According to data published by the International Council of Toy Industries, worldwide sales of retail plush and doll toys were over $11 billion in 2000, about 20% of the $55 billion worldwide toy industry (excluding video games) and, according to a study conducted for the Toy Industry Association, U.S. sales of retail plush and doll toys in 2003 were over $4 billion.

According to the United States Census Bureau, in 2002 there were over 60 million children age 14 and under in the United States. While the size of this population group is projected to remain relatively stable over the next decade, the economic influence of this age group is expected to increase. Based on a recent third-party publication, it is believed that children’s spending has doubled every ten years for the past three decades, tripling in the 1990s.

Guests who visit a Company’s workshop enter a teddy-bear-themed environment consisting of eight stuffed animal-making stations. Cheerful proprietary teddy bear music plays, and the sign system is easy to read to distinguish each station and direct the Guests through the animal-making process. At each station a friendly and knowledgeable Bear Builder associate is available to explain the process.

Upon entering the Company’s stores, Guests are greeted by the Company’s First Impressions Bear who introduces the Company’s concept and its collection of furry stuffed animals. Depending on the season, the Company typically offers between 30 and 35 varieties of animals, including teddy bears, bunnies, dogs, kitties, a frog, a monkey, or a pony as well as a selection of limited edition Collectibear products. Fully stuffed versions of the animals are displayed along a wall so Guests can see and touch each animal before selecting an unstuffed animal, or skin, of their own.

Guests may select from 16 sound choices to insert inside the animal, including the “Build-A-Sound” option which allows a Guest to record their own ten-second message to further personalize their animal. Pre-recorded sounds can also be selected, including giggles, barks, meows, and other animal sounds as well as songs or messages such as “I love you.”

With the assistance of a Bear Builder associate, the Guest pumps stuffing into the animal until it reaches the appropriate firmness and passes the Guest’s own “huggability” test. After the Guest pumps the pedal of the stuffing machine, they participate in the Company’s signature “heart ceremony” in which they make a special wish before placing the distinctive, three-dimensional, fabric heart inside the animal.

The Bear Builder associate sews up the back of the animal through an exclusively licensed, pre-laced system. Before closing the animal, the Bear Builder associate inserts a unique barcode into the animal. The Company’s “Find-A-Bear” identification system allows the Company to reunite a missing stuffed animal with its registered owner if it is ever lost and returned to the Company at one of the Company’s stores.

Guests air wash and fluff the stuffed animal with air blowers and brushes at the “bear bath.” This step ensures the new animal is well-groomed and “paw-fectly huggable.”

Gross margin increased to $65.3 million for the first half of fiscal 2004 from $40.6 million for the first half of fiscal 2003, an increase of $24.7 million, or 60.9%.

Selling, general and administrative expenses were $48.6 million for the first half of fiscal 2004 as compared to $36.1 million for the first half of fiscal 2003, an increase of $12.5 million, or 34.8%.

Store preopening expense was $0.6 million for the first half of fiscal 2004 as compared to $1.5 million for the first half of fiscal 2003.

Interest income, net of interest expense, was $0.1 million for both the first half of fiscal 2004 and fiscal 2003.