Fiscal Year 2005 10-K/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the fiscal year ended January 28, 2006

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT 0F 1934

For the transition period from _______________ to ___________________

Commission file number 1-7288

The Bombay Company, Inc.

(Exact name of registrant as specified in its charter)

A Delaware Corporation (State or other jurisdiction of incorporation or organization)	75-1475223 (I.R.S. Employer Identification Number)
550 Bailey Avenue Fort Worth, Texas (Address of principal executive offices)	76107 (Zip Code)
(Registrant's telephone number, including area code) (817) 347-8200
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Common Stock, Par Value, $1 Per Share	Name of Each Exchange on Which Registered New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark whether the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Exchange Act). Yes ¨ No x

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Act). Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

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

The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant based on the closing price of the stock on July 30, 2005 was approximately $177,673,480.

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.

Class		Number of shares outstanding at April 1, 2006
Common stock, $1 par value		36,435,796

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Definitive Proxy Statement for the 2006 Annual Meeting of Stockholders

are incorporated by reference in Part III.

EXPLANATORY NOTE

We are filing this Amendment No.1 on form 10-K/A to correct clerical errors in our Form 10-K filed on April 13, 2006 (the “Original Filing”).

Under Item 6, Selected Financial Data, the Net revenue increase (decrease) for the fiscal year ended January 31, 2004 previously reflected as (21)% has been corrected to 21%.

Under Item 15, Exhibits and Financial Statement Schedules, typographical errors have been corrected as follows: In the Consolidated Statements of Shareholders’ Equity, the amount of Deferred Compensation as of February 1, 2003 previously stated as $237 has been corrected to $(237). The amount of Net loss previously reflected in Retained Earnings for Fiscal 2004 as $12,641 has been corrected to $(12,641). The amount of Retained Earnings as of January 28, 2006, previously stated as $23,996, has been corrected to $23,669. The typographical error in the Fiscal 2005 captions which previously read Net lLoss has been corrected to Net loss. In the Consolidated Statements of Cash Flows, the amount of $9,624 reflected in Deferred taxes and other at January 28, 2006 has been corrected to $9,264.

Except for the matters described above, this amendment does not modify or update disclosures in the Original Filing. Furthermore, except for the matters described above, this amendment does not change any previously reported financial results.

Form 10-K

PART I

ITEM 1. Business.

(a) General Development of Business

The Bombay Company, Inc. and its wholly-owned subsidiaries design, source and market a line of proprietary home furnishings that includes large furniture, occasional furniture, wall decor and decorative accessories that is timeless, classic and traditional in its styling through a network of retail locations throughout the United States and Canada, through the Internet, specialty catalogs and international licensing arrangements. Throughout this report, the terms "our," "we," "us," "Bombay" and “Company” refer to The Bombay Company, Inc., including its subsidiaries.

The Company has a retail (52-53 week) fiscal year, which ends on the Saturday nearest January 31. The periods ended January 28, 2006 (“Fiscal 2005”), January 29, 2005 (“Fiscal 2004”), and January 31, 2004 (“Fiscal 2003”) reflect 52 weeks. The period ending February 3, 2007 (“Fiscal 2006”) will be a 53-week period.

Bombay’s unique position in the market place is a result of our core competencies in design, sourcing and importing. We are a global importer, sourcing product from approximately 27 countries worldwide. Over 90% of the product has been designed or styled to Bombay’s specifications.

Bombay has three distinct retail concepts leveraging the Bombay brand: Bombay, BombayKIDS and Bombay Outlet. Bombay stores feature timeless and classically styled home furnishings including accessories, wall decor and furniture focusing on the bedroom, the home office, the dining room and the living room. We entered the children’s furnishings business in 2001 with the introduction of BombayKIDS, which features a line of children’s furniture, textiles and accessories for children’s bedrooms and bathrooms. Bombay Outlet stores, which are located primarily in major outlet centers across the United States and in Canada, feature an assortment of home furnishings similar to the Bombay store offering at lower price points. Additionally, Bombay Outlet stores provide a channel to liquidate overstocks of Bombay and BombayKIDS product as well as merchandise produced for our former wholesale operation.

In addition to our primary retail operations, Bombay has other operating enterprises which contributed incrementally to profitability but which were not significant to our operations in Fiscal 2005. Unless specified otherwise, the discussions in this Annual Report on Form 10-K relate to the Bombay retail operations, including BombayKIDS, outlets, Internet and catalog.

(b) Financial Information About Segments

Bombay operates primarily in one business segment as a multi-channel retailer selling decorative home furnishings, furniture and related items.

Merchandise Sales, Purchasing and Distribution

Bombay operates stores, primarily located in regional shopping malls, certain secondary malls, open-air lifestyle centers, high-end strip centers and selected street locations. As of January 28, 2006, there were 439 stores in 41 states in the United States and 59 stores in nine Canadian provinces. We also market our products through our mail order operations in the United States and Canada and over the Internet at www.bombaycompany.com, www.bombaykids.com, www.bombayoutlet.com and www.bombay.ca.

We offer a diverse selection of products consisting of approximately 5,000 stock keeping units (“SKUs”) of which over 90% of the product has been designed or styled to our specifications. Bombay’s proprietary product offers unique design, quality and exceptional value to a wide audience of consumers. We regularly update our merchandise assortment by introducing new products while discontinuing others. We have a fashion component to our product offerings, primarily in the accessory and wall decor areas, which is introduced seasonally. Other products with longer lives are discontinued as they approach the end of their life cycles. Approximately 3,000 and 3,500 new SKUs were introduced in Fiscal 2005 and Fiscal 2004, respectively. Typically, new product introductions have been concentrated during our spring, fall and Christmas selling periods. The principal categories of merchandise include the following:

·	Furniture - We sell two broad categories of furniture as described below. Our furniture is manufactured by third party vendors located principally in China, Malaysia, Vietnam, Taiwan, India and Indonesia. The Company is currently developing furniture resources in South America.

Large Furniture - This category includes both wood and metal furniture focusing on the bedroom, home office, dining room and living room. Many of the larger items are displayed in stores, stocked in our distribution centers and can be delivered to stores typically within ten days. Large furniture represented 29%, 29% and 30% of total sales in Fiscal 2005, 2004 and 2003, respectively.

Occasional Furniture - This category includes wood and metal hall tables, end and coffee tables, plant stands and other small accent tables and curios that are ready-to-assemble, take home products. Occasional furniture represented 17%, 19% and 19% of total sales in Fiscal 2005, 2004 and 2003, respectively.

Accessories - This is the broadest category and represented 40% of total sales in both Fiscal 2005 and 2004 and 39% of total sales in Fiscal 2003. This category includes both functional and decorative accessories including lamps, jewelry and memorabilia boxes, crystal, ceramics, frames and desktop items, textiles, floral, candles and holiday decor. These items are sourced from over 27 countries in Asia, North America and Europe.

·	Wall Decor - This category includes prints, mirrors and wall accessories that represented 14% of total sales in Fiscal 2005 and 12% of total sales in Fiscal 2004 and 2003. This merchandise is sourced primarily from the United States and various countries in Asia.

Merchandise is manufactured to Bombay’s specifications through a network of third party vendors principally located in Asia, Europe and the United States. Over 90% of production needs are sourced from foreign countries. We have branch offices in Taiwan, Malaysia, China and Vietnam, and use agents in various countries to locate prospective vendors, coordinate production requirements with manufacturers and provide technical expertise and quality control.

We are not dependent on any particular supplier and have had long standing relationships with many of our vendors. Forty-five manufacturers in eight countries supply almost 70% of our merchandise requirements. Bombay has no long-term production agreements; however, we generally have agreements with major manufacturers that prohibit the production of our proprietary product for other parties. Additional manufacturing capacity and alternative sources, both domestic and international, continue to be added through new vendors and plant expansions by existing vendors. We do business with our vendors principally in United States currency and historically have not experienced any material disruptions as a result of any foreign political, economic or social instability.

The product development process takes between three to twelve months, beginning with the original idea and concluding with the final product received at regional distribution centers in the United States and Canada. Depending on the category, the source country and whether an item is new or reordered, lead times generally vary from two to six months from order placement until arrival at the stores. Order times are slightly less for North American manufacturers principally due to shorter shipping times. Lead times may also be impacted by seasonality factors especially in months when manufacturers are producing at, or near, peak capacity to meet seasonal demands. As a result, we strive to maintain an adequate inventory position in our distribution centers to ensure a sufficient supply of products to our customers.

We have regional distribution centers in Fort Worth, Texas; McDonough, Georgia; Breinigsville, Pennsylvania; Mira Loma, California; Plainfield, Indiana and Brampton, Ontario. The distribution centers are strategically located and enable us to replenish the majority of store inventories within 48 hours of when the order is processed. We use dedicated trucks and less-than-truckload carriers to transport product from our distribution centers to the stores.

Channels of Distribution

RETAIL

Stores and Real Estate

Historically, we have located our stores primarily in regional shopping malls, certain secondary malls and selected urban and suburban locations that satisfied our demographic and financial return criteria. Over the past few years as many of those leases were nearing their expiration dates, we began aggressively pursuing an off-mall strategy for new and relocated stores focusing on open-air lifestyle centers and high-end strip centers (especially those with a concentration of home furnishings retailers). Such locations offer us the opportunity to lower occupancy costs, improve operating efficiencies and provide a more convenient shopping experience for our customer. Our preference is to identify locations where we can operate a combined Bombay and BombayKIDS store, thereby realizing economies that come with a larger location while attracting a new and younger customer to Bombay. As of January 28, 2006, approximately 48% of our stores, excluding outlets, were in off-mall locations.

In selecting store locations, our real estate department conducts extensive analyses of potential store sites. We base our selection on the existing or planned co-tenancy of the center, the size of the market and the demographics of the surrounding area. In evaluating a store location, placement of the store relative to retail traffic patterns and customer base of other retailers in the nearby vicinity are important considerations. Significant attention is given to visual merchandising opportunities to maximize the ability to display product in the most attractive setting. We seek out the most potentially profitable locations for the opening of new stores. As we migrate to off-mall locations, new Bombay stores are planned to be in the 4,000 to 5,000 square foot range. Bombay mall stores are slightly smaller in size, currently averaging approximately 3,600 square feet. When appropriate, we are targeting 8,500 to 9,000 square foot locations where we can construct a Bombay store of approximately 4,500 square feet with an adjacent BombayKIDS store of approximately 4,000 square feet. In addition to building new stores, we continue to selectively convert our existing regular stores, which average approximately 2,000 square feet, to the larger format. As of January 28, 2006, there were 16 regular stores left in the chain.

At January 28, 2006, the store chain included a total of 48 outlet stores. We view the use of outlets as an opportunity to increase sales to a different customer base, to assist in the orderly clearance of merchandise and to further leverage our design and sourcing capabilities.

Following is a table summarizing our store activity and composition:

	January 28, 2006		January 29, 2005		January 31, 2004
Number of stores:
Beginning of year……………………......................		502		471		422
Opened…………………………………...................		41		66		84
Closed…………………………………........................		45		35		35
End of year…………………………….......................		498		502		471
Store composition:
Large format.…………………………......................		372		384		365
Regular.………………………………......................		16		20		25
Outlet…………………………………....................		48		47		46
BombayKIDS…..……………………......................		62		51		35
Store location:
Mall………………………………….........................		235		273		302
Off-Mall……………………….……........................		215		182		123
Outlet…………….…………………		48		47		46
Retail square footage (in thousands):
Large format…………………………......................		1,548		1,570		1,459
Regular………………………………......................		30		38		46
Outlet………………………………........................		206		200		198
BombayKIDS………………………......................		258		212		144
Total…………………………………....................		2,042		2,020		1,847

During Fiscal 2006, we plan to open approximately 25 to 30 new stores, including approximately three combination stores that include BombayKIDS stores. We plan to close approximately 60 to 65 stores, ending the year with approximately 460 to 465 stores. For store count purposes, a combined Bombay and BombayKIDS location represents two stores.

Our average cost of leasehold improvements, furniture, fixtures and machinery for Bombay stores opened in Fiscal 2005, net of landlord construction allowances, was approximately $158,000 per store, or $33 per square foot. In addition, other investments, which consist primarily of inventory in the store location, averaged approximately $87,000 per large format store. The average net cost of a BombayKIDS store is approximately $197,000, slightly higher than a Bombay large format store due to higher fixturing costs. During Fiscal 2005, inventory investment averaged $89,000 for a BombayKIDS store. During Fiscal 2005, average inventory physically in store was approximately 41% of the total inventory investment. Our mall-based stores typically achieve store level operating profitability during their first full year of operation and reach maturity in three years. Off-mall stores are typically profitable during their first year of operation. However, based upon our limited experience, it appears that it may take slightly longer for these stores to mature. Further, whether a store was relocated from a local mall or is a new store in a market may also be an influencing factor as to profitability and length of time until maturity.

As of January 28, 2006, 439 stores were operating in 41 states in the United States and 59 stores were operating in nine provinces in Canada as illustrated in the map below.

Direct-to-Customer

We conduct electronic commerce through our U.S. websites at http://www.bombaycompany.com for Bombay, http://www.bombaykids.com for BombayKIDS and http://www.bombayoutlet.com for Bombay Outlets. During Fiscal 2003, we launched our Bombay Canada website at http://www.bombay.ca which currently sells core product and a limited selection of outlet and BombayKIDS product. The Internet is an important tool not only for generating direct-to-customer sales but also for enabling the customer to conduct research on our product offering prior to making a store visit. The majority of our active SKU's are available for purchase on the websites although the actual number available at any point in time may vary based upon availability of inventory. We continue to pursue online marketing partnerships to broaden our reach to additional customers. Direct-to-customer revenue over the Internet was approximately $15.9 million, $21.2 million and $17.1 million in Fiscal 2005, 2004 and 2003, respectively. We also maintain websites supporting our international wholesale activities.

Bombay has a catalog business, which primarily serves as a marketing vehicle to drive customers into stores and to our Internet sites. Total direct-to-customer revenue, including Internet and catalog sales, represented 4.2%, 5.5% and 5.0% of total revenue in Fiscal 2005, 2004 and 2003, respectively.

WHOLESALE

Bailey Street Trading Company - During Fiscal 2000, we created Bailey Street Trading Company (“Bailey Street”), a wholly-owned subsidiary involved in the wholesale distribution of a proprietary line of accent furniture. The brand was separate from Bombay and the merchandise was marketed to variety of customers including independent gift stores, catalogers, department stores, furniture stores and mass merchants through a network of independent regional sales representatives. In November 2004, we announced our intention to exit the Bailey Street operations through sale or liquidation in order to focus on our core business.

On May 27, 2005, we completed the sale of the majority of the assets of Bailey Street to Bailey Street Holding Company, a newly-formed corporation, independent of Bombay. Under the terms of the agreement, Bombay received $4.7 million in cash in return for $1.1 million in accounts receivable and $2.3 million in inventories as well as intellectual property, equipment and facilities associated with the operations. Bailey Street Holding Company also assumed certain normal operating liabilities associated with the operations and Bombay agreed to provide certain transition services for up to one year. Bombay retained approximately $2 million of inventory not included in the sale which has been or is currently being liquidated through its retail and Internet channels.

During the third quarter of Fiscal 2005, we terminated the lease associated with approximately half of the distribution center previously utilized by the Bailey Street operations and prior to that, as part of the Bombay operations. As of the end of the fourth quarter of Fiscal 2005, we ceased using the remaining space and were actively seeking a party to whom the space could be sublet. We recorded a non-cash, pre-tax charge of approximately $0.9 million which represents the net present value of the difference between the remainder of the lease obligation less the estimated net sublet income based upon current market rates and assuming a subtenant within twelve months.

Total revenue for Bailey Street was $6.9 million, $15.1 million and $15.8 million during Fiscal 2005, 2004 and 2003, respectively.

International - Bombay International, Inc. (“International”) is our international licensing and distribution channel. International operations have extended to 16 licensed stores as of the end of Fiscal 2005, operating in the Middle East and the Caribbean. Total revenue from International was $2.4 million, $3.8 million and $3.7 million during Fiscal 2005, 2004 and 2003, respectively. In the short-term, we plan to continue expansion abroad through licensing and distribution agreements in existing markets or with current partners. During Fiscal 2006, approximately three additional International stores are planned to be opened by our licensees.

Intangibles

We own a number of the trademarks, service marks, copyright registrations and design patents used in our business, including federal trademark registrations for the marks The Bombay Companyâ, Bombayâ, the palm tree logo and BombayKIDSâ. Our trademarks are also registered or are the subject of pending applications in a number of foreign countries. Each trademark registration is renewable indefinitely if the mark is still in use at the time of renewal.

We believe that our intangible property rights have significant value, enhance the Bombayâ brand and are instrumental in our ability to create, sustain demand for and market our product. From time to time, we discover products in the marketplace that are counterfeit reproductions of our product or that otherwise infringe upon our trademark, copyright, trade dress or design rights. We have and will continue to vigorously defend our intellectual property rights as necessary.

Seasonality

Operating results are subject to seasonal variation. Historically, the largest portion of sales and substantially all of the income occur in the fourth fiscal quarter, which includes the Christmas season. Inventory balances are generally built to their highest levels prior to the Christmas selling season. Inventories decline, short-term borrowings are repaid and cash balances increase in December due to the Christmas business.

Competition

The home furnishings and decorative accessories market is highly fragmented and very competitive. We face competition from furniture stores, department stores, mass merchants and other specialty retailers, including national chains and independent retailers. We believe that we compete primarily on the basis of style, selection, quality and value of merchandise.

Employees

We have approximately 5,000 employees, which include approximately 3,100 part-time employees, and are not a party to any union contract. Employee relations are considered to be good.

(d) Financial Information About Geographic Areas

Bombay operates in one industry segment, specialty retailing. Greater than 90% of all revenue is from the sale of home furnishings and accessories through retail stores in the United States and Canada. The remaining portion of our revenue results from the sale of home furnishings and accessories through our wholesale operations, direct-to-customer retail operations and related shipping charges. Our wholesale and direct-to-customer operations have been immaterial to our operations and financial results to date. Long-lived assets include all non-current assets except deferred taxes.

The following table shows net revenue and long-lived assets by geographic area (in thousands):

			Year Ended
	January 28, 2006		January 29, 2005		January 31, 2004
			(as adjusted)		(as adjusted)
Net revenue:
United States…………......................................	$	487,704	$	505,499	$	526,219
Canada………………........................................		77,370		70,588		70,216
Total………..……..........................................	$	565,074	$	576,087	$	596,435

Long-lived assets:
United States………….......................................	$	80,024	$	86,111
Canada……………….........................................		10,680		6,856
Total………………….....................................	$	90,704	$	92,967

(e) Available Information

We make available free of charge through our website, http://www.bombaycompany.com, all materials that we file electronically with the Securities and Exchange Commission (“SEC”), including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and Section 16 filings as soon as reasonably practicable after electronically filing such materials with, or furnishing them to, the SEC. During the period covered by this Form 10-K, we made all such materials available through our website as soon as reasonably practicable after filing such materials with the SEC.

Any materials filed by the Company with the SEC may also be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Suite 1580, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website, http://www.sec.gov, that contains reports, proxy and information statements and other information which we file electronically with the SEC.

A copy of the Company’s Corporate Governance Practice, the Code of Business Conduct, the Whistle-blower Protection Policy and the charters of the Audit and Finance Committee, the Compensation and Human Resources Committee and the Governance and Nominating Committee are posted on the Company’s website in the Investor Relations section.

ITEM 1A. Risk Factors.

The value of an investment in Bombay involves significant risks and uncertainties. One should carefully consider the risks and uncertainties described below. If any of such risks and uncertainties actually occurs, our business, financial condition or operating results could differ materially from the plans, projections and other forward-looking statements included in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in our other public filings.

Our turnaround strategy may disrupt our business. In addition, the strategy may not be successful.

We have been involved in a multi-year turnaround strategy that has focused on regaining market share, aggressively repositioning our real estate portfolio, attracting new customers, improving the quality of our merchandise assortment and investing in infrastructure to support the other initiatives. This turnaround strategy may lead to disruptions in our business that could adversely affect our business operations and our financial results. Further, if our turnaround strategy is not successful, or if we do not execute the strategy effectively, our business operations and financial results could be adversely affected.

We may not have sufficient liquidity to execute our turnaround strategy.

During the past three years, we have had over half of our store leases come up for renewal which has resulted in significant investments of capital. During this same time period, we have seen a significant decline in our cash balances as a result of the required investments and recently, two years of operating losses. Failure to meet our plans could result in insufficient liquidity to continue to execute our turnaround strategy. We currently believe that our available cash and cash equivalents, cash flow from operations and cash available under our existing credit facilities will be sufficient to finance our operations and expected capital requirements for at least the next twelve months. However, if the turnaround fails to materialize and we do not meet our plans, we might experience liquidity issues during peak borrowing periods and may require additional external funding to support our operations. We may need to raise additional funds through capital market transactions, asset sales or financing from third parties or a combination thereof. Additional sources of funds may not be available on terms favorable to us or at all. If adequate funds are not available or are not available on acceptable terms, our business could suffer if such inability to raise funds threatens our ability to execute our turnaround strategy and reduces our operating flexibility. Availability of additional funds may be adversely affected because of our recurring losses from operations and negative cash flows. Moreover, if additional funds are raised through the issuance of equity securities, the percentage of ownership of our current stockholders will be reduced. Newly issued equity securities may have rights, preferences and privileges senior to those of investors in our common stock. In addition, the terms of any new debt could impose restrictions on our operations or capital structure.

Our competition is both intense and varied, and our failure to effectively compete could adversely affect our prospects.

The home furnishings industry has become increasingly competitive with mass merchants and warehouse clubs entering the market in a more significant way. We also compete with traditional furniture stores, other specialty retailers, department stores and, to a lesser extent, with alternative channels of distribution such as e-commerce and mail order. Changes in the amount and degree of promotional intensity or merchandising strategy exerted by our current competitors and potential new competition could present us with difficulties in retaining existing customers, attracting new customers and maintaining our profit margins.

In addition, some of our competitors may use strategies such as lower pricing, wider selection of products, larger store size, improved store design, and more efficient sales methods. While we attempt to differentiate ourselves from our competitors by focusing on the timeless and classically styled home furnishings shown in lifestyle settings, our business model may not allow us to compete successfully against existing and future competitors.

We may continue to experience fluctuations in our comparable store sales.

Our success depends, in part, upon our ability to increase sales at our existing stores. Various factors affect comparable store sales, including the number of stores we open, close or expand in any period, potential disruption to our customer base as we migrate to off-mall locations; the general retail sales environment; consumer preferences and buying trends; changes in sales mix among distribution channels; our ability to efficiently source and distribute products; changes in our merchandise mix; competition; current local and global economic conditions; the timing of our releases of new merchandise and promotional events; the success of marketing programs; and the cannibalization of existing store sales by new stores. Among other things, weather conditions can affect comparable store sales because inclement weather can require us to close certain stores temporarily and thus reduce store traffic. These factors may cause our comparable store sales results to differ materially from prior periods.

Our comparable store sales have fluctuated significantly in the past on an annual, quarterly and monthly basis, and we expect that comparable store sales will continue to fluctuate in

the future. Our comparable store sales results for Fiscal 2005, 2004 and 2003 were (2%), (12%) and 13%, respectively. Past comparable store sales are no indication of future results.

Our ability to improve our comparable store sales results depends in large part on maintaining and improving our forecasting of customer demand and buying trends, selecting

effective marketing techniques, providing an appropriate mix of and using more effective pricing strategies. Any failure to meet the comparable store sales expectations of investors

and security analysts in one or more future periods could significantly reduce the market price of our common stock.

We may not be able to find appropriate locations as we migrate our stores from mall to off-mall, expand our store base in major markets, and rationalize the real estate portfolio.

As part of our turnaround strategy, we have attempted to find suitable off-mall real estate sites to which we can relocate stores when mall leases expire. As a result of a significant growth in the store base during the mid 1990’s, we have been faced with a large number of leases with expiration dates over the past three years. During this same period, we have sought to expand our store base by increasing store density in major markets. Additionally, in order to enhance the customer experience, we are seeking off-mall locations that are approximately 20% to 30% larger for the core operations and have expanded the assortment to include children’s home furnishings. Where we do not have the ability to find appropriate off-mall locations, we have entered into either short-term or long-term extensions. Our ability to open new stores and to expand, remodel or relocate existing stores depends on a number of factors, including our ability to:

·	obtain adequate capital resources for leasehold improvements, fixtures and inventory on acceptable terms, or at all;

·	locate and obtain favorable store sites and negotiate acceptable lease terms;

·	construct or refurbish store sites;

·	hire, train and retain skilled employees; and

·	continue to upgrade our information and other operating systems to support operations.

The rate of our migration and expansion will depend on the availability of adequate capital, which in turn will depend in large part on cash flow generated by our business and the availability of equity and debt capital. There can be no assurance that we will have adequate cash flow generated by our business or that we will be able to obtain equity or debt capital on acceptable terms, or at all. Moreover, our credit facility contains restrictions on the amount of debt we may incur in the future. If we are not successful in obtaining sufficient capital, we may be unable to open additional stores or expand, remodel and relocate existing stores as planned, which may adversely affect our migration and expansion strategy resulting in a decrease in sales.

There also can be no assurance that our existing stores will maintain their current levels of net sales and store-level profitability or that new stores will generate sales levels necessary to achieve store-level profitability. New stores that we open in our existing markets may draw customers from our existing stores and may have lower sales growth relative to stores opened in new markets. New stores also may face greater competition and have lower anticipated sales volumes relative to previously opened stores during their comparable years of operations. Also, stores opened in non-mall locations may require greater marketing costs in order to attract customer traffic. These factors may reduce our average store contribution and operating margins. If we are unable to profitably open and operate new stores and maintain the profitability of our existing stores, our net income could suffer.

We recently announced our intention to exit certain under-performing locations. In the recent past, we exited the majority of leases at the end of the lease term with minimal expense associated with the transaction. To the extent that we will attempt to terminate certain leases relating to under-performing locations prior to lease expiration, our ability to exit those stores on an economic basis will be dependent upon our being able to successfully negotiate acceptable terms with landlords.

We may not be able to effectively manage our inventory levels, particularly excess or inadequate amounts of inventory, which could adversely affect our financial results.

We source inventory both domestically and internationally, and our inventory levels are subject to a number of factors beyond our control. These factors, including reduced consumer spending and consumer disinterest in our product offerings, could lead to excess inventory levels. Additionally, we may not assess appropriate product life cycles or end-of-life products, leaving us with excess inventory. To reduce these inventory levels, we may be required to lower our prices, adversely impacting our margin levels and our financial results

Alternatively, we may have inadequate inventory levels for particular items, including popular selling merchandise, due to factors such as unavailability of products from our vendors, import delays, untimely deliveries or the disruption of international, national or regional transportation systems. The occurrence of any of these factors on our inventory supply could adversely impact our financial results.

Any potential tariffs imposed on products that we import from China, as well as the potential sudden strengthening of China’s currency against the U.S. dollar, could reduce our gross margins and our overall profitability.

We purchase a significant portion of our inventory from manufacturers located in China. Changes in trade regulations (including tariffs on imports) or the continued strengthening of the Chinese currency against the U.S. dollar could increase the cost of items we purchase, which in turn could have a material adverse effect on our gross margins.

Our business is subject to risks generally associated with U.S. and foreign government regulations related to product sourcing.

Over 90% of the products we sell are imported. As such, our business is subject to U.S. and foreign government regulations and legislation related to product sourcing. Additional duties, quotas, tariff and other restrictions may be imposed upon the sourcing of our products in the future. We cannot predict the effect that such actions would have on our cost of operations and our ability to source products. Additional duties, quotas or tariffs could have a significant impact on our business, financial condition and results of operations.

We may not be able to attract, retain and grow an effective management team or changes in the cost or availability of a suitable workforce to manage and support our operating strategies could cause our operating results to suffer.

Our success depends in large part upon our ability to attract, motivate and retain a qualified management team and employees. Qualified individuals needed to fill these positions could be in short supply. The inability to recruit and retain such individuals could result in high employee turnover at our stores and in our Company overall, which could have a material adverse effect on our business and financial results. Additionally, competition for qualified employees requires us to continually assess our compensation structure. Competition for qualified employees has required, and in the future could require, us to pay higher wages to attract a sufficient number of qualified employees, resulting in higher labor compensation expense.

Various types of employee related claims may be raised from time to time. We may also experience union organizing activity in currently non-union distribution facilities, stores and in our Company overall. Union organizing activity may result in work slowdowns or stoppages and higher labor costs, which would harm our business and operating results. Higher than expected costs, particularly if coupled with lower than expected sales, would negatively impact our business and operating results.

The occurrence of severe weather events or natural disasters could significantly damage or destroy outlets or prohibit consumers from traveling to our retail locations, especially during the peak winter holiday shopping season.

If severe weather, such as a large hurricane, tornado or earthquake, occurs in a particular region and damages or destroys a significant number of our stores in that area, our overall sales would be reduced accordingly. In addition, if severe weather, such as heavy snowfall or extreme temperatures, discourages or restricts customers in a particular region from traveling to our stores, our sales would also be adversely affected. If severe weather occurs during the fourth quarter holiday season, the adverse impact to our sales could be even greater than at other times during the year because we generate a significant portion of our sales during this period.

Changes to estimates related to our property and equipment, or results that are lower than our current estimates at certain store locations, may cause us to incur non-cash impairment charges.

We make certain estimates and projections in connection with impairment analyses for certain of our store locations for which current cash flows from operations are negative. Impairment results when the carrying value of the asset exceeds the undiscounted future cash flows over the life of the lease. These calculations require us to make a number of estimates and projections of future results, often up to ten years into the future. If these estimates or projections prove to be inaccurate, we may be required to take impairment charges on certain of these store locations. If these impairment charges are significant, our results of operations could be adversely affected.

We may be vulnerable to disruptions in our business due to reliance on technology.

We rely upon our existing information systems for operating and monitoring all major aspects of our business, including sales, warehousing, distribution, purchasing, inventory control, merchandise planning and replenishment, as well as various financial functions. These systems and our operations are vulnerable to damage or interruption from:

·	fire, flood and other natural disasters;

·	power loss, computer system failures, Internet and telecommunications or data network failures;

·	operator negligence; improper operation by or supervision of employees;

·	physical or electronic loss of data or security breaches, misappropriation and similar events; and

·	computer viruses.

Any disruption in the operation of our information systems, the loss of employees knowledgeable about such systems or our failure to continue to effectively modify such systems could interrupt our operations or interfere with our ability to monitor inventory, which could result in reduced net sales and affect our operations and financial performance. We also need to ensure that our systems are consistently adequate to satisfy our needs. The cost of any such system upgrades or enhancements could be significant.

Any additional terrorist activities in the U.S., as well as the international war on terror, may adversely affect our sales and our stock price.

An additional terrorist attack or series of attacks on the United States could have a significant adverse impact on the United States’ economy. This downturn in the economy could, in turn, have a material adverse effect on our sales. Furthermore, the threat of terrorist attacks in the United States since September 11, 2001, as well as the ongoing international war on terror, continues to create economic and political uncertainties in the United States. The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility could cause greater uncertainty and cause the economy to suffer in ways that we currently cannot predict. In addition, these events could cause or contribute to a general decline in equity valuations, which, in turn, could reduce our market value.

We may not be able to obtain commercial insurance at acceptable prices which might have a negative impact on our business.

Insurance costs continue to be volatile, affected by natural catastrophes, fear of terrorism and financial irregularities and other fraud at publicly-traded companies. We believe that commercial insurance coverage is prudent for risk management and insurance costs may increase substantially in the future. In addition, for certain types or levels of risk, such as risks associated with earthquakes or terrorist attacks, we might determine that we cannot obtain commercial insurance at acceptable prices. Therefore, we might choose to forego or limit our purchase of relevant commercial insurance, choosing instead to self-insure one or more types or levels of risks. If we suffer a substantial loss that is not covered by commercial insurance, the loss and attendant expenses could negatively impact our business and operating results.

We may not be able or may fail to protect our intellectual property which would adversely impact on our business.

Our trademarks, service marks, copyrights, trade dress rights, domain names and other intellectual property are valuable assets that are critical to our success. The unauthorized reproduction or other misappropriation of our intellectual property could diminish the value of our brands or goodwill and cause a decline in our sales. We may not be able to adequately protect our intellectual property. In addition, the costs of defending our intellectual property may adversely affect our operating results.

Our quarterly results of operations fluctuate due to a variety of factors, including seasonality.

Our quarterly results have fluctuated in the past and are expected to fluctuate in the future, depending upon a variety of factors, including shifts in the timing of holiday selling seasons, including Valentine’s Day, Easter, Mother’s Day, Father’s Day, Halloween, Thanksgiving and Christmas, and the strategic importance of fourth quarter results. A significant portion of our revenue and all of our net earnings have been realized during the period from October through December. In anticipation of increased holiday sales activity, we incur certain significant incremental expenses, including the hiring of a substantial number of temporary employees to supplement our existing workforce. If, for any reason, we were to realize significantly lower-than-expected revenue or net earnings during the October through December selling season, our business and results of operations would be materially adversely affected.

ITEM 1B. Unresolved Staff Comments.

None.

ITEM 2. Properties.

We own our United States headquarters office complex of which we occupy approximately 87,000 square feet. We lease stores, distribution centers, regional and Canadian offices under numerous operating leases. Owned and leased facilities are summarized following:

	Square Feet
Description	Owned	Leased
Stores:
Large format…………………......................................	—	1,548,000
Regular………………………......................................	—	30,000
Outlet………………………........................................	—	206,000
BombayKIDS………………......................................	—	258,000
Distribution centers:
Breinigsville, PA……………....................................	—	410,000
Plainfield, IN. ……………….....................................	—	300,000
McDonough, GA………….…..................................	—	254,000
Fort Worth, TX……………….................................	—	250,000
Gilbertsville, PA……………....................................	—	102,000
Mira Loma, CA……………......................................	—	156,000
Brampton, ON, CAN……..........................................	—	211,000
Offices and storage:
Brampton, ON, CAN…...…..........................................	—	9,000
Regional sites………………........................................	—	2,000
Fort Worth, TX……………….....................................	121,000	—
	121,000	3,736,000

Leases generally have 10-year terms, expiring between 2006 and 2016. Rents under the store leases are generally based upon minimum rentals plus additional contingent rentals based upon a percentage of the store’s sales volume in excess of specified levels. Store lease terms generally require additional payments covering taxes, common area charges, insurance and certain other costs.

Rental expense included in the accompanying consolidated statements of operations for operating leases was (in thousands):

	Fiscal 2005		Fiscal 2004		Fiscal 2003
			(as adjusted)		(as adjusted)
Minimum rentals...............................................................	$	66,382	$	64,736	$	57,154
Contingent rentals...........................................................		113		295		482
Total...............................................................................	$	66,495	$	65,031	$	57,636

Leased year-end square footage.....................................		3,736		3,750		3,167

The minimum rental commitments for future fiscal years related to real estate properties are as follows (in thousands):

Fiscal
2006……………………...................	$	51,094
2007……………………..................		51,309
2008…………………….................		49,590
2009…………………….................		47,182
2010…………………….................		44,805
Thereafter……………...................		160,217
Total…………………...............	$	404,197

We believe that the insurance coverage maintained on all properties is adequate.

ITEM 3. Legal Proceedings.

We have certain contingent liabilities resulting from litigation and claims incident to the ordinary course of business. Management believes that the probable resolution of such contingencies will not materially affect our financial position or results of operations.

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

There were no matters submitted to a vote of security holders during the fourth quarter of Fiscal 2005.

PART II

ITEM 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

(a)	The principal market for Bombay’s common stock is the New York Stock Exchange. The high and low trading prices, quoted by fiscal quarter, follow:

Year ended January 28, 2006	High	Low	Year ended January 29, 2005	High	Low
First quarter	$ 6.59	$ 3.50	First quarter	$ 7.99	$ 5.44
Second quarter	$6.09	$3.95	Second quarter	$6.49	$4.70
Third Quarter	$5.25	$3.76	Third Quarter	$7.59	$4.47
Fourth quarter	$4.20	$2.65	Fourth quarter	$7.16	$5.10

(b)	The approximate number of record holders of common stock on March 29, 2006 was 1,700.

(c)

Our credit facility allows us to pay dividends, so long as: no default or event of default has occurred and is continuing; immediately after giving effect thereto, availability exceeds usage under the line by at least $25 million; and certain other conditions are satisfied. We are not currently, nor have we been, restricted from paying such dividends. However, we have not paid dividends the past two years and will continue to utilize available funds primarily for the expansion of our retail stores and operating purposes.

(d)	The information required by this item appears under the caption “Equity Compensation Plan Information” in the Definitive Proxy Statement of The Bombay Company, Inc. relating to the Company’s Annual Meeting of Shareholders, which information is incorporated herein by reference.

On January 6, 2006, we acquired 979 shares of treasury stock at a cost of $2.90 per share.

ITEM 6. Selected Financial Data.

(Unaudited)

The following selected financial data has been derived from our consolidated financial statements. The data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto.

					Year Ended
	January 28,		January 29,		January 31,		February 1,		February 2,
Financial Data:	2006		2005		2004		2003		2002
			(as adjusted)		(as adjusted)		(as adjusted)		(as adjusted)

Net revenue*………………………………………….....	$	565,074	$	576,087	$	596,435	$	494,000	$	437,457
Net revenue increase (decrease)……………………....		(2)%		(3)%		21%		13%		3%
Same store sales increase (decrease)……………….....		(2)%		(12)%		13%		5%		(2)%
Net income (loss)*……………………………………...	$	(46,731)	$	(12,641)	$	9,150	$	7,298	$	3,352
Basic earnings (loss) per share…………………….....	$	(1.29)	$	(0.35)	$	0.26	$	0.22	$	0.10
Diluted Earnings (loss) per share………………….....	$	(1.29)	$	(0.35)	$	0.26	$	0.22	$	0.10
Total assets*…………………………………………....	$	238,741	$	280,843	$	266,842	$	237,630	$	208,376
Stockholders' equity*……………………………….....	$	135,737	$	178,601	$	188,124	$	166,940	$	156,160
Return on average assets……………………………...		(18.0)%		(4.6)%		3.6%		3.3%		1.6%
Return on average equity……………………………..		(29.7)%		(6.9)%		5.2%		4.5%		2.2%

Operating Data:

Average sales per store open for full fiscal year*…...	$	1,069	$	1,074	$	1,249	$	1,098	$	1,012
Average sales per square foot for full fiscal year…....	$	262	$	273	$	322	$	296	$	288
Number of stores:
Beginning of year………………………………….........		502		471		422		419		408
Opened……………………………………………...........		41		66		84		28		32
Closed……………………………………………............		45		35		35		25		21
End of year………………………………………...........		498		502		471		422		419
Store composition:
Large format………………………………………..........		372		384		365		334		324
Regular……………………………………………...........		16		20		25		37		59
Outlet……………………………………………….........		48		47		46		46		36
BombayKIDS……………………………………............		62		51		35		5		─
Store locations:
Mall………………………………………………...........		235		273		302		328		348
Off-mall……………………………………………...........		215		182		123		48		35
Outlet………………………………………………........		48		47		46		46		36
Retail Square footage:*
Large format……………………………………….........		1,548		1,570		1,459		1,297		1,244
Regular…………………………………………….........		30		38		46		68		107
Outlet………………………………………………........		206		200		198		193		151
BombayKIDS……………………………………............		258		212		144		20		─
Total………………………………………………..........		2,042		2,020		1,847		1,578		1,502

* In thousands

Bombay has paid no cash dividends during the periods presented.

NOTE: On October 5, 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position FAS 13-1, Accounting for Rental Costs Incurred during a Construction Period (“FSP FAS 13-1”), which requires that rental costs incurred during the construction period of new stores be charged to rental expense as a period cost. In January 2006, we elected to early adopt FSP FAS 13-1 and we have retrospectively applied the statement. Prior year amounts have been adjusted to reflect the change.

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This MD&A section discusses our results of operations, liquidity and financial condition, risk management practices and certain factors that may affect our future results, including economic and industry-wide factors, as well as our critical accounting policies and estimates. Our MD&A should be read in conjunction with our consolidated financial statements and accompanying notes, as well as the Risk Factors set forth in Item 1A., included in this Annual Report on Form 10-K.

Retrospective Application of New Accounting Pronouncement

On October 5, 2005, the FASB issued FSP FAS 13-1, which requires that rental costs incurred during the construction period of new stores, be charged to rental expense as a period cost. Our practice had been to capitalize such rents as part of the cost of the asset and amortize them over the asset’s estimated useful life. We have elected early adoption and have chosen to retrospectively apply FSP FAS 13-1 to prior years’ financial statements for enhanced comparability with peers and consistency of internal treatment for all properties. The retrospective application includes adjustments to cost of sales, buying and store occupancy costs, income (loss) before income taxes, provision (benefit) for income taxes, net income (loss) and earnings (loss) per share. Item 6, Selected Financial Data and Management’s Discussion and Analysis gives effect to these adjustments. For additional information with respect to these adjustments, see Note 2 to the accompanying consolidated financial statements

Executive Overview

Bombay markets a line of proprietary home furnishings that includes large furniture, occasional furniture, wall decor and decorative accessories that is timeless and classic in its styling. Over 90% of the items are sourced from approximately 27 countries worldwide, with slightly more than half of the product coming from China. We are a multi-channel retailer with store locations, Internet and mail order operations. We continue to have a small wholesale operation that is immaterial to overall revenue but contributes incrementally to profitability.

We focus on several key metrics in managing and evaluating our operating performance and financial condition including the following: same store sales, sales and gross margins, operating margins as a percentage of revenue, cash flow, and inventory.

We are currently executing a multi-phase turnaround intended to improve Bombay’s long-term profitability and generate competitive operating results in-line with current market leaders in the sector whose operating profits are in the 8% to 12% range. During the course of the turnaround, we have focused on a number of strategies to position the Company to achieve these goals including repositioning the real estate portfolio by moving from high cost mall to lower cost off-mall locations, upgrading the merchandise assortment from both a quality and a pricing standpoint, attracting new customers and ensuring the we have the appropriate infrastructure in place to ensure that we can meet these goals. Our recent focus has included or is expected to include the following:

Migrating from mall to off-mall - During the 1980s and 1990s, the focus was on opening stores in “A” malls throughout North America. As shopping habits have evolved, with alternative venues such as lifestyle centers and big box strip centers gaining popularity, we began to migrate our stores to off-mall locations. Management continues to be encouraged by the results of its store migration. In addition to being more convenient for customers and suitable for the sale of large items, such locations typically have lower cost structures, both from a fixed rent perspective and for other common area expenses billed by landlords. Off-mall stores have consistently delivered four-wall profits that are 350 to 450 basis points higher than the mall-based stores while maintaining or growing the average sales volumes of the mall-stores that they replaced. The Company expects to continue to execute its strategy of exiting mall locations at the end of the lease when a desirable off-mall location can be identified. As of the end of the year, the Company had 163 off-mall core stores and 225 mall-based core stores. Including BombayKIDS stores, the Company has a total of 235 mall stores and 215 off-mall stores as of the end of Fiscal 2005.

The following table reflects the real estate portfolio at each fiscal year end:

	January 28, 2006				January 29, 2005				January 31, 2004
	Units		% of total		Units		% of total		Units		% of total
Mall………............................		235		47%		273		54%		302		64%
Off-mall…….........................		215		43		182		37		123		26
Outlet………........................		48		10		47		9		46		10
Total………......................		498		100%		502		100%		471		100%

Rationalizing the real estate portfolio - During Fiscal 2005, we conducted a comprehensive review of our stores and identified a total of approximately 25 unprofitable stores targeted for closure in Fiscal 2006. We expect to close an additional 35 to 40 stores during the year as leases expire, with 25 to 30 stores being replaced by new off-mall locations. We will continue to assess closing opportunities and presently expect to end the year with approximately 460 to 465 stores of which approximately 43% will be in mall locations, 49% will be in off-mall locations and 8% will be outlets.

Upgrading the assortment - During late Fiscal 2004 and Fiscal 2005, we focused on upgrading our assortment - increasing quality and price points to further differentiate our offering from that of the mass merchants and other specialty retailers. As a result of these efforts, we have successfully increased our average transaction size by 9% and also increased the size of our average unit retail. We also believe that we have made strides in improving the quality of our merchandise and have been able to offer a more fashion-right assortment to our customers. We will continue to make this a priority in Fiscal 2006 as we seek to attract a customer less motivated by price and promotion and more likely to make a purchase based upon the value we offer, which considers fashion, quality and price.

Remerchandising stores - In the summer of Fiscal 2005, we rolled out our new merchandising presentation standards which feature our products in lifestyle settings that we refer to as “Rooms.” One of the benefits of our new Rooms format is that it allows us to better measure the productivity of our product offering and make modifications to the assortment as needed. During Fiscal 2006, we plan to test variations of the merchandise offered within our stores with the goal of increasing the overall sales per square foot and resulting profits. To date, tests that are planned include:

·	introducing a bath assortment into 74 stores,

·	featuring a limited selection of the top selling BombayKIDS product in a few larger stores,

·	reallocating a portion of BombayKIDS square footage in a selected number of stores and replacing it with other Bombay merchandise that we believe would be more productive, and

·	remerchandising certain stores with assortments that are more relevant to the current shopper.

We expect to conduct the tests over the course of the year and adapt our store assortments based upon those results.

Reducing promotional activity - We intend to selectively reduce the level of promotional activity as we continue to offer an upgraded assortment and improve quality. We believe that progress made during the second half of Fiscal 2005 toward higher product margins should continue into the first half of Fiscal 2006. We expect product margin improvement in the 100 to 200 basis point range during the year.

Controlling costs - During the early phases of the turnaround, we have made investments in infrastructure to help support the growing base of stores and increasing complexities of being a multi-channel retailer. We completed the roll out of the new point of sale system to our stores and improved our store telecommunication environment. We relaunched our Internet site on a more stable, reliable platform. We have made improvements in our planning and allocations system and expect to continue to invest in this area in order to improve our ability to forecast and assort our stores. While we believe that these investments are critical to our future success, we also need to ensure that our expenses are in line with our revenue base. As a result, we have taken steps in other areas to right size the organization and will continue to focus on cost control in order to ensure that infrastructure costs are in line with the planned reduction in the store count during Fiscal 2006.

Growing customer base - As we upgrade our assortment and migrate our stores to new off-mall locations, connecting with the right customer is critical to our future success. As part of our efforts to grow our customer base, we need to not only attract more customers but we need to attract the right customer who can grow with Bombay as we reposition the brand. We plan to invest in marketing to drive both retail and Internet sales. A key focus will be gathering additional customer names and email addresses with a goal of doubling the current number of customers in our databases. We intend to test new reach vehicles and increase the focus on gathering customer information at the point of sale. Recent investments in technology are expected to help us more effectively manage our customer databases and increase the effectiveness of direct marketing efforts across all channels.

Improving the supply chain - Over the past three years, we have made investments in the supply chain focusing in large part on improving the domestic distribution network - opening new distribution centers in the Midwest, Northeast and Canada. During Fiscal 2005, we made technology investments that will improve visibility to orders within the global supply chain and appointed a logistics services provider to assist in managing the flow of product in an efficient, cost-effective manner worldwide. These actions are expected to improve our ability to manage inventory flow and reduce overall supply chain costs.

Other Disclosures

The largest percentage of our sales and operating income is realized in the fourth fiscal quarter, which includes December (Christmas season).

Same store sales comparisons are calculated based upon revenue from stores opened for more than 12 months. Stores converted from the regular format to the large format and stores relocated from mall to off-mall locations are classified as new and are excluded from same store sales until they have been open for 12 months. Stores relocated within a mall and whose size is significantly changed are treated as new stores and are excluded from the same store sales calculation until opened for a full year. Remodeled stores remain in the computation of same store sales.

Cost of sales includes all costs associated with the purchase of product including, but not limited to, vendor cost, inbound transportation costs, duties, commission, inspections, quality control, warehousing and outbound transportation costs. Buying costs include costs associated with our buying department, consisting primarily of salaries, travel, product development and product sample costs. Store occupancy costs include costs such as rent, real estate taxes, common area maintenance charges, utilities and depreciation and amortization of leasehold improvements and other fixed assets relating to our retail locations.

The impact of inflation on operating results is typically not significant because the majority of our products are proprietary. We attempt to alleviate inflationary pressures by improving designs, finding alternative production sources in lower cost countries and increasing selling prices (subject to competitive conditions).

An anti-dumping petition against China furniture makers for allegedly dumping bedroom furniture was filed during 2003. This created some disruption in the industry and in our flow of product as we shifted orders to vendors with production capacity in other countries in preparation for the unfavorable duties. The actual duties determined by the Department of Commerce were announced late in 2004 and we do not expect the impact of these duties to have a material effect on operations going forward.

We have a retail (52-53 week) fiscal year that ends on the Saturday nearest January 31. All periods presented reflect 52 weeks.

Net Revenue

Net revenue consists of sales to retail customers, through store, mail order and Internet, and wholesale sales, through Bailey Street and to our international licensees, as well as shipping fees and other revenue. Shipping fees reflect revenue from customers for delivery of merchandise. Other includes royalties and territory fees from international licensees.

Net revenue (in millions)	Fiscal 2005		Fiscal 2004		Fiscal 2003
Retail sales……………….............................	$	550.4	$	551.5	$	571.8
Wholesale sales…………….......................		8.5		17.0		17.7
Shipping revenue…………........................		5.9		7.2		6.6
Other revenue…………….........................		0.3		0.4		0.3
Total revenue……………......................	$	565.1	$	576.1	$	596.4

Merchandise Category	Fiscal 2005		Fiscal 2004		Fiscal 2003
Accessories……………….......................		40%		40%		39%
Large furniture..…………........................		29		29		30
Occasional furniture.…….......................		17		19		19
Wall decor..………………......................		14		12		12
Total……………………......................		100%		100%		100%

Fiscal 2005

Net revenue decreased $11.0 million, or 2%, to $565.1 million, compared to $576.1 million in Fiscal 2004. Retail sales decreased $1.1 million, or less than 1%, from the previous year. Same store sales declined 2% in Fiscal 2005 compared to Fiscal 2004. During the year, we opened 29 large format stores, and 11 BombayKIDS stores, which partially offset the closing of 41 large format stores and four regular stores. Sales from new stores opened less than twelve months totaled $67.2 million in Fiscal 2005. Stores that were closed in Fiscal 2005 contributed, in aggregate, approximately $48.5 million to net sales in Fiscal 2004. Direct-to-customer sales (excluding shipping) decreased 26% to $19.8 million from $26.9 million in the previous year, primarily attributable to a decline in Internet sales. Wholesale sales declined to $8.5 million from $17.0 million in Fiscal 2004 primarily due to the sale of Bailey Street operations during May 2005. Shipping revenue, which relates to both the direct-to-customer operations and the wholesale operations, declined due to lower volumes in both channels compared to the prior year.

All regions of the U.S. reported low to mid single digit same store sales declines while Canada reported a low single-digit increase. We ended Fiscal 2005 with 372 large format stores, 16 regular stores, 48 outlets and 62 BombayKIDS stores. Total retail square footage increased 1% from Fiscal 2004 year-end, while the store count decreased 1%. The number of retail transactions for the year decreased 6% while the average ticket increased 9% to $79.

Fiscal 2004

Net revenue decreased $20.3 million, or 3%, to $576.1 million, compared to $596.4 million in Fiscal 2003. Retail sales decreased $20.3 million, or 4%, from the previous year. Same store sales declines of 12% were partially offset by sales from new stores, which contributed approximately $85.7 million in net sales. During the year, we opened 50 large format stores and 16 BombayKIDS stores. Increases from new stores were partially offset by the closing of 31 large format stores and four regular stores, which, in aggregate, contributed approximately $48.4 million to net sales in Fiscal 2003. Direct-to-customer sales increased 5% to $26.9 million from $25.7 million in the previous year, attributable to 25% growth in Internet sales, which more than offset the 31% decline in mail order revenue. Wholesale sales declined to $17.0 million from $17.7 million in Fiscal 2003 due primarily to a decline in the Bailey Street business. Shipping revenue, which relates to both the direct-to-customer operations and the wholesale operations, increased due to growth in the Internet business and increased rates charged to customers.

All regions of the U.S. and Canada reported low double digit same store sales declines. We ended Fiscal 2004 with 384 large format stores, 20 regular stores, 47 outlets and 51 BombayKIDS stores. Total retail square footage increased 9% from Fiscal 2003 year-end, while the store count increased by a net 31 units. The number of retail transactions for the year increased by approximately 8%, and the average ticket decreased to $77.

Cost of Sales, Buying and Store Occupancy Costs

Fiscal 2005

Cost of sales, including buying and store occupancy costs, for Fiscal 2005 was $429.2 million, or 76.0% of revenue, compared to 74.4% for Fiscal 2004. Product margins, defined as revenue less cost of sales and excluding buying and occupancy costs, decreased 50 basis points as a result of an increased level of promotional activity related to clearing product to re-merchandise stores and upgrade the assortment during the first half of the year. In addition, distribution center costs increased as a result of higher average inventory levels and higher distribution center costs in part due to recording a $0.9 million impairment relating to a lease for an idle warehouse most recently used by the Bailey Street operations. Buying and occupancy costs were 20.3% of revenue for Fiscal 2005 compared to 19.3% for Fiscal 2004. The increase in buying and occupancy cost is primarily attributable to higher rents and depreciation expense as we annualized new store openings, as well as higher utility costs.

Fiscal 2004

Cost of sales, including buying and store occupancy costs, for Fiscal 2004 was $428.7 million, or 74.4% of revenue, up from 70.8% of revenue in Fiscal 2003. Product margins declined 130 basis points as a result of issues with merchandise mix, promotional activity and a general softness in the home furnishings retail sector. Additionally, distribution costs had a negative impact on margins as they were deleveraged on a lower sales volume. Buying and store occupancy costs increased 230 basis points, reflecting the deleveraging impact of these relatively fixed costs compared to the lower sales volume.

Store Impairments

Fiscal 2005

Store impairment charges were $5.9 million in Fiscal 2005, compared to $0.5 million in Fiscal 2004. The charges were incurred in connection with the impairment of fixed assets related to 40 unprofitable stores. Following two years of declines in same stores sales for Bombay, there was an increase in the number of stores where impairment was required. In addition, some stores that had been open for two holiday seasons were identified for impairment as profitability was significantly lower than had originally been projected.

Fiscal 2004

Store impairment charges were $0.5 million in Fiscal 2004, compared to $0.2 million in Fiscal 2004. The non-cash charges were incurred in connection with the impairment of fixed assets related to unprofitable stores.

Selling, General and Administrative Expenses

Fiscal 2005

Selling, general and administrative (“SG&A”) expenses were $167.0 million compared to $165.7 million in Fiscal 2004. As a percentage of revenue, expenses increased to 29.6% in Fiscal 2005 compared to 28.8% in Fiscal 2004.

At the store level, SG&A expenses increased $5.1 million, or 120 basis points compared to Fiscal 2004. The increase was driven primarily by a $3.7 million increase in store payroll and payroll related costs as well as higher credit card fees, which vary with sales.

Marketing and visual merchandising costs increased approximately $1.6 million or 40 basis points as we have continued to invest in marketing to reach new customers, primarily in the direct-to-customer channel.

These increases were partially offset by a $3.7 million or 40 basis point decrease in corporate office SG&A. Insurance and taxes declined $2.0 million, primarily due to lower medical insurance costs. Payroll and payroll related costs decreased $1.3 million or 20 basis points due to cost saving measures taken over the past year. Credit and collections, supplies and telephone expenses of the corporate office also declined, by a less significant amount. Professional services increased $0.9 million in connection with the merchandise strategy study conducted in the first half of Fiscal 2005 as well as professional service fees incurred in connection with asset sales.

SG&A associated with our direct-to-customer operations decreased $1.3 million or 20 basis points compared to last year as a result of the lower volume primarily on the Internet which resulted in a decline in hosting and other variable expenses.

Fiscal 2004

SG&A expenses were $165.7 million compared to $158.4 million in Fiscal 2003. As a percentage of revenue, expenses increased to 28.8% in Fiscal 2004 compared to 26.6% in Fiscal 2003.

At the store level, expenses increased $2.4 million, or 90 basis points. The increase was driven primarily by a $2.0 million increase in store payroll resulting from the higher store count over the course of the year. On a per store basis, total costs were down as we tightly managed expenses in a soft sales environment. The 90 basis point increase as a percentage of revenue is the result of the same store sales declines and a general softness in sales for all stores making it difficult to leverage fixed costs, particularly early in the year when store payroll costs tend to be more fixed in nature.

Marketing and visual merchandising costs increased approximately $1.5 million or 40 basis points to 5.6% of total revenue. The increase in this category resulted from our decision to continue to invest in marketing despite the soft sales trend in order to drive traffic and reach new customers.

Corporate office SG&A expenses increased $3.4 million, or 90 basis points over the prior year, due to higher medical and other insurance costs of $2.7 million and higher severance expenses of $0.7 million associated with right-sizing the organization. Additionally, audit expenses increased approximately $0.6 million as a result of the new requirements for compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Internet and mail order SG&A expenses increased by $1.1 million due to higher Internet sales and higher hosting and design costs as we launched our updated website on a new platform. Also, we had approximately $0.8 million less foreign exchange gain resulting from changes in the Canadian dollar exchange rate, in addition to other less significant changes. Current year depreciation was $2.0 million lower than in Fiscal 2003 as a result of the prior year charge of $2.1 million associated with replacing the Company’s point-of-sales system. Additionally, corporate incentive-based compensation expense was $1.4 million lower in Fiscal 2004 than in Fiscal 2003.

Interest

Fiscal 2005

During Fiscal 2005, we generated interest income of $41,000 and interest expense of $2,410,000, compared to interest income of $67,000 and interest expense of $601,000 in Fiscal 2004. During Fiscal 2005, the Company accelerated the seasonal inventory build up to an earlier timeframe to support the new merchandise and presentation, resulting in lower cash balances, earlier and higher borrowings, causing the increase in interest expense and a decrease in interest income. In addition, the average interest rate increased approximately 230 basis points compared to last year.

Fiscal 2004

During Fiscal 2004, we had interest income of $67,000 and interest expense of $601,000, compared to interest income of $176,000 and interest expense of $621,000 in Fiscal 2003. Interest income declined as we had lower levels of invested cash balances during the year resulting from the lack of profitability. However, interest expense also declined as we managed inventory levels and maintained average borrowing levels lower than in Fiscal 2003.

Income Taxes

We recorded income tax expense of $12.0 million in Fiscal 2005, income tax benefit of $6.7 million in Fiscal 2004 and income tax expense of $5.8 million in Fiscal 2003. The effective rates for income tax expense (benefit) were 34.4%, (34.7%) and 38.8% in the respective periods. The income tax expense incurred in Fiscal 2005 was the result of recording a non-cash charge of $23.8 million in connection with providing a valuation allowance against all U.S. deferred tax assets as a result of cumulative losses in recent years. Under accounting principles generally accepted in the United States, this valuation allowance will be adjusted in the future resulting in the reinstatement of all or part of the deferred tax assets when operating results demonstrate a pattern of future profitability, in reversal of the current cumulative three year loss trend. The adjustment has no impact on cash flow in the current or any future period.

Fluctuations in the effective tax rate between Fiscal 2004 and Fiscal 2003 were primarily related to foreign taxes associated with our Canadian subsidiary and the relative significance of the profit generated by the Canadian subsidiary to the overall consolidated entity, as well as the impact of state tax expenses that have not changed proportionately to income (loss) before income taxes.

Liquidity and Capital Resources

The primary sources of liquidity and capital resources are cash flows from operations and a line of credit. We have a secured, revolving credit agreement with a group of banks, with an aggregate commitment of up to $125 million for working capital, inventory financing and letter of credit purposes. The available commitmen