canada as a percentage of net retail sales resulting from the decline in comparable store sales, and higher shipping and transportation costs, also contributed to the decline in gross margin as a percentage of net retail sales.

Selling, general and administrative.Selling, general and administrative expenses were $70.2 million for the twenty-six weeks ended July 1, 2006 as compared to $57.6 million for the twenty-six weeks ended July 2, 2005, an increase of $12.7 million, or 22.1%. As a percentage of total revenues, selling, general and administrative expenses increased to 36.5% for the twenty-six weeks ended July 1, 2006 as compared to 35.8% for the twenty-six weeks ended July 2, 2005, an increase of 0.7%. The dollar increase was primarily due to having 70 more stores in operation at July 1, 2006 as compared to July 2, 2005, higher central office expenses required to support a larger store base, higher selling, general and administrative costs associated with the U.K. Acquisition, as well as, higher stock-based compensation expense. The increase in selling, general and administrative expenses as a percent of revenue was primarily due to the increased stock-based compensation expense which was partially offset by lower performance-based bonus expense and the leveraging of store payroll, over a larger revenue base.

Store preopening.Store preopening expense was $2.2 million for the twenty-six weeks ended July 1, 2006 as compared to $3.1 million for the twenty-six weeks ended July 2, 2005. Approximately $1.5 million of this decrease was due to preopening costs in the prior year related to our flagship store in New York City, which opened in July 2005. We expect to open ten stores during the fiscal 2006 third quarter (13-weeks ended September 30, 2006) as compared to seven stores opened during the same period in fiscal 2005. Preopening expenses include expenses for stores that opened in the current period as well as some expenses incurred for stores that will be opened in future periods.

Interest expense (income), net.Interest income, net of interest expense, was $1.2 million for the twenty-six weeks ended July 1, 2006 as compared to $0.7 million for the twenty-six weeks ended July 2, 2005. This increase was due to higher cash balances and higher interest rates in the ~~first quarter of~~ fiscal 2006 period as compared to the ~~first quarter of~~ fiscal ~~2005.~~2005 period.

Provision for income taxes.The provision for income taxes was ~~$5.2~~$7.6 million for the ~~thirteen~~twenty-six weeks ended ~~April~~July 1, 2006 as compared to ~~$5.0~~$7.2 million for the ~~thirteen~~twenty-six weeks ended ~~April~~July 2, 2005. The effective tax rate was 40.2% for the twenty-six weeks ended July 1, 2006 and 38.5% for the ~~thirteen~~twenty-six weeks ended ~~April 1,~~July 2, 2005. The higher effective tax rate in the fiscal 2006 period resulted from the impact of the U.K. Acquisition and ~~38.7%~~the inability to record a benefit for net operating losses anticipated to be generated by the ~~thirteen weeks ended April 2,~~U.K. operations in the current year. We expect the effective tax rate for full year 2006 to approximate 40% compared to 38.5% in fiscal year 2005.

Non-GAAP Financial Measures

We use the term “store contribution” in this quarterly report on Form 10-Q. Store contribution consists of income before income tax expense, interest, store depreciation and amortization, store preopening expense and general and administrative expense, excluding franchise fees, income from licensing activities and contribution from our webstore and seasonal and event-based locations. This term, as we define it, may not be comparable to similarly titled measures used by other companies and is not a

measure of performance presented in accordance with U.S. generally accepted accounting principles (GAAP).

We use store contribution as a measure of our stores’ operating performance. Store contribution should not be considered a substitute for net income, net income per store, cash flows provided by operating activities, cash flows provided by operating activities per store, or other income or cash flow data prepared in accordance with GAAP. We believe store contribution is useful to investors in evaluating our operating performance because it, along with the number of stores in operation, directly impacts our profitability.

The following table sets forth a reconciliation of store contribution to net income for our stores located in the U.S. and Canada (North America), stores located in the U.K. and Ireland (United Kingdom), and for our consolidated store base, stores in the U.S., Canada, U.K. and Ireland (total) (in thousands):


							Twenty-six weeks ended									Twenty-six weeks ended
							July 1, 2006									July 2, 2005
	Thirteen weeks ended						North			United						North			United
	April 1, 2006			April 2, 2005			America			Kingdom			Total			America			Kingdom			Total
Net income	$	8,346		$	7,968		$	14,045		$	(2,700	)	$	11,345		$	11,463		$	—		$	11,463
Income tax expense		5,225			5,029			7,627			—			7,627			7,176			—			7,176
Interest expense (income)		(866	)		(368	)		(1,165	)		—			(1,165	)		(746	)		—			(746	)
Store depreciation and amortization (1)		3,912			3,214			7,790			408			8,198			6,579			—			6,579
Store preopening expense		615			1,188			2,020			177			2,197			3,117			—			3,117
General and administrative expense (2)		9,852			7,871			19,178			845			20,023			15,856			—			15,856
Franchising and licensing contribution (3)		(457	)		(21	)		(963	)		—			(963	)		(4	)		—			(4	)
Non-store activity contribution (4)		(403	)		(662	)		(1,108	)		—			(1,108	)		(969	)		—			(969	)

Store contribution	$	26,223		$	24,219		$	47,424		$	(1,270	)	$	46,154		$	42,472		$	—		$	42,472


Total revenues	$	98,631		$	86,058		$	184,788		$	7,500		$	192,288		$	159,758		$	—		$	159,758
Franchising and licensing revenues		(902	)		(336	)		(1,660	)		—			(1,660	)		(756	)		—			(756	)
Revenues from non-store activities (4)		(3,001	)		(3,081	)		(6,502	)		—			6,502	)		(5,526	)		—			(5,526	)

Store location net retail sales	$	94,729		$	82,642		$	176,626		$	7,500		$	184,126		$	153,476		$	—		$	153,476

Store contribution as a percentage of store location net retail sales		27.7	%		29.3	%		26.8	%		-16.9	%		25.1	%		27.7	%		0.0	%		27.7	%

Total net income as a percentage of total revenues		8.5	%		9.3	%		7.6	%		-36.0	%		5.9	%		7.2	%		0.0	%		7.2	%


(1)		Store depreciation and amortization includes depreciation and amortization of all capitalized assets in store locations, including leasehold improvements, furniture and fixtures, and computer hardware and software.

(2)		General and administrative expenses consist of non-store, central office general and administrative functions such as management payroll and related benefits, travel, information systems, accounting, purchasing and legal costs as well as the depreciation and amortization of central office leasehold improvements, furniture and fixtures, computer hardware and software and intellectual property. General and administrative expenses also include a central office marketing department, primarily payroll and related benefits expense, but exclude advertising expenses, such as direct mail catalogs and television advertising, which are included in store contribution.


(3)		Franchising and licensing contribution includes franchising and licensing revenues and all expenses attributable to the international franchising and licensing and entertainment segments other than depreciation, amortization and interest expense/income. Depreciation and amortization related to


		franchising and licensing is included in the general and administrative expense caption. Interest expense/income related to franchising and licensing is included in the interest expense (income) caption.

(4)		Non-store activities include our webstore, seasonal and event-based locations, and our New York City flagship store café.

Seasonality and Quarterly Results

Our operating results for one period may not be indicative of results for other periods, and may fluctuate significantly because of a variety of factors, including: (1) the timing of our new store openings and related expenses; (2) the profitability of our stores; (3) increases or decreases in our comparable store sales; (4) the timing and frequency of our marketing initiatives; (5) changes in general economic conditions and consumer spending patterns; (6) changes in consumer preferences; (7) the effectiveness of our inventory management; (8) the actions of our competitors or mall anchors and co-tenants; (9) seasonal shopping patterns and holiday and vacation schedules; (10) the timing and frequency of national media appearances and other public relations events; and (11) weather conditions.

The timing of new store openings may result in fluctuations in quarterly results as a result of the revenues and expenses associated with each new store location. We typically incur most preopening costs for a new store in the three months immediately preceding the store’s opening. We expect our growth, operating results and profitability to depend in some degree on our ability to increase our number of stores.

Historically, for North American stores (U.S. and Canada) open more than twelve months, seasonality has not been a significant factor in our results of operations, although we cannot assure you that this will continue to be the case. U.K.-based store sales have historically been weighted more heavily in the fourth quarter as compared to North American stores. In addition, for accounting purposes, the quarters of each fiscal year consist of 13 weeks, although we will have a 14-week quarter approximately once every six years.

Liquidity and Capital Resources

Our cash requirements are primarily for the opening of new stores, information systems and working capital. Historically, we have met these requirements through capital generated from the sale and issuance of our securities to private investors and through our initial public offering, cash flow provided by operations and our revolving line of credit.

Operating Activities.Cash used in operating activities was ~~$1.8~~$11.2 million for the ~~thirteen~~twenty-six weeks ended ~~April~~July 1, 2006 as compared with cash ~~provided by~~used in operating activities of ~~$5.2~~$7.1 million for the ~~thirteen~~twenty-six weeks ended ~~April~~July 2, 2005, or ~~a decrease~~an increase of ~~$7.0~~$4.1 million. This ~~decrease~~increase over the year ago period was primarily due to the change in deferred taxes of $3.2 million. In addition, changes in assets and liabilities, excluding cash, which used cash of ~~$14.1~~$32.0 million for the ~~thirteen~~twenty-six weeks ended ~~April~~July 1, 2006 as compared to using cash of ~~$8.5~~$30.8 million for the ~~thirteen~~twenty-six weeks ended ~~April~~July 2, 2005, an increase in the use of cash of ~~$5.6~~$1.2 million. The variances in changes in assets and liabilities from the prior year were primarily due to ~~increases in inventory of $3.4 million in~~ the ~~thirteen weeks ended April 1, 2006 as compared to increases of $28,000 in~~U.K. Acquisition and the thirteen weeks ended April 2, 2005. The higher inventory increase in the current year was in anticipation of the Easter holiday which occurred in April 2006 as compared to March 2005. Increases in accounts receivable and prepaid expenses of $1.2 million in the thirteen weeks ended April 1, 2006 as compared to decreases in the same accounts of $0.6 million in the thirteen weeks ended April 2, 2005 also caused a $1.8 million decline in cash from operating activities in the current period.associated working capital changes. Also, the adoption of SFAS 123R led to the reclassification of the tax benefit from the exercise of stock options from operating activities to financing activities. This caused the impact of

this line item on cash flows from operating activities to decrease by ~~$2.5~~$2.7 million from the prior period. These ~~decreases in~~uses of cash ~~flows provided by operating activities~~ were partially offset by increases over the year ago period in ~~net income, adjusted for the impact of~~ depreciation and amortization of ~~$1.0~~$2.4 million.

Investing Activities.Cash used in investing activities was ~~$46.9~~$71.1 million for the ~~thirteen~~twenty-six weeks ended ~~April~~July 1, 2006 as compared to ~~$5.8~~$16.6 million for the ~~thirteen~~twenty-six weeks ended ~~April~~July 2, 2005. Cash used in investing activities ~~includes an escrow deposit of $36.9 million related to a business acquisition which was completed on April 2, 2006. The remaining cash used in investing activities~~ relates primarily to ~~costs associated with our new~~the U.K. Acquisition which used $38.3 million in cash. The

increase also relates to progress payments on construction of a company-owned distribution center, and ~~two new stores opened in the thirteen weeks ended April 1, 2006, along with progress payments~~ on stores scheduled to open throughout fiscal 2006. ~~There were three new stores opened in the thirteen weeks ended April 2, 2005.~~

Financing Activities.Cash provided by financing activities was ~~$1.1~~$1.8 million in the ~~thirteen~~twenty-six weeks ended ~~April~~July 1, 2006 which consisted primarily of proceeds from the exercise of employee stock options and the tax benefit from the exercise of stock options. Cash flows provided by financing activities of ~~$3.9~~$4.3 million for the thirteen weeks ended ~~April~~July 2, 2005 consisted primarily of proceeds from the exercise of employee stock options and the collection of a note receivable from one of our officers. No borrowings were made under our line of credit in either the ~~thirteen~~twenty-six weeks ended ~~April~~July 1, 2006 or the ~~thirteen~~twenty-six weeks ended ~~April~~July 2, 2005.

Capital Resources.As of ~~April~~July 1, 2006, we had a cash balance of ~~$43.4~~$10.6 million. We also have a ~~$15.0 million~~ line of credit, which we can use to finance capital expenditures and seasonal working capital needs throughout the year. The credit agreement is with U.S. Bank, National ~~Association.~~Association and was amended effective June 30, 2006 to include a seasonal overline from July 1 to December 31 each year during which the line availability increases from $15 million to $30 million. Borrowings under the credit agreement are not collateralized, but availability under the credit agreement can be limited by the vendor based on our level of accounts receivable, inventory, and property and equipment. The credit agreement expires on September 30, 2007 and contains various restrictions on indebtedness, liens, guarantees, redemptions, mergers, acquisitions or sale of assets, loans, transactions with affiliates, and investments. It also prohibits us from declaring dividends without the bank’s prior consent, unless such payment of dividends would not violate any terms of the loan agreement. Borrowings bear interest at the company’s option of prime ~~rate less 0.5%~~minus 1.0% or LIBOR plus 1.5%. Financial covenants include maintaining a minimum tangible net worth, maintaining a minimum fixed charge cover ratio (as defined in the credit agreement) and not exceeding a maximum funded debt to earnings before interest, depreciation and amortization ratio. As of ~~April~~July 1, 2006, we were in compliance with these covenants. There were no borrowings under our line of credit as of ~~April~~July 1, 2006. There was a standby letter of credit of approximately $1.1 million outstanding under the credit agreement as of ~~April~~July 1, 2006. Accordingly, there was approximately ~~$13.9~~$28.9 million available for borrowing under the line of credit as of ~~April~~July 1, 2006.

Most of our retail stores are located within shopping malls and all are operated under leases classified as operating leases. ~~These~~Our leases in North America typically have a ten-year term and contain provisions for base rent plus percentage rent based on defined sales levels. Many of the leases contain a provision whereby either we or the landlord may terminate the lease after a certain time, typically in the third to fourth year of the lease, if a certain minimum sales volume is not achieved. In addition, some of these leases contain various restrictions relating to change of control of our company. Our leases also subject us to risks relating to compliance with changing mall rules and the exercise of discretion by our landlords on various matters, including rights of termination in some cases.

Our leases in the U.K. typically have terms of 10-15 years and generally contain a provision whereby every fifth year the rental rate can be adjusted to reflect the current market rates. The leases typically provide the lessee with the first right for renewal at the end of the lease. We may also be required to make deposits and rent guarantees to secure new leases as we expand. Real estate taxes also change according to government time schedules to reflect current market rental rates for the locations we lease.

In fiscal 2006, we expect to spend a total of approximately $60 million on capital ~~expenditures,~~expenditures. Capital spending through the twenty-six weeks ended July 1, 2006 totaled $31.4 million, on track with our full year plans. Capital spending in fiscal 2006 is primarily for the construction of our new distribution center, the opening of ~~33-35~~approximately 34 new stores ~~(30~~(31 in North America and three ~~to five~~ in the United Kingdom), the re-branding of 25 stores in the United Kingdom, and the continued installation and upgrades of central office information technology systems. In fiscal 2005, the average investment per new store, which includes leasehold improvements, fixtures, equipment and inventory, was approximately ~~$0.6~~

$0.6 million. We anticipate the investment per store in fiscal 2006 will be approximately the same as fiscal 2005.

We believe that cash generated from operations and borrowings under our credit agreement will be sufficient to fund our working capital and other cash flow requirements for at least the next 18 months. However, there is a possibility that we may need to seek additional financing to cover seasonal working capital needs, and it is possible that the needed financing will not be available at acceptable rates. Our credit agreement expires on September 30, 2007.

Off-Balance Sheet Arrangements

We do not have any arrangements classified as off-balance sheet arrangements.

Inflation

We do not believe that inflation has had a material adverse impact on our business or operating results during the periods presented. We cannot provide assurance, however, that our business will not be affected by inflation in the future.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the financial statements.

We believe our selection and application of accounting policies, and the estimates inherently required therein, is reasonable. These accounting policies and estimates are periodically reevaluated, and adjustments are made when facts and circumstances dictate a change. Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.

Our accounting policies and use of estimates are discussed in and should be read in conjunction with the annual consolidated financial statements and notes included in our annual report on Form 10-K, as filed with the Securities and Exchange Commission on March 16, 2006, which includes audited consolidated financial statements for our 2005, 2004 and 2003 fiscal years. We have identified certain critical accounting policies which are described below.

Inventory

Inventory is stated at the lower of cost or market, with cost determined on an average cost basis. Historically, we have not conducted sales whereby we offer significant discounts or markdowns, nor have we experienced significant occurrences of obsolete or slow moving inventory. However, future changes in circumstances, such as changes in guest merchandise preference, could cause reclassification of inventory as obsolete or slow-moving inventory. The effect of this reclassification would be the recording of a reduction in the value of inventory to realizable values.

Throughout the year we record an estimated cost of shortage based on past historical results. Periodic physical inventories are taken and any difference between the actual physical count of merchandise and the recorded amount in our records are adjusted and recorded as shortage. Historically, the timing of the physical inventory has been near the end of the fiscal year so that no material amount of shortage was required to be estimated on activity between the date of the physical count and year-end. However, future

physical counts of merchandise may not be at times at or near the end of a fiscal quarter or fiscal year-end, and our estimate of shortage for the intervening period may be material based on the amount of time between the date of the physical inventory and the date of the fiscal quarter or year-end.

Long-Lived Assets

If facts and circumstances indicate that a long-lived asset, including property and equipment, may be impaired, the carrying value is reviewed. If this review indicates that the carrying value of the asset will not be recovered as determined based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of the asset is reduced to its estimated fair value.

Revenue Recognition

Revenues from retail sales, net of discounts and excluding sales tax, are recognized at the time of sale. Guest returns have not been significant. Revenues from gift cards are recognized at the time of redemption. Unredeemed gift cards are included in current liabilities on the consolidated balance sheets.

We have a frequent shopper program whereby guests who purchase $100 of merchandise receive $10 off a future purchase. An estimate of the obligation related to the program, based on historical redemption rates, is recorded as deferred revenue and a reduction of net retail sales at the time of purchase. The deferred revenue obligation is reduced, and a corresponding amount is recognized in net retail sales, in the amount of and at the time of redemption of the $10 discount.

We evaluate the ultimate redemption rate under this program through the use of frequent shopper cards which have an expiration date after which the frequent purchase discount would not have to be honored. The initial card had no expiration date but has not been provided to our guests since May 2002. Beginning in June 2002, and continuing each summer thereafter, a new series of cards was issued that had an expiration date of December 31 of the year following the year in which that series of cards was first issued. We track redemptions of these various cards and use actual redemption rates by card series and historical results to estimate how much revenue to defer. We review these redemption rates and assess the adequacy of the deferred revenue account at the end of each fiscal quarter. Due to the estimates involved in these assessments, adjustments to the deferral rate are generally made no more often than bi-annually in order to allow time for more definite trends to emerge. Based on this assessment, beginning with the second quarter of fiscal 2005, the amount of revenue being deferred was reduced by 0.1% on a prospective basis from its then current level due to changes in the Company’s redemption experience. Also during the second quarter of fiscal 2005, the balance in the deferred revenue account was adjusted downward by $78,000 with a corresponding increase to net retail sales. There have been no changes to the level of revenue being deferred since the second quarter of fiscal 2005. A 0.1% adjustment of the ultimate redemption rate at the end of fiscal 2005 for the current cards expiring on December 31, 2005 and December 31, 2006 would have an approximate impact of $0.5 million on the deferred revenue balance and net retail sales.

Income Taxes

We provide for income taxes based on our estimate of federal, statutory, and state income tax liabilities. Our estimates include, but are not limited to, effective state and local income tax rates, allowable tax credits and estimates related to depreciation expense allowable for tax purposes. We usually file our income tax returns several months after our fiscal year-end. We file our tax returns with the advice and consultations of tax consultants. All tax returns are subject to audit by federal and state governments, usually years after the returns are filed, and could be subject to differing interpretation of the tax laws.

Deferred tax accounting requires that we evaluate net deferred tax assets to determine if these assets will more likely than not be realized in the foreseeable future. This test requires projection of our taxable income into future years to determine if there will be taxable income sufficient to realize the tax assets (future tax deductions). The preparation of the projections requires considerable judgment and is subject to change to reflect future events and changes in the tax laws.

Leases

We lease all of our store locations and our corporate headquarters. We account for our leases under the provisions of FASB Statement No. 13,Accounting for Leases(SFAS 13) and subsequent amendments, which require that our leases be evaluated and classified as operating or capital leases for financial reporting purposes. All of our store leases are classified as operating leases pursuant to the requirements of SFAS 13. We disburse cash for leasehold improvements and furniture fixtures and equipment to build out and equip our leased premises. We may also expend cash for permanent improvements that we make to leased premises that generally are reimbursed to us by our landlords as construction allowances (also known as tenant improvement allowances) pursuant to agreed-upon terms in our leases. Landlord allowances can take the form of up-front cash, full or partial credits against minimum or percentage rents otherwise payable by us, or a combination thereof. Under the provisions of FASB Technical Bulletin No. 88-1, “Issues Relating to Accounting for Leases,” we account for these landlord allowances as lease incentives resulting in a deferred credit to be recognized over the term of the lease as a reduction of rent expense.

New Accounting Pronouncements

In March 2006, the Emerging Issues Task Force (“EITF”) issued EITF Issue 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).” A consensus was reached that entities may adopt a policy of presenting sales taxes in the income statement on either a gross or net basis. If taxes are significant, an entity should disclose its policy of presenting taxes and the amounts of taxes. The guidance is effective for periods beginning after December 15, 2006. We present company sales net of sales taxes. This issue will not impact the method for recording these sales taxes in our consolidated financial statements.

In July 2006, the FASB issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 is effective for fiscal years beginning after December 15, 2006. We are evaluating the impact the adoption of FIN 48 will have on our consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Our market risks relate primarily to changes in interest rates. We bear this risk in two specific ways. First, our revolving credit facility carries a variable interest rate that is tied to market indices and, therefore, our results of operations and our cash flows could have been impacted by changes in interest rates. We had no borrowings outstanding under our revolving credit facility during the ~~thirteen~~twenty-six weeks ended ~~April~~July 1, 2006. Accordingly, a 100 basis point change in interest rates would result in no material change to our recorded interest expense. The second component of interest rate risk involves the short term investment of excess cash in short term, investment grade interest-bearing securities. These investments are considered to be cash equivalents and are shown that way on our balance sheet. If there are changes in interest rates, those changes would affect the investment income we earn on these investments and, therefore, impact our cash flows and results of operations.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures:The Company’s management, with the participation of the Company’s Chief Executive Bear and Chief Financial Bear, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based on such evaluation, the Company’s Chief Executive Bear and Chief Financial Bear have concluded that, as of the end of such period, the Company’s disclosure controls and procedures provided reasonable assurance that the disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

Changes in Internal Control Over Financial Reporting:The Company’s management, with the participation of the Company’s Chief Executive Bear and Chief Financial Bear, also conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, there has been no such change during the period covered by this report.

It should be noted ~~the Company’s~~that while our management, including the ~~Chief~~chief Executive Bear and the Chief Financial Bear, believe the Company’s disclosure controls and procedures provide a reasonable level of assurance, they do not expect that the Company’s disclosure controls and procedures or internal controls will prevent all error and all fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further,

the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

On April 2, 2006, the Company acquired Amsbra Limited (Amsbra), our franchisee in the United Kingdom, and The Bear Factory Limited, a stuffed animal retailer in the United Kingdom (U.K. Acquisition). This significant business is a separate control environment. The evaluation of disclosure controls and procedures referred to in the paragraph above included the U.K. Acquisition. However, the Company will exclude this business from management’s report on internal controls over financial reporting, as permitted by SEC guidance, to be included in our Form 10-K for the year ended December 30, 2006.

2327

PART II — OTHER INFORMATION

Item 1A. Risk Factors.

There have been no material changes to our Risk Factors as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange Commission on March 16, 2006.

Item ~~2. Unregistered Sales~~4. Submission of ~~Equity Securities and Use~~Matters to a Vote of ~~Proceeds.~~Security Holders

At our annual meeting of stockholders held on May 11, 2006, the following matters were submitted to a vote of the stockholders:

Final Voting Results

Item No. 1

The ~~following table sets forth information with respect~~election of the Class II Directors identified below to ~~repurchases by us~~the Board of ~~our common stock during~~Directors of Build-A-Bear Workshop, Inc. to serve until 2009 or until their successors are elected and qualified. The final voting results were:

Election of Class II Directors For Withheld
William Reisler 19,032,909 194,336
Coleman Peterson 19,023,466 203,779

Item No. 2

For Against Abstain
Ratification of KPMG LLP 19,211,544 11,413 4,288

All matters voted on at the ~~fiscal quarter ended April 1, 2006:~~annual meeting were approved. In addition to the directors elected at the annual meeting, Barry Erdos, James Gould, Joan Ryan, Maxine Clark, Mary Lou Fiala and Louis Mucci continue to serve as directors. Messrs. Erdos and Gould and Ms. Ryan service as Class III directors, and their terms will expire at the 2007 annual meeting. Ms. Clark, Ms. Fiala and Mr. Mucci service as Class I directors and their terms will expire at the 2008 annual meeting.

Total Number of Maximum Number
Shares Purchased of Shares that May
as Part of Publicly Yet Be Purchased
Total Number of Average Price Announced Plans Under the Plans
Period(1) Shares Purchased Paid per Share or Programs or Programs
Month #1 (Jan. 1, 2006 — Jan. 28, 2006) — n/a n/a n/a
Month #2 (Jan. 29, 2006 — Feb. 25, 2006) — n/a n/a n/a
Month #3 (Feb. 26, 2006 — April 1, 2006)(2) 7,673 $ 27.54 n/a n/a

Total 7,673 $ 27.54 n/a n/a

Coleman Peterson was appointed to the Board of Directors effective November 10, 2005 and Joan Ryan was appointed to the Board of Directors effective February 28, 2005.

Mr. Ebsworth agreed to continue to serve the Company as Board Member Emeritus effective after the 2006 annual meeting.


~~(1)~~		~~Periods represent our fiscal months.~~

~~(2)~~		Represents a combination of (a) shares of our common stock delivered to us in satisfaction of the exercise price of employee stock options and (b) shares of our common stock delivered to us in satisfaction of the tax withholding obligation of holders of restricted shares which vested during the quarter. Our equity incentive plans provide that the value of shares delivered to us to pay the exercise price of options or withheld to cover tax obligations is calculated as the average of the high and low trading price of our common stock on the date the relevant transaction occurs.

Item 6. Exhibits.

The following is a list of exhibits filed as a part of the quarterly report on Form 10-Q:


Exhibit
No.		Description
3.1		Third Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q/A (File No. 001-32320)) filed with the Securities and Exchange Commission on December 13, 2004

3.2		Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.4 to the Company’s Registration Statement on Form S-1 (File No. 333-118142)) filed with the Securities and Exchange Commission on October 12, 2004

31.1		Rule 13a-14(a)/15d-14(a) certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by the Chief Executive Bear)

31.2		Rule 13a-14(a)/15d-14(a) certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by the Chief Financial Bear)

32.1		Section 1350 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by the Chief Executive Bear)

32.2		Section 1350 Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by the Chief Financial Bear)

2429

BUILD-A-BEAR WORKSHOP, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Date: ~~May~~August 10, 2006
	BUILD-A-BEAR WORKSHOP, INC. (Registrant)
	By:	/s/ Maxine Clark
		~~BUILD-A-BEAR WORKSHOP, INC.~~	Maxine Clark
		~~(Registrant)~~

		~~By:~~	~~/s/ Maxine Clark~~

			~~Maxine Clark~~
			Chairman of the Board and Chief Executive Bear


		By:	/s/ Tina Klocke
				Tina Klocke
			~~Tina Klocke~~
			Chief Financial Bear, Treasurer and Secretary

2530


Current assets	$	7,856
Property and equipment		6,351
Goodwill		28,090
Intangibles		1,824

Total assets acquired		44,121

Current liabilities assumed		(7,228	)
Loan previously advanced		4,517


Total purchase price	$	41,410


U.K. Acquisition	$	28,090
Acquisition costs		1,005
Severance costs		729

		29,824

Effect of foreign currency translation		1,274


Goodwill, as of July 1, 2006	$	31,098


	United States		Canada		Other		Total
Thirteen weeks ended April 1, 2006
Net sales to external customers	$	93,144	$	4,797	$	690	$	98,631
Property and equipment, net		91,849		3,323		22		95,194
Thirteen weeks ended April 2, 2005
Net sales to external customers		83,253		2,500		306		86,059
Property and equipment, net		75,030		2,291		—		77,321


	North		United Kingdom
	America		& Ireland		Other		Total
Thirteen weeks ended July 1, 2006
Net sales to external customers	$	85,521	$	7,500	$	636	$	93,657
Property and equipment, net		108,768		8,716		20		117,504
Thirteen weeks ended July 2, 2005
Net sales to external customers		73,365		53		281		73,699
Property and equipment, net		83,730		—		—		83,730

Twenty-six weeks ended July 1, 2006
Net sales to external customers	$	183,461	$	7,500	$	1,327	$	192,288
Property and equipment, net		108,768		8,716		20		117,504
Twenty-six weeks ended July 2, 2005
Net sales to external customers		159,118		127		513		159,758
Property and equipment, net		83,730		—		—		83,730


Election of Class II Directors	For		Withheld
William Reisler		19,032,909		194,336
Coleman Peterson		19,023,466		203,779


	For		Against		Abstain
Ratification of KPMG LLP		19,211,544		11,413		4,288