UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 27, 2008April 4, 2009

OR

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)

(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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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

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

As of October 31, 2008,May 8, 2009, there were 19,354,39119,899,288 issued and outstanding shares of the registrant’s common stock.

BUILD-A-BEAR WORKSHOP, INC.

INDEX TO FORM 10-Q

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)

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)

See accompanying notes to condensed consolidated financial statements.

BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

See accompanying notes to condensed consolidated financial statements.

Notes to Condensed Consolidated Financial Statements

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 (collectively, the “Company”) pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet of the Company as of December 29, 2007January 3, 2009 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 29, 2007January 3, 2009 included in the Company’s annual report on Form 10-K filed with the SEC on March 13, 2008.

Certain reclassifications were made to prior years’ financial statements to be consistent with the current presentation.19, 2009.

2. Goodwill

Goodwill is accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations” and is reported as a component of the Company’s retail segment. The following table summarizes the changes in goodwill for the thirteen weeks ended April 4, 2009 (in thousands):

Goodwill is not subject to amortization and is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. This testing requires comparison of carrying values to fair values, and when appropriate, the carrying value of impaired assets is reduced to fair value. Goodwill will be tested for impairment no later than January 2, 2010.

3. Stock-based Compensation

The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards (SFAS)SFAS 123R,Share-Based Payment, using the modified prospective method. 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. In addition, theThe Company uses the straight-line expense attribution method for all stock-based compensation awards with graded vesting. On March 20, 2008, the Company entered into long-term incentive plan agreements with certain key executives that provide restricted shares granted under the agreements will be forfeited if certain financial performance targets for fiscal year 2008 are not met. Upon achievement of the performance goals, restricted shares remain outstanding but are still subject to restriction for the remainder of the vesting period. Compensation expense is recognized over the performance period plus the vesting period. The awards are treated as a liability award during the performance period and as an equity award once the performance objectives have been obtained. As of September 27, 2008, these awards were not expected to vest; accordingly, no compensation expense related to these awards was recognized in the thirty-nine weeks ended September 27, 2008 and no shares related to these awards are included in the dilutive shares as of September 27, 2008.

For the thirteen and thirty-nine weeks ended September 27, 2008,April 4, 2009, selling, general and administrative expense includes $0.9 million ($0.50. 6 million after tax) and $2.7 million ($1.9 million after tax), respectively, of stock-based compensation expense. For the thirteen and thirty-nine weeks ended SeptemberMarch 29, 2007,2008, selling, general and administrative expenses includes $0.8$0.9 million ($0.50.6 million after tax) and $2.3 million ($1.4 million after tax), respectively, of stock-based compensation expense.

As of September 27, 2008,April 4, 2009, there was $7.6$9.4 million of total unrecognized compensation expense related to nonvested restricted stock and option awards which is expected to be recognized over a weighted-average period of 1.71.9 years.

3.4. Stock Incentive Plans

In 2000, the Company adopted the Build-A-Bear Workshop, Inc. 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 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 boardBoard of directorsDirectors (the Committee). The vesting provision of individual awards is at the discretion of the Committee and generally ranges from one to four years.

On March 17, 2009, the Board of Directors adopted, subject to stockholder approval at the Company’s annual meeting of stockholders on May 14, 2009, certain amendments to the Amended and Restated 2004 Stock Incentive Plan (the Amended Incentive Plan). If adopted by our stockholders, the Amended Incentive Plan amendments would, among other things: (i) provide that the number of shares authorized for issuance under the Amended Incentive Plan as of January 3, 2009 would be 3,230,000, subject to certain adjustments; (ii) expressly prohibit the use of shares withheld to satisfy tax withholding obligations for reissuance under the Amended Incentive Plan; (iii) provide a formula for the share reserve ratio of awards under the Amended Incentive Plan, including an increased ratio for certain awards; (iv) expressly prohibit the repricing of awards under the Amended Incentive Plan without the approval of stockholders; (v) revise a portion of the definition of “change in control” to state that a change in control occurs upon the occurrence of a reorganization, merger or consolidation rather than stockholder approval of such transactions; (vi) expressly state that the purchase price of all options shall be fair market value on the date of grant; (vii) limit the term of a stock appreciation right to 10 years; and (viii) provide that the Committee will administer and interpret the Amended Incentive Plan in a manner consistent with the intent to satisfy the requirements of Section 409A of the Internal Revenue Code to avoid any adverse tax results thereunder to a holder of an award.

(a) Stock Options

The following table is a summary of the balances and activity for the Plans related to stock options for the thirty-ninethirteen weeks ended September 27, 2008:April 4, 2009:

No options were exercised in the thirty-ninethirteen weeks ended September 27,April 4, 2009 or March 29, 2008. The total intrinsic value of options exercised in the thirty-nine weeks ended September 29, 2007 was approximately $1.4 million. The Company generally issues new shares to satisfy option exercises.

The expense recorded related to options during the thirteen weeks ended April 4, 2009 was determined using the Black-Scholes option pricing model and the provisions of Staff Accounting Bulletin (SAB) 107 and 110, which allow the use of a simplified method to estimate the expected term of “plain vanilla” options. The assumptions used in the option pricing model for the thirteen weeks ended April 4, 2009 were: (a) dividend yield of 0%; (b) volatility of 65%; (c) risk-free interest rates ranging from 2.3% to 2.4%; and (d) an expected life of 6.25 years.

(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 thirty-ninethirteen weeks ended September 27, 2008:April 4, 2009:

The total fair value of shares vested during the thirty-ninethirteen weeks ended September 27,April 4, 2009 and March 29, 2008 and September 29, 2007 was $1.0$0.9 million and $1.6$0.9 million, respectively. The above grants do not include 459,877 shares of restricted stock approved by the Committee on March 17, 2009, subject to shareholder approval of the Amended Incentive Plan.

(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, or calendar quarter. Up to 1,000,000 shares of the Company’s common stock are available for issuance under the ASPP.The ASPP was terminated, effective December 31, 2008. The employees of the Company purchased 10,89212,566 shares at $6.34$7.68 per share through the ASPP during the 2008 thirdfirst calendar quarter, which ended September 30,March 31, 2008. The purchase occurred in the Company’s fiscal 2008 fourthsecond quarter. The expense recorded related to the ASPP during the thirteen weeks ended September 27, 2008 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 weeks ended September 27, 2008 were: (a) dividend yield of 0%; (b) volatility of 45%; (c) risk-free interest rate of 0.87%; and (d) an expected life of 0.25 years.

4.5. 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):

In calculating diluted loss per share for the thirteen and thirty-nine weeks ended September 27, 2008, options to purchase 368,677 shares of common stock were outstanding as of the end of the period, but were not included in the computation of diluted loss per share due to their anti-dilutive effect. An additional 691,103 shares of restricted common stock were outstanding at the end of the period, but excluded from the calculation of diluted loss per share for the thirteen and thirty-nine weeks ended September 27, 2008 due to their anti-dilutive effect under the provisions of SFAS No. 128,Earnings per Share (SFAS No. 128).

In calculating diluted earnings per share for the thirteen and thirty-nine weeks ended September 29, 2007,April 4, 2009, options to purchase 141,096819,537 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 333,0681,031,236 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 undereffect.

In calculating diluted earnings per share for the provisionsthirteen weeks ended March 29, 2008, options to purchase 128,116 shares of SFAS No. 128.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 659,409 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.

5.6. Comprehensive Income

Comprehensive loss for the thirteen weeks ended April 4, 2009 was $0.3 million; comprehensive income for the thirteen weeks ended March 29, 2008 was $5.7 million. The difference between comprehensive income and net income resulted from foreign currency translation adjustments on the balance sheets of subsidiaries whose functional currency is not the US Dollar.

7. Property and Equipment

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

8. Income Taxes

The Company accounts for uncertainty in income taxes in accordance with Financial Standards Accounting Standards Board Interpretation No. 48Accounting for Uncertainty in Income Taxes—AnTaxes an interpretation of FASB Statement No. 109 (FIN 48). As of September 27, 2008April 4, 2009 and December 29, 2007, the Company hadJanuary 3, 2009, there were approximately $1.0 million, and $1.2 million, respectively, of unrecognized tax benefits. InDuring the next twelve months, Company management does not expect any significant changes.it is reasonably possible to reduce unrecognized tax benefits by $0.4 million either because the tax positions are sustained on audit or expiration of the statute of limitations.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of September 27, 2008April 4, 2009 and December 29, 2007,January 3, 2009, there was approximately $0.2 million of accrued interest related to uncertain tax positions.

The Internal Revenue Service’s audit of the Company’s fiscal 2005 federal tax return has been completed. No adjustments to taxable income were required.

6. Comprehensive Income (Loss)

Comprehensive income (loss) for the thirteen weeks ended September 27, 2008 and September 29, 2007 was $(7.7) million and $4.1 million, respectively, and for the thirty-nine week period ended September 27, 2008 and September 29, 2007 was $(5.4) million and $15.3 million, respectively. The difference between comprehensive income (loss) and net income (loss) resulted from foreign currency translation adjustments.

7.9. Segment Information

The Company’s operations are conducted through three reportableoperating segments consisting of retail, international franchising, and licensing and entertainment. The retail segment includes the operating activities of company-owned stores in the United States, Canada, Puerto Rico, the United Kingdom, Ireland, France and other retail delivery operations, including the Company’s webstoresweb store and non-traditional store locations such as baseball ballparks. The international franchising segment includes the licensing activities of the Company’s franchise agreements with store locations in Europe, (outsideoutside of France),France, Asia, Africa,Australia and Australia.Africa. 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. The operating segments have discrete sources of revenue, different capital structures and different cost structures. These operating segments represent the basis on which the Company’s chief operating decision-makerdecision maker regularly evaluates the business in assessing performance, determining the allocation of resources and the pursuit of future growth opportunities. TheAccordingly, the Company has determined that each of its operating segments have discrete sources of revenue, different capital structures and different cost structures.represent one reportable segment. The reportingreportable segments follow the same accounting policies used for the Company’s consolidated financialfinancials statements.

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

		Retail				International Franchising			Licensing & Entertainment			Total
Thirteen weeks ended April 4, 2009
Net sales to external customers		$	96,316			$	597		$	429		$	97,342
Income (loss) before income taxes			(1,692	)			244			342			(1,106	)
Capital expenditures, net			2,089				61			—			2,150
Depreciation and amortization			6,925				114			—			7,039
Thirteen weeks ended March 29, 2008
Net sales to external customers		$	121,854			$	1,249		$	704		$	123,807
Income before income taxes			8,850				778			520			10,148
Capital expenditures, net			5,594				118			—			5,712
Depreciation and amortization			6,786				214			2			7,002
Total Assets as of:
April 4, 2009		$	263,305			$	2,804		$	2,936		$	269,045
March 29, 2008		$	308,797			$	2,512		$	2,192		$	313,501

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 allocates revenues to geographic areas based on the location of the customer or franchisee. The following schedule is a summary of the Company’s sales to external customers and long-lived assets by geographic area (in thousands):

8.10. Investment in Affiliate

The Company holds a minority interest in Ridemakerz, LLC, which is accounted for under the equity method. Ridemakerz is an early-stage company that has developed an interactive retail concept that allows children and families to build and customize their own personalized cars. In 2006, the Company invested $0.6 million, which represented an ownership interest of approximately 10%. The Company invested an additional $2.4 million in fiscal 2007 and $2.5 million in the first nine months of fiscal 2008.2007. The Company has also entered into a series of agreements whereby the

Company has agreed to perform advisory and operational support services for Ridemakerz in exchange for additional equity. For the thirteen and thirty-nine weeks ended September 27, 2008, theThe Company received $0.2 million and $0.7 million, respectively, in equity in exchange for support services provided. Forprovided in the thirteen and thirty-nine weeks ended SeptemberApril 4, 2009 and March 29, 2007, the Company received $0.3 million and $0.9 million, respectively, in equity in exchange for support services provided. In 2007, the2008. The Company also purchased a call option from a group of other Ridemakerz investors for $150,000 for 1.25 million Ridemakerz common units at an exercise price of $1.25 per unit. The call option was immediately exercisable and expires April 30, 2012. Simultaneously, the Company granted a put option to the same group of investors for 1.25 million common units at an exercise price of $0.50 per unit. The put option becamewas exercisable on April 30, 2008 and expires on April 30, 2012. As of September 27, 2008,April 4, 2009, the investment in Ridemakerz was approximately $7.5$7.9 million, which represented an ownership interest of approximately 21%25%. DueUnder current agreements, the Company is the sole member of an equity class that is allocated losses only following the allocation of losses to all other common and preferred equity holders to the structureextent of their capital contributions. Accordingly, the Company will not be allocated any losses until all of the Company’s investment in Ridemakerz, no income or loss allocations were recordedpriority equity members’ capital has been reduced to zero. As such, in the thirteen or thirty-nine weeks ended September 27,April 4, 2009 or March 29, 2008, or September 29, 2007.no share of losses had been allocated to the Company because the priority equity capital accounts had not been reduced to zero in those periods. Under the current agreements, Build-A-Bear Workshop, Inc. could own up to approximately 34%38% of fully diluted equity in Ridemakerz.

As of September 27, 2008April 4, 2009 and December 29, 2007,January 3, 2009, outstanding receivables from Ridemakerz were $1.0$0.6 million and $0.8$0.4 million, respectively.

9.11. Closure of friendsFriends 2B madeMade Concept

On September 16,In 2008, the Company announced plans to close its friendsFriends 2B madeMade concept, a line of make-your-own dolls and related products. The closure plan affects the Company’s nine friendsFriends 2B madeMade locations, all but one of which is inside or adjacent to a Build-A-Bear Workshop store, separate friendsFriends 2B madeMade fixtures in approximately 50 Build-A-Bear Workshop stores, and the concept’s website,www.friends2bmade.com. While the Company expects to complete the closures by the end of the third quarter of fiscal 2009, the specific timing of the closures is dependent on finalizing third-party agreements and is therefore subject to change. During the third quarter of fiscal 2008,thirteen weeks ended April 4, 2009, the Company recorded a pre-tax charge of $2.9$0.5 million or $0.09 per diluted share, related to the closures, which consisted primarily of asset impairmentlease termination charges and is included in “Store closing” expenses in the Condensed Consolidated Statements of Operations. This charge is a component of net income (loss)before income taxes in the retail segment. In addition to the charges already recorded, the Company expects to incur pre-tax charges of approximately $1.9$1.4 to $2.3$1.8 million during the fourth quarter of fiscal 2008 and through the third quarter of fiscal 2009. The majority of these charges are attributable to potential lease termination costs and other potential costs associated with the closure plan.

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 29, 2007,January 3, 2009, as filed with the SEC, and the following: general economic conditions may continue to deteriorate, which could lead to disproportionately reduced consumer demand for our products, which represent relatively discretionary spending; our consolidated financial results may be significantly affected by foreign currency exchange rates; customer traffic may continue to decrease in the shopping malls where we are located, on which we depend to attract guests to our stores; 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; our marketing and online initiatives may not be effective in generating sufficient levels of brand awareness and guest traffic; we may be unable to generate sufficient comparable store sales;sales growth; we may be unable to open new stores or may be unable to effectively manage our growth; losses incurred by our affiliate Ridemakerz LLC may adversely affect our financial condition and profitability; we may be unable to close our Friends 2B Made concept on terms we currently anticipate; we may be unable to effectively manage our international franchises or laws relating to those franchises may change; 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; 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 productproducts prices could adversely affectincrease our inventory transportation costs and adversely affect our profitability; we may be unable to repurchase shares at all or at the times or in the amounts we currently anticipate or the results of the share repurchase program may not be as beneficial as we currently anticipate; fluctuations in our quarterly results of operations could cause the price of our common stock to substantially decline; we may suffer negative publicity or be sued due to violations of labor laws or unethical practices by manufacturers of our merchandise; we may improperly obtain or be unable to protect information from our guests in violation of privacy or security laws or expectations; our products could become subject to recalls or product liability claims that could adversely impact our financial performance and harm our reputation among consumers; we may lose key personnel, be unable to hire qualified additional personnel, or experience turnover of our management team; we may be unable to realize the anticipated benefits from our company-owned distribution center or our third-party distribution center providers may perform poorly; we may be unable to realize some of the expected benefits of the acquisition of Amsbra and Bear Factory, and the inclusion of France as a Company-owned country; 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; we may be unable to realize the anticipated benefits from our company-owned distribution center or our third-party distribution center providers may perform poorly; fluctuations in our quarterly results of operations could cause the price of our common stock to substantially decline; 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; our market share could be adversely affected by a significant, or increased, number of competitors; we may suffer negative publicity or be sued due to violations of labor laws or unethical practices by manufacturers of our merchandise; our products could become subject to recalls or product liability claims that could adversely impact our financial performance and harm our reputation among consumers; we may improperly obtain or be unable to protect information from our guests in violation of privacy or security laws or expectations; we may fail to renew, register or otherwise protect our trademarks or other intellectual property; and we may have disputes with, or be sued by, third parties for infringement or misappropriation of their proprietary rights. 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. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We are the leading, and only international, 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 primarily 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 September 27, 2008,April 4, 2009, we operated 288292 stores in the United States, Canada, and Puerto Rico, 5354 stores in the United Kingdom, Ireland and France, and had 60 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 multiple websites,website, which simulates our interactive shopping experience, as well as non-traditional store locations in five Major League Baseball^® ballparks,parks, one location in a zoo and one location in a science center. Seasonal locations, such as ballparks and zoos, are excluded from our store count.

On September 16, 2008, we announced plans to close the friends 2B made concept, a line of make-your-own dolls and related products. We expect to complete the nine location closures by the end of the third quarter of fiscal 2009, however the specific timing of the closures is dependent on finalizing third-party agreements, and is therefore subject to change. In addition to closing the nine friends 2B made doll locations, we will remove friends 2B made products from separate display fixtures in approximately 50 Build-A-Bear Workshop stores and discontinue product sales at www.friends2bmade.com.

On August 11, 2008, we renewed our line of credit agreement with U.S. Bank, National Association. The amended agreement increases the seasonal overline on the line of credit to be in effect from July 1 to December 31 of each year from $30 million to $50 million and increases the available line of credit for the first half of each calendar year from $15 million to $40 million. In addition, the fixed charge coverage ratio covenant was reduced from 1.5:1 to 1.3:1 and the interest rate was reduced from, at our option, prime minus 1.0% or LIBOR plus 1.5% to prime minus 1.0% or LIBOR plus 1.3%. The amended agreement is now secured by our assets and a pledge of 65% of our ownership interest in certain of our foreign subsidiaries.

On April 2, 2006, wethe 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 former U.K. franchisee (collectively, the U.K. Acquisition).

The results of the U.K. Acquisition operations have been included in the Company’s consolidated financial statements since that date. In conjunction with those transactions, we obtained 40 retail locations in the United Kingdom and Ireland. Four of those locations closed during 2006. Of those four locations, two closed due to overlapping store locations in the Amsbra and Bear Factory portfolios, and the other two locations were concessions within department stores which was a format we chose not to continue. In 2007, the Company expanded its Company-owned store base to France, which was previously under a franchise agreement and had one store within a department store in operation that was subsequently closed. The Company currently operatesis now operating three Company-owned stores in France.

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

Selected financial data attributable to each segment for the thirteen and thirty-nine weeks ended September 27,April 4, 2009 and March 29, 2008 and September 29, 2007 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 15.8%13.6% for the thirty-ninethirteen weeks ended September 27,April 4, 2009 and 21.1% for the thirteen weeks ended March 29, 2008 and 20.9%consolidated net loss as a percentage of total revenues was 0.8% for the thirty-ninethirteen weeks ended September 29, 2007April 4, 2009 and consolidated net income as a percentage of total revenues was -0.1%5.2% for the thirty-ninethirteen weeks ended September 27, 2008 and 3.9% for the thirty-nine weeks ended SeptemberMarch 29, 2007.2008. See “— Non-GAAP Financial Measures” for a definition of store contribution and a reconciliation of store contribution to net income. The decrease in our store contribution over the prior year was primarily due to the decline in gross margin, resulting primarily from a lack of sales leverage on storefixed occupancy costs in the North American operations and higher costs associated with maintaining multiple websites, including Build-A-Bearville,the decline in merchandise margin resulting from the value pricing initiatives and the impact of foreign currency translation, partially offset by improved occupancy leverage in Europe, a reduction in fuel surcharges, and operating efficiencies in our new online virtual world site. We have historically 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 basisdistribution and through continued expense management focused on labor planning, monitoring of warehousing and distribution costs, store supplies, travel and other expenses.operations.

We use comparable store sales as one of the performance measures for our business. Comparable store sales percentage changes are based on net retail sales, excluding our webstore and seasonal and event-based locations. Stores are considered comparable beginning in their thirteenth full month of operation. In the fiscal 2008 first quarter our European operations met the criteria for inclusion in the comparable store sales calculation for the first time. As such, there is no historic comparable store sales data for the European operations. The percentage change in comparable store sales for the periods presented below is as follows:

We believe the decline in comparable store sales was attributedfor the periods presented is primarily attributable to the following factors:

The Company is addressing the decline in comparable store sales with the following key initiatives:

compared to less than 10% of our assortment last year. Furthermore, we have priced our holiday collectible product at $18, a price point below the holiday product offering last year. The holiday product is also enhanced with the added value of our first proprietary book, “Holly and Hal Moose: Our Uplifting Christmas Adventure”, that tells a story and builds character profiles for these animals.

Expansion and Growth Potential

Retail Stores:

The table below sets forth the number of Build-A-Bear Workshop Company-owned stores in the United States, Canada, Puerto Rico (collectively, “North America”), the United Kingdom, Ireland, and France (collectively, “Europe”) for the periods presented:

During fiscal 2008,2009, we anticipate opening 20one Build-A-Bear Workshop storesstore in North America and five new stores in Europe.America. We believe there is a market potential for at least 350 Build-A-Bear Workshop stores in North Americathe United States and Canada and approximately 70 to 75 stores in the United Kingdom and Ireland.

We also have store locations for our proprietary friends“Friends 2B madeMade” line of make-your-own dolls and related products. As of September 27, 2008,April 4, 2009, we operated one stand-alone friendsFriends 2B madeMade store and eight friendsseven Friends 2B madeMade stores adjacent to Build-A-Bear Workshop stores in the United States. Other than the one stand-alone store, these friendsFriends 2B madeMade stores are not included in our store count, but rather are considered expansions of existing Build-A-Bear Workshop stores. On September 16,In the fiscal 2008 third quarter, we announced plans to close the friendsFriends 2B madeMade concept. For additional information on the closure plan, refer to Note 9 – Closure of friends 2B made Concept to the Condensed Consolidated Financial Statements.

Non-Traditional Store Locations:

In fiscal 2004, we began offering merchandise in seasonal, event-based locations such as Major League Baseball^® ballparks. We expect to expand our future presence at select seasonal, event-based locations contingent on their availability. As of September 27, 2008,April 4, 2009, we had a total of five ballpark locations, one store within a zoo and one store within a science center. Seasonal locations, such as ballparks and zoos are excluded from our store count.

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:

As of September 27, 2008,April 4, 2009, we had master franchise agreements, which typically grant franchise rights for a particular country or countries, covering 20 countries. We anticipate signing additional master franchise agreements in the future. We expect our franchisees to open approximately5 to 10 stores in fiscal 2008,2009, net of closures. We believe there is a market potential for approximately 300 franchised stores outside of the United States, Canada, Puerto Rico, the United Kingdom, Ireland and France.

Results of Operations

The following table sets forth, for the periods indicated, selected statement of income 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 immaterial rounding:

BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Thirteen weeks ended September 27, 2008April 4, 2009 compared to thirteen weeks ended SeptemberMarch 29, 20072008

Total revenues.Net retail sales decreased to $105.8$96.3 million for the thirteen weeks ended September 27, 2008April 4, 2009 from $108.4$121.8 million for the thirteen weeks ended SeptemberMarch 29, 2007,2008, a decrease of $2.6$25.5 million, or 2.4%21%. Net retail sales for new stores contributed a $5.5This decline was primarily attributable to an $18.8 million increasedecline in net retail sales in North America and a $4.6 million increase in Europe. For the thirteen weeks ended September 27, 2008, consolidated comparable store sales, (North America and Europe) declined 11.6%. Comparable store sales

in North America declined $13.0a $5.7 million or 14.4%, while comparable store sales in Europe increased by $1.0 million or 8.2%. A decrease of $0.7 million of other items, including, but not limited to, thenegative impact of foreign currency translation and a decrease$6.2 million impact of the shift in non-store location sales, anthe weeks included in the fiscal 2009 first quarter as compared to the fiscal 2008 first quarter. These declines were partially offset by a $5.6 million increase in webstore sales and a decrease in deferred revenue also contributed to the changefrom new stores. Other changes in net retail sales.sales totaled $0.4 million and included decreased sales from non-store locations, partially offset by deferred revenue adjustment.

We believe the decline in comparable store sales was attributedfor the periods presented is primarily attributable to the following factors:

Revenue from franchise fees increaseddecreased to $1.0$0.6 million for the thirteen weeks ended September 27, 2008April 4, 2009 from $0.9$1.2 million for the thirteen weeks ended SeptemberMarch 29, 2007, an increase2008, a decrease of $0.1$0.6 million. This increasedecrease was primarily due to the addition of new franchise agreements and new franchised stores openeddecline in franchisee store sales reflecting the past year.global economic slowdown. Revenue from licensing totaled $0.5decreased to $0.4 million for the thirteen weeks ended September 27, 2008 andApril 4, 2009 from $0.7 million for the thirteen weeks ended SeptemberMarch 29, 2007.2008, a decrease of $0.3 million. This decrease was primarily related to a change in the mix of licensed products.

Gross margin.Gross margin decreased to $42.3$35.3 million for the thirteen weeks ended September 27, 2008April 4, 2009 from $47.0$53.1 million for the thirteen weeks ended SeptemberMarch 29, 2007,2008, a decrease of $4.7$17.8 million, or 11.0%33.5%. As a percentage of net retail sales, gross margin decreaseddeclined to 40.0%36.6% for the thirteen weeks ended September 27, 2008April 4, 2009 from 43.3%43.6% for the thirteen weeks ended SeptemberMarch 29, 2007,2008, a decrease of 330700 basis points as a percentage of net retail sales (“bps”). This decrease resultedThe decline in gross margin was primarily from reduced salesattributable to a lack of leverage on storefixed occupancy costs in the North AmericaAmerican operations and the decline in merchandise margin resulting from the value pricing initiatives and the impact of foreign currency translation, partially offset by improved salesoccupancy leverage on store occupancy costs in Europe, a reduction in fuel surcharges, and a slight improvementoperating efficiencies in consolidated merchandise margin. Consolidatedour distribution and warehousing costs as a percent of net retail sales increased as an increase in North America, driven by higher diesel fuel surcharges, was partially offset by improved cost trends in Europe.operations.

Selling, general and administrative.Selling, general and administrative expenses were $43.5$36.9 million for the thirteen weeks ended September 27, 2008April 4, 2009 as compared to $42.5$44.8 million for the thirteen weeks ended SeptemberMarch 29, 2007, an increase2008, a decrease of $1.0$7.9 million, or 2.2%.17.6 %. As a percentage of total revenues, selling, general and administrative expenses increased to 40.6%37.9% for the thirteen weeks ended September 27, 2008April 4, 2009 as compared to 38.8%36.2% for the thirteen weeks ended SeptemberMarch 29, 2007,2008, an increase of 180170 bps. The dollar increasedecrease was primarily due to having 32cost reduction efforts put into place to align our cost structure with the downturn we are experiencing in consumer spending even though we had 21 more stores in operation at September 27, 2008April 4, 2009 as compared to SeptemberMarch 29, 2007 as well as expenses associated with maintaining multiple websites, including the new social networking site, buildabearville.com^TM, launched in December 2007.2008. The increase in selling, general and administrative expenses as a percent of revenuesrevenue was primarily due to decreased sales leverage ondeleveraging of fixed components of overhead costs, specifically, central office expense, store payroll, as well as costs associated with buildabearville.com. Partially offsetting these increases were improved sales leverage on expenses in European operations as well as lower advertising expense.and depreciation.

Store preopening.StoreWe had no store preopening expense was $0.9for the thirteen weeks ended April 4, 2009 as compared to $0.6 million for the thirteen weeks ended September 27, 2008 as compared to $1.4 million for the thirteen weeks ended SeptemberMarch 29, 2007.2008. The decrease in store preopening for the period was the result of timing of store preopening activities. We expect to open 5no stores during the fiscal 2008 fourth2009 second quarter as compared to 11five stores opened during the same period in fiscal 2007.2008. Preopening expenses include expenses for stores that opened in the current period as well as some expenses incurred for stores that will openbe opened in future periods.

Store closing.Store closing expense was $2.9$0.5 million for the thirteen weeks ended September 27, 2008April 4, 2009 and consisted primarily of asset impairmentlease termination charges related to the closure of the friends 2B made concept.

Interest expense (income), net.Interest income, net of interest expense, was $0.1$24,000 and $0.5 million for the thirteen weeks ended September 27,April 4, 2009 and March 29, 2008, as compared to $0.4 million for the thirteen weeks ended September 29, 2007. Thisrespectively. The decrease was primarily due tothe result of lower cash balances and lower interest rates in the fiscal 2008 third quarter as compared to the fiscal 2007 third quarter.rates.

Provision for income taxes.The income tax benefit was $1.4$0.3 million for the thirteen weeks ended September 27, 2008April 4, 2009 as compared to the provision for income tax expensetaxes of $1.8$3.8 million for the thirteen weeks ended SeptemberMarch 29, 2007.2008. The effective tax rate was 40.2%25.4% for the thirteen weeks ended September 27, 2008April 4, 2009 compared to 37.8%37.0% for the thirteen weeks ended SeptemberMarch 29, 2007. We expect2008. The decrease in the effective tax rate for full year 2008 to be approximately 35% to 36% compared to 35.7% in fiscal year 2007.

Thirty-nine weeks ended September 27, 2008 compared to thirty-nine weeks ended September 29, 2007

Total revenues.Net retail sales decreased to $321.1 million for the thirty-nine weeks ended September 27, 2008 from $323.3 million for the thirty-nine weeks ended September 29, 2007, a decrease of $2.2 million, or 0.7%. Net retail sales for new stores

contributed a $26.3 million increase in net retail sales in North America and a $12.2 million increase in Europe. For the thirty-nine weeks ended September 27, 2008, consolidated comparable store sales (North America and Europe) declined 13.1%. Comparable store sales in North America declined $43.5 million or 15.8%, while comparable store sales in Europe increased by $2.8 million or 8.3%. Other items, including, but not limitedwas primarily attributable to the impact of foreign currency translation, a decrease in non-store location sales, a decrease in webstore sales and an increase in deferred revenue had a minimal net impact on net retail sales.

We believe the decline in comparable store sales was attributed primarily to the following factors:

Revenue from franchise fees increased to $3.0 million for the thirty-nine weeks ended September 27, 2008 from $2.3 million for the thirty-nine weeks ended September 29, 2007, 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. Revenue from licensing increased to $1.6 million for the thirty-nine weeks ended September 27, 2008 from $1.3 million for the thirty-nine weeks ended September 29, 2007, an increase of $0.3 million. This increase was primarily related to increased licensing activities.

Gross margin.Gross margin decreased to $129.5 million for the thirty-nine weeks ended September 27, 2008 from $142.2 million for the thirty-nine weeks ended September 29, 2007, a decrease of $12.7 million, or 8.9%. As a percentage of net retail sales, gross margin decreased to 40.3% for the thirty-nine weeks ended September 27, 2008 from 44.0% for the thirty-nine weeks ended September 29, 2007, a decrease of 370 bps. This decrease resulted primarily from a lack of sales leverage on store occupancy costs in North America partially offset by improved sales leverage on store occupancy costs in Europe.

Selling, general and administrative.Selling, general and administrative expenses were $130.5 million for the thirty-nine weeks ended September 27, 2008 as compared to $123.4 million for the thirty-nine weeks ended September 29, 2007, an increase of $7.1 million, or 5.8%. As a percentage of total revenues, selling, general and administrative expenses increased to 40.1% for the thirty-nine weeks ended September 27, 2008 as compared to 37.7% for the thirty-nine weeks ended September 29, 2007, an increase of 240 bps. The dollar increase was primarily due to having 32 more stores in operation at September 27, 2008 as compared to September 29, 2007 and the costs associated with maintaining multiple websites, including the new social networking site, buildabearville.com^TM, launched in December 2007. The increase in selling, general and administrative expenses as a percent of revenues was primarily due to a decrease in sales leverage on store payroll costs and costs associated with buildabearville.com. Partially offsetting this increase was improved sales leverage on expenses in European operations.

Store preopening.Store preopening expense was $2.0 million for the thirty-nine weeks ended September 27, 2008 as compared to $3.5 million for the thirty-nine weeks ended September 29, 2007. We expect to open 25 stores during fiscal 2008 as compared to 50 stores opened in fiscal 2007. Preopening expenses include expenses for stores that opened in the current period as well as expenses incurred for stores that will open in future periods.

Store closing.Store closing expense was $2.9 million for the thirty-nine weeks ended September 27, 2008 and consisted primarily of asset impairment charges related to the closure of the friends 2B made concept.

Interest expense (income), net.Interest income, net of interest expense, was $0.8 million for the thirty-nine weeks ended September 27, 2008 as compared to $1.3 million for the thirty-nine weeks ended September 29, 2007. This decrease was primarily due to lower interest rates in fiscal 2008 period as compared to fiscal 2007 period.

Provision for income taxes.The incomewhich no tax benefit was $0.2 million for the thirty-nine weeks ended September 27, 2008 as compared to income tax expense of $7.6 million for the thirty-nine weeks ended September 29, 2007. The effective tax rate was 27.8% for the thirty-nine weeks ended September 27, 2008 and 37.5% for the thirty-nine weeks ended September 29, 2007. We expect the effective tax rate for full year 2008 tomay be approximately 35% to 36% compared to 35.7% in fiscal year 2007.recognized.

Non-GAAP Financial Measures

We use the term “store contribution” in this quarterly report on Form 10-Q. Store contribution consists of income (loss) before income tax expense, (benefit), interest, store depreciation and amortization, store preopening expense, store closing 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 company-owned stores located in the United States, Canada and Puerto Rico (North America), stores located in the United Kingdom, Ireland and France (Europe) and for our consolidated store base:base (in thousands):

(4)

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.

(5)	Non-store activities include our webstores, and seasonal and event-based locations.locations as well as intercompany transfer pricing charges.

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) fluctuations in 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 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. European-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. The 2008 fiscal fourth quarter will havehad 14 weeks.

Liquidity and Capital Resources

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

Operating Activities.Cash used in operating activities was $1.8$10.9 million for the thirty-ninethirteen weeks ended September 27, 2008April 4, 2009 as compared to cash provided by operating activities of $0.3 million for the thirty-nine weeks ended September 29, 2007, or a decrease of $2.1 million. Generally, changes in cash from operating activities are driven by changes in net income or loss and changes in operating assets and liabilities. In 2008, the increase inwith cash used in operating activities as compared to 2007,of $9.6 million for the thirteen weeks ended March 29, 2008, or an increase of $1.3 million. This increase of cash used in operating activities over the year ago period was primarily due to a declinethe net loss of $0.8 million in the thirteen weeks ended April 4, 2009 as compared to net income driven by lower third quarter sales. In the 2008 period, the change in operating assets and liabilities was driven by decreases in accounts payable and accrued expenses, primarily attributable to the timing of cash payments and reduced taxes payable. In the 2007 period, the change in operating assets and liabilities was driven by the decrease in gift cards and customer deposit liability and an increase in prepaid rent due to new stores$6.4 million in the United Kingdom.thirteen weeks ended March 29, 2008 partially offset by overall reductions in inventory levels.

Investing Activities.Activities. Cash used in investing activities was $23.6$2.3 million for the thirty-ninethirteen weeks ended September 27, 2008April 4, 2009 as compared to $33.0$5.9 million for the thirty-ninethirteen weeks ended SeptemberMarch 29, 2007.2008. Cash used in investing activities during the thirty-ninethirteen weeks ended September 27,April 4, 2009 primarily relates to investments in buildabearville.com and the acquisition of trademarks and other intellectual property. Cash used in investing activities during the thirteen weeks ended March 29, 2008 and September 29, 2007 primarily relates to new store construction costs and additional investment in Ridemakerz.costs.

Financing Activities.Cash used inWe had no cash flows from financing activities was $13.4 million in the thirty-ninethirteen weeks ended September 27, 2008 which consisted primarily of cash spent for repurchases of the Company’s common stock.April 4, 2009. Cash flows used in financing activities of $3.5$8.3 million for the thirty-ninethirteen weeks ended SeptemberMarch 29, 20072008 consisted primarily of cash spent for the repurchase of the Company’s common stock, partially offset by proceeds from the exercise of stock options and employee stock purchases and the tax benefit from the exercise of stock options.stock. No borrowings were made under our line of credit in either the thirty-ninethirteen weeks ended September 27, 2008April 4, 2009 or the thirty-ninethirteen weeks ended SeptemberMarch 29, 2007.2008.

Capital Resources.As of September 27, 2008,April 4, 2009, we had a consolidated cash balance of $27.3 million held in both domestic and foreign financial institutions.$34 million. We also have a 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 and was amended oneffective August 11, 2008 to increase the availability for the first half of each calendarthe fiscal year from $15 million to $40 million and the availability for the seasonal overline from $30 million to $50 million. The seasonal overline is in effect from July 1 to December 31 each year. Borrowings under the credit agreement are secured by our assets and a pledge of 65% of our ownership interest in our foreign subsidiaries. The credit agreement expires on December 31, 2009 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 credit agreement. Borrowings bear interest at our option of prime minus 1.0% or LIBOR plus 1.3%. Financial covenants include maintaining a minimum tangible net worth, maintaining a minimum fixed charge coveragecover ratio (as defined in the credit agreement) and not exceeding a maximum funded debt to earnings before interest, depreciation and amortization ratio. As of September 27, 2008,April 4, 2009: (i) we were in compliance with these covenants. Therecovenants, (ii) there were no borrowings under our line of credit, as of September 27, 2008. There(iii) there was a standby letter of credit of approximately $1.1 million outstanding under the credit agreement as of September 27, 2008. Accordingly,and (iv) there was approximately $48.9$38.9 million available for borrowing under the line of credit as of September 27, 2008.credit.

Most of our retail stores are located within shopping malls and all are operated under leases classified as operating leases. 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 United KingdomU.K. and Ireland 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. Rents are charged quarterly and paid in advance.

Our French leases each have terms of 10 years. French leases for premier retail properties frequently have entry fees and/or key money payments required to be made in conjunction with signature of the leases. Such entry fees or key money payments may be recovered, in whole or in part, upon disposal of the leases. The leases typically provide the lessee with the first right for renewal at the end of the lease. Rent deposits consisting of three months rent are also required to be paid on execution of the leases. Rents are negotiated on a fixed basis, but are reviewed annually in relation to an inflation index and therefore also have a variable rent component. Rents are charged quarterly and paid in advance.

In fiscal 2008,2009, we expect to spend $25 to $30a total of $9 million on capital expenditures. Capital spending through the thirty-ninethirteen weeks ended September 27, 2008April 4, 2009 totaled $20.4$2.2 million, on track with our full year plans. Capital spending in fiscal 20082009 is primarily for the opening of 25 new stores (20 in North America and 5 in Europe), and the continued installation and upgrades of central office information technology systems.systems, the opening of one new store, relocation of one store and the closure of our Friends 2B Made concept. In fiscal 2007,2008, the average investment per new store in North America, which includes leasehold improvements, fixtures, equipment and inventory, was approximately $0.6$0.4 million.

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. Our credit agreement expires on December 31, 2009.

On March 10, 2008, we announced an expanded share repurchase program. UnderOn March 3, 2009, we announced an additional twelve month extension of this expanded share repurchase program, weprogram. We currently intendhave the ability to purchase up to $50 million of our common stock in the open market (including through 10b5-1 trading plans), through privately negotiated transactions, or through an accelerated repurchase transaction. The primary source of funding for the program is expected to be cash on hand. The timing and amount of share repurchases, if any, will depend on price, market conditions, applicable regulatory requirements, and other factors. The program authorizes the Company to repurchase shares over the next 12 months, does not require us to repurchase any specific number of shares, and may be modified, suspended or terminated at any time without prior notice. Shares repurchased under the program will be subsequently retired. As of September 27, 2008,May 8, 2009, approximately 1.71.9 million shares at an average price of $8.52$10.21 per share have been repurchased under this expanded program for an aggregate amount of $14.1$19.0 million.

Off-Balance Sheet Arrangements

The Company holdsWe hold a minority interest in Ridemakerz, LLC, which is accounted for under the equity method. The CompanyWe purchased a call option from a group of other Ridemakerz investors for $150,000 for 1.25 million Ridemakerz common units at an exercise price of $1.25 per unit. The call option was immediately exercisable and expires April 30, 2012. Simultaneously, the Companywe granted a put option to the same group of investors for 1.25 million common units at an exercise price of $0.50 per unit. The put option becamewas exercisable on April 30, 2008 and expires on April 30, 2012. As of September 27, 2008,April 4, 2009, the investment in Ridemakerz was approximately $7.5$7.9 million, which represented an ownership interest of approximately 21%25%. Under the current agreements, Build-A-Bear Workshop, Inc.we could own up to approximately 34%38% of fully diluted equity in Ridemakerz. See Note 810 – Investment in Affiliate to the Condensed Consolidated Financial Statements for additional information.

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 PoliciesEstimates

The preparation of financial statements in conformity with generally accepted accounting principlesU.S. GAAP 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, isare reasonable. These accounting policies and estimates, including those related to inventory, long-lived assets, goodwill and revenue recognition, are periodically reevaluated on an ongoing basis, 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 critical 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 13, 2008,19, 2009, which includes audited consolidated financial statements for our 2008, 2007 2006 and 20052006 fiscal years. WeThere have identified certainbeen no material changes to the 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 reductionand estimates disclosed 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.2008 Form 10-K.

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.

Goodwill and Other Intangible Assets

Intangible assets deemed to have indefinite lives and goodwill are not subject to amortization. All other intangible assets are amortized over their estimated useful lives. Goodwill and other intangible assets not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. This testing requires comparison of carrying values to fair values, and when appropriate, the carrying values of impaired assets is reduced to fair value. We reviewed our goodwill and other intangible assets as of December 29, 2007 and determined that no impairment existed.

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 certificates are recognized at the time of redemption. Unredeemed gift cards are included in current liabilities on the consolidated balance sheets.

We have an automated frequent shopper program in the United States, the Stuff Fur Stuff^® club, whereby guests enroll in the program and receive one point for every dollar or partial dollar spent and after reaching 100 points receive a $10 discount on a future purchase. This program replaced the former Buy Stuff^®Club. 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.