UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended October 29, 2005

OR

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

For the transition period from                      to                     

Commission file number 000-21250

THE GYMBOREE CORPORATION

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization) 94-2615258
(IRS Employer Identification No.)

500 Howard Street, San Francisco, California
(Address of principal executive offices) 94105
(Zip code)

(415) 278-7000
(Registrant’s telephone number, including area code)

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

Yes þ            No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ            No o

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

Yes o            No þ

     As of November 26, 2005, 31,666,499 shares of the registrant’s common stock were outstanding.

TABLE OF CONTENTS

Part I — FINANCIAL INFORMATION	3
Item 1. FINANCIAL STATEMENTS	3
CONDENSED CONSOLIDATED BALANCE SHEETS	3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME	4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	11
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	12
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	19
Item 4. CONTROLS AND PROCEDURES	20
Part II — OTHER INFORMATION	20
Item 1. LEGAL PROCEEDINGS	20
Item 6. EXHIBITS	21
SIGNATURES	22
Exhibit Index
EXHIBIT 15
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

2

Part I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)

	October 29,			January 29,			October 30,
	2005			2005			2004
Assets
Current Assets
Cash and cash equivalents	$	34,132		$	30,599		$	24,608
Marketable securities		58,275			30,000			40,000
Accounts receivable		12,095			16,547			17,732
Merchandise inventories		100,814			97,237			91,706
Prepaid income taxes		8,615			3,554			2,600
Prepaid expenses		2,928			2,994			3,295
Deferred income taxes		2,772			3,795			311
Current assets of discontinued operations		514			1,794			4,428
Total current assets		220,145			186,520			184,680
Property and Equipment
Land and buildings		10,375			10,375			10,375
Leasehold improvements		152,615			144,998			141,648
Furniture, fixtures and equipment		154,502			146,917			150,144
		317,492			302,290			302,167
Less accumulated depreciation and amortization		(169,000	)		(151,545	)		(156,070	)
		148,492			150,746			146,097
Deferred Income Taxes		3,411			12,891			11,251
Lease Rights and Other Assets		1,558			1,542			1,526
Total Assets	$	373,606		$	351,699		$	343,554
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable	$	45,404		$	39,241		$	38,245
Accrued liabilities		44,990			41,803			43,391
Current liabilities of discontinued operations		956			7,144			5,631
Total current liabilities		91,350			88,188			87,267
Long-Term Liabilities
Deferred rent and other liabilities		47,599			46,105			39,943
Total Liabilities		138,949			134,293			127,210
Stockholders’ Equity
Common stock, including additional paid-in capital ($.001 par value: 100,000,000 shares authorized, 31,397,459, 31,062,066 and 30,830,374 shares issued and outstanding at October 29, 2005, January 29, 2005 and October 30, 2004, respectively)		71,470			67,355			64,752
Retained earnings		164,247			150,915			151,727
Unearned compensation		(1,066	)		(617	)		—
Accumulated other comprehensive gain (loss)		6			(247	)		(135	)
Total stockholders’ equity		234,657			217,406			216,344
Total Liabilities and Stockholders’ Equity	$	373,606		$	351,699		$	343,554

See notes to condensed consolidated financial statements.

3

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)

	13 Weeks Ended						39 Weeks Ended
	October 29,			October 30,			October 29,			October 30,
	2005			2004			2005			2004
Net sales:
Retail	$	174,507		$	152,823		$	464,582		$	410,746
Play & Music		2,576			2,785			7,505			7,961
Total net sales		177,083			155,608			472,087			418,707
Cost of goods sold, including buying and occupancy expenses		(95,779	)		(93,944	)		(278,918	)		(253,457	)
Gross profit		81,304			61,664			193,169			165,250
Selling, general and administrative expenses		(60,956	)		(54,306	)		(170,879	)		(151,984	)
Operating income		20,348			7,358			22,290			13,266
Other income, net		488			69			989			451
Income from continuing operations before income taxes		20,836			7,427			23,279			13,717
Income tax benefit (expense)		(9,725	)		122			(10,600	)		(2,174	)
Income from continuing operations		11,111			7,549			12,679			11,543
Income (loss) from discontinued operations, net of income tax		46			(3,377	)		653			(3,315	)
Income before cumulative effect of change in accounting principle		11,157			4,172			13,332			8,228
Cumulative effect of change in accounting principle, net of income tax		—			—			—			1,228
Net income	$	11,157		$	4,172		$	13,332		$	9,456
Basic per share amounts:
Income from continuing operations	$	0.36		$	0.25			0.41		$	0.38
Income (loss) from discontinued operations, net of income tax		—			(0.11	)		0.02			(0.11	)
Cumulative effect of change in accounting principle, net of income tax		—			—			—			0.04
Net income	$	0.36		$	0.14			0.43		$	0.31
Diluted per share amounts:
Income from continuing operations	$	0.35		$	0.24			0.40		$	0.37
Income (loss) from discontinued operations, net of income tax		—			(0.11	)		0.02			(0.11	)
Cumulative effect of change in accounting principle, net of income tax		—			—			—			0.04
Net income	$	0.35		$	0.13			0.42		$	0.30
Weighted average shares outstanding:
Basic		31,370			30,801			31,263			30,657
Diluted		32,051			31,346			31,767			31,355

See notes to condensed consolidated financial statements.

4

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

	39 Weeks Ended
	October 29,			October 30,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	13,332		$	9,456
Adjustments to reconcile net income to net cash provided by operating activities:
(Income) loss from discontinued operations, net of income tax		(653	)		3,315
Cumulative effect of change in accounting principle, net of income tax		—			(1,228	)
Depreciation and amortization		21,889			20,368
Deferred income tax provision (benefit)		10,504			(3,563	)
Loss on disposal of property and equipment		287			451
Tax benefit from exercise of stock options		794			2,856
Non-cash compensation expense		210			—
Change in assets and liabilities:
Accounts receivable		4,459			(6,546	)
Merchandise inventories		(3,733	)		(22,533	)
Prepaid expenses and other assets		52			(818	)
Prepaid income taxes		(4,879	)		(9,639	)
Accounts payable		6,074			4,832
Accrued liabilities		7,975			18,891
Deferred and other liabilities		1,652			8,344
Net cash provided by continuing operations		57,963			24,186
Net cash (used in) provided by discontinued operations		(4,193	)		5,626
Net cash provided by operating activities		53,770			29,812
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of marketable securities		362,125			574,455
Purchases of marketable securities		(390,400	)		(546,455	)
Capital expenditures		(24,377	)		(58,040	)
Proceeds from sale of assets and other		18			141
Net cash used in investing activities		(52,634	)		(29,899	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock		2,660			3,436
Net cash provided by financing activities		2,660			3,436
Effect of exchange rate fluctuations on cash		(263	)		(294	)
Net Increase in Cash and Cash Equivalents		3,533			3,055
CASH AND CASH EQUIVALENTS:
Beginning of Period		30,599			21,553
End of Period	$	34,132		$	24,608
NON-CASH INVESTING ACTIVITIES:
Capital expenditures incurred, but not yet paid	$	2,192		$	4,495
OTHER CASH FLOW INFORMATION:
Cash paid for income taxes	$	5,362		$	12,318
Cash paid for interest	$	6		$	59

See notes to condensed consolidated financial statements.

5

THE GYMBOREE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

     The unaudited interim condensed consolidated financial statements, which include The Gymboree Corporation and its subsidiaries, all of which are wholly owned (“the Company”), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with generally accepted accounting principles have been omitted. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 29, 2005.

     The accompanying interim condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to present fairly the results of operations, the financial position and cash flows for the periods presented. All such adjustments are of a normal and recurring nature, except for adjustments related to income taxes and the litigation settlement which are disclosed in Notes 9 and 10.

     The results of operations for the thirty-nine weeks ended October 29, 2005, are not necessarily indicative of the operating results that may be expected for the fiscal year ending January 28, 2006 (“fiscal 2005”).

2. Stock Based Compensation

     The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” The table below illustrates the effect on net income and income per share had the Company recorded compensation expense for its stock option plans, stock awards plan and purchase plan based on the fair value method consistent with the method of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148.

	13 Weeks Ended						39 Weeks Ended
	October 29,			October 30,			October 29,			October 30,
	2005			2004			2005			2004
	(In thousands, except per share data)
Net income, as reported	$	11,157		$	4,172		$	13,332		$	9,456
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		63			—			132			—
Deduct: Total stock-based employee compensation expense determined under fair value based method, for awards granted or settled, net of related tax effects		(1,068	)		(1,618	)		(3,548	)		(4,865	)
Pro forma net income	$	10,152		$	2,554		$	9,916		$	4,591
Basic income per share
As reported	$	0.36		$	0.14		$	0.43		$	0.31
Pro forma		0.32			0.08			0.32			0.15
Diluted income per share
As reported	$	0.35		$	0.13		$	0.42		$	0.30
Pro forma		0.32			0.08			0.31			0.15

6

     The fair value of option grants and shares issued under stock option plans, share awards plan and the purchase plan are estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	Periods ended
	October 29,			October 30,
	2005			2004
Expected dividend rate		0	%		0	%
Expected volatility		46.0	%		47.9	%
Risk-free interest rate		4.3	%		2.6	%
Expected lives (yrs.)		4.1			4.0

     On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. The statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments, computed at the date of grant. Upon adoption, all employee stock option awards will be recognized as an expense in the Company’s statement of income, typically over the related vesting period of the options. Additionally, SFAS No. 123R requires companies to record compensation expense for the unvested portion of previously granted awards as they continue to vest, as calculated previously and included in the Company’s prior pro forma disclosures under SFAS No. 148. The Company plans to adopt SFAS No. 123R as of the beginning of the first quarter of fiscal 2006, as required. The Company expects the adoption of SFAS No. 123R to reduce earnings for fiscal 2006 by approximately $0.08 to $0.10 per diluted share.

3. Net Income Per Share

     Basic net income per share is calculated by dividing net income for the period by the weighted average common shares outstanding for that period. Diluted net income per share includes the effects of dilutive instruments, such as stock options and unvested stock award shares, and uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted average number of shares outstanding. The following summarizes the incremental shares from these potentially dilutive securities, calculated using the treasury stock method.

	13 Weeks Ended				39 Weeks Ended
	October 29,		October 30,		October 29,		October 30,
	2005		2004		2005		2004
	(In thousands)
Weighted average number of shares — basic		31,370		30,801		31,263		30,657
Add: effect of dilutive securities		681		545		504		698
Weighted average number of shares — diluted		32,051		31,346		31,767		31,355

7

     Anti-dilutive options to purchase 2,218,369 and 3,225,671 shares of common stock for the 13 weeks ended October 29, 2005 and October 30, 2004, respectively, and 2,609,718 and 2,919,005 shares of common stock for the 39 weeks ended October 29, 2005 and October 30, 2004, respectively, were excluded from the above computations of weighted average shares.

4. Comprehensive Income

     Comprehensive income, which includes net income, foreign currency translation adjustments and fluctuations in the fair market value of certain derivative financial instruments, is as follows:

	13 Weeks Ended				39 Weeks Ended
	October 29,		October 30,		October 29,		October 30,
	2005		2004		2005		2004
	(In thousands)
Net income	$	11,157	$	4,172	$	13,332	$	9,456
Other comprehensive income		435		139		253		382
Total comprehensive income	$	11,592	$	4,311	$	13,585	$	9,838

5. Segments

     The Company operates two reportable segments, retail stores and Play & Music. Corporate overhead and income taxes are included in the retail stores segment. The following table provides the summary financial data of each reportable segment excluding discontinued operations (in thousands).

	13 Weeks Ended October 29, 2005						39 Weeks Ended October 29, 2005
	Retail						Retail
	Stores		Play & Music		Total		Stores		Play & Music		Total
Net sales	$	174,507	$	2,576	$	177,083	$	464,582	$	7,505	$	472,087
Depreciation and amortization		7,192		113		7,305		21,510		379		21,889
Operating income		19,785		563		20,348		20,888		1,402		22,290
Total assets		367,210		5,882		373,092		367,210		5,882		373,092
Capital expenditures		9,399		100		9,499		24,052		325		24,377

	13 Weeks Ended October 30, 2004						39 Weeks Ended October 30, 2004
	Retail						Retail
	Stores (1)		Play & Music		Total		Stores (1)		Play & Music		Total
Net sales	$	152,823	$	2,785	$	155,608	$	410,746	$	7,961	$	418,707
Depreciation and amortization		6,964		108		7,072		20,019		349		20,368
Operating income		7,123		235		7,358		12,225		1,041		13,266
Total assets		333,379		5,747		339,126		333,379		5,747		339,126
Capital expenditures		29,433		122		29,555		57,839		201		58,040

(1) Includes Gymboree Visa credit card program, which was previously reported under Play & Music and Other segment.

     Net retail sales from our Canadian operations amounted to $7.5 million and $6.5 million for the 13 weeks ended October 29, 2005 and October 30, 2004, respectively, and $18.8 million and $16.8 million for the 39 weeks ended October 29, 2005 and October 30, 2004, respectively. Long-lived assets held by our Canadian operations amounted to $2.5 million and $3.2 million as of October 29, 2005 and October 30, 2004, respectively.

8

6. Discontinued Operations

     The Company closed its United Kingdom and Ireland operations in fiscal 2004 and is in the process of liquidating the legal entities. The results of the United Kingdom and Ireland operations have been presented as discontinued operations in the accompanying financial statements for all periods presented.

Net sales and income (loss) from discontinued operations were as follows (in thousands):

	13 Weeks Ended						39 Weeks Ended
	October 29,			October 30,			October 29,			October 30,
	2005			2004			2005			2004
Net sales	$	—		$	9,651		$	—		$	22,979
Income (loss) from discontinued operations	$	(441	)		(5,317	)	$	1,130			(5,219	)
Income tax benefit (expense)		487			1,940			(477	)		1,904
Income (loss) from discontinued operations, net of income taxes	$	46		$	(3,377	)	$	653		$	(3,315	)

     The changes in lease disposition accruals included in current liabilities of discontinued operations were as follows (in thousands):

Lease disposition accruals as of January 29, 2005	$	5,647
Payments		(3,489	)
Revisions to estimates, primarily favorable settlements of lease terminations		(2,158	)
Lease disposition accruals as of October 29, 2005	$	—

7. Change in Accounting Principle

     Effective February 1, 2004, the Company elected to change its accounting method for inventory valuation from the retail method to the lower of cost or market method, determined on a weighted average basis (the “cost method”). The Company believes the cost method is a preferable method for matching the cost of merchandise with the revenues generated. The cumulative effect of this accounting change, which was recorded in the first quarter of fiscal 2004, was income of $1.2 million, or $0.04 per diluted share, net of income taxes. It is not possible to determine the effect of this change on any other previously reported fiscal periods or on fiscal 2005.

8. Credit Facility Amendment

     On July 27, 2005, the Company entered into a Second Amendment to Credit Agreement (the “Second Amendment”) by and between the Company and certain of its subsidiaries (collectively, the “Borrowers”) and the Bank of America, N.A. (the “Lender”). The Second Amendment amends certain terms of the Credit Agreement

9

dated as of August 11, 2003, as previously amended by the Waiver and First Amendment to Credit Agreement on December 3, 2004 (as amended, the “Credit Agreement”), by and between the Company, the Borrowers and the Lender. Among other things, the Second Amendment amends the Credit Agreement by:

     i. Extending the maturity date of the unsecured revolving credit facility from August 11, 2006, to August 11, 2008; and

     ii. Providing the Company with the option to increase the maximum revolving loan limit from an aggregate principal amount of $70,000,000 to $80,000,000.

9. Income Taxes

     Income tax expense for the thirteen and thirty-nine weeks ended October 29, 2005 includes $1.9 million of additional expense related to the establishment of new valuation allowances for certain tax assets, an election to take bonus depreciation resulting in the impairment of an existing deferred tax asset and the adjustment of estimated income tax expense to match the final fiscal 2004 tax return filed in October 2005. Excluding the effect of this additional expense, the effective tax rate for the thirty-nine weeks ending October 29, 2005 would have approximated 37%. During the thirteen and thirty-nine weeks ended October 30, 2004, income tax expense was reduced due to the reversal of a $3.4 million tax reserve, which was largely attributable to the favorable resolution of a Canadian income tax audit. Excluding the effect of this tax benefit, the effective tax rate for the thirty-nine weeks ended October 30, 2004 would have approximated 36%.

10. Subsequent Events

Share Repurchase

     On November 2, 2005, the Board of Directors authorized the Company to utilize up to $55 million of the Company’s cash reserves to purchase shares of the Company’s outstanding common stock. Purchases will be made from time to time on the open market or in privately negotiated transactions. Depending on market conditions and other factors, purchases under this program may be commenced or suspended without prior notice at any time, or from time to time, through October 28, 2006.

Litigation Settlement

     The Company was served in a class action lawsuit filed against Gymboree Operations, Inc., a wholly owned subsidiary of the Company, in the Superior Court of Riverside County, California on April 21, 2005. The lawsuit alleged that Gymboree Operations failed to pay overtime wages and provide meal and rest breaks. As a result of mediation proceedings, the Company entered into a binding Memorandum of Understanding on November 18, 2005 to fully resolve all claims related to the lawsuit. The Memorandum of Understanding provides for a settlement in the total amount of up to approximately $2.3 million, payable on a claims-made basis. The settlement resulted in a charge of approximately $1.5 million after tax, which was recorded in the thirteen weeks ended October 29, 2005. Court hearings to review the fairness of the terms of the settlement are expected to be held in the first quarter of fiscal 2006.

10

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Board of Directors and Stockholders of The Gymboree Corporation:

We have reviewed the accompanying condensed consolidated balance sheets of The Gymboree Corporation and subsidiaries (the “Company”) as of October 29, 2005 and October 30, 2004, and the related condensed consolidated statements of income for the thirteen and thirty-nine week periods then ended, and cash flows for the thirty-nine week periods then ended. These condensed consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 7 to the condensed consolidated financial statements, effective February 1, 2004, the Company changed its accounting method for inventory valuation from the retail method to the lower of cost or market method, determined on a weighted average basis.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of The Gymboree Corporation as of January 29, 2005, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated April 22, 2005, we expressed an unqualified opinion on those consolidated financial statements and included explanatory paragraphs related to a restatement and a change in accounting method. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 29, 2005, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Deloitte & Touche LLP

San Francisco, California

December 5, 2005

11

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-looking statements

     The following discussion and analysis should be read in conjunction with the financial statements and related notes thereto included elsewhere in this Quarterly Report. The discussion in this report contains forward-looking statements that involve risks and uncertainties, including statements regarding planned capital expenditures, planned store openings, expansions and renovations, systems infrastructure development, future cash generated from operations and future cash needs. Inaccurate assumptions and known and unknown risks and uncertainties can affect the accuracy of forward-looking statements, and our actual results could differ materially from results that may be anticipated by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, customer reactions to new merchandise, service levels and new concepts, the level of promotional activity, gross margin achievement, our ability to manage inventory levels appropriately, general economic conditions, success in meeting delivery targets, competitive market conditions, effects of future embargoes from countries used to source product, unanticipated costs actually incurred in connection with the liquidation of our United Kingdom and Ireland entities, instability in countries where our merchandise is manufactured and the other factors described in this document. When used in this document, the words “believes,” “expects,” “estimates,” “anticipates” and similar expressions are intended to identify certain of these forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The cautionary statements made in this document should be read as being applicable to all related forward-looking statements wherever they appear in this document. Readers are cautioned not to place undue reliance on these forward-looking statements, which are based on information available as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made in this report, in our Annual Report on Form 10-K for the fiscal year ended January 29, 2005 and our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations.

General

     The Gymboree Corporation is a specialty retailer operating stores selling high quality apparel and accessories for children and women, as well as play programs for children under the GYMBOREE®, JANIE AND JACK®, JANEVILLE® and GYMBOREE PLAY & MUSIC™ brands. As of October 29, 2005, the Company operated a total of 663 stores: 574 Gymboree stores (546 in the United States and 28 in Canada), 11 Gymboree Outlet stores, 62 Janie and Jack shops and 16 Janeville stores in the United States. The Company also operates online stores at www.gymboree.com and www.janieandjack.com, and offers directed parent-child developmental play programs at 522 franchised and company-operated centers in the United States and 24 other countries.

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     During the quarter, the Company opened 6 Gymboree stores, relocated or remodeled 3 Gymboree stores, converted 2 Gymboree stores into Gymboree Outlet stores, opened 2 Janie and Jack shops and opened 11 Gymboree Outlet stores (including the 2 conversions).

     For the remainder of fiscal 2005, the Company plans to open approximately 2 Gymboree Outlet stores, 2 Janie and Jack shops, and 1 Janeville store. The Company also expects to relocate 1 Gymboree store and close approximately 6 Gymboree stores during the remainder of fiscal 2005.

     The Company closed its United Kingdom and Ireland operations in fiscal 2004, and is in the process of liquidating the legal entities. The results of the United Kingdom and Ireland operations have been presented as discontinued operations in the accompanying financial statements for all periods presented.

Results of Operations

Thirteen weeks ended October 29, 2005 compared to thirteen weeks ended October 30, 2004

Net Sales

     Net retail sales in the third quarter of fiscal 2005 increased to $174.5 million from $152.8 million in the same period last year, an increase of $21.7 million, or 14.2%. Comparable store sales increased 10% over the same 13-week period last year. This increase was primarily driven by a strong customer response to our fall and holiday deliveries. The largest increase in comparable store sales came from our newborn and accessories departments, followed by our boy and girl departments. In addition, the Company revised the timing of several branded promotional events within the quarter, which improved the productivity of these events while allowing us to capitalize on our strong product performance. Non-comparable store sales increased $5.1 million due to net store and square footage growth of 21 stores and 57,000 square feet, respectively. There were 663 stores open at the end of the period compared to 642 as of the end of the same period last year.

     Play & Music net sales in the third quarter of fiscal 2005 decreased to $2.6 million from $2.8 million in the same period last year, a decrease of $0.2 million or 7.1%. This decrease was primarily due to a decrease in equipment sales, partially offset by an increase in domestic franchise fees. There were 5 corporate owned sites open at the end of the period compared to 8 at the end of the same period last year.

Gross Profit

     Gross profit for the third quarter of fiscal 2005 increased to $81.3 million from $61.7 million in the same period last year. As a percentage of net sales, gross profit increased 6.3 percentage points to 45.9% from 39.6% in the same period last year. This increase was attributable to the reduction in product costs as a result of our product costing strategy and the strong customer response to our fall and holiday lines. Our product costing strategy involved the improved coordination of product design, merchandising and development, as well as greater efficiencies in product sourcing. The increase in comparable store sales also allowed us to leverage occupancy and buying costs. Management expects continued improvement in gross margins in the fourth quarter of fiscal 2005 compared to the same period last year.

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Selling, General and Administrative Expenses

     Selling, general and administrative (“SG&A”) expenses, which principally consist of non-occupancy store expenses, corporate overhead and distribution expenses, increased to $61.0 million in the third quarter of fiscal 2005 from $54.3 million in the same period last year. The increase in SG&A expense was due to higher corporate expenses for incentive compensation, as well as higher store operating costs due to an increase in total store count compared to the prior year and an increase in sales volume. SG&A also includes approximately $2.3 million related to the settlement of a class action lawsuit in the third quarter of fiscal 2005. As a percentage of net sales, SG&A expenses decreased 0.5 percentage points to 34.4% in the third quarter of fiscal 2005 from 34.9% in the same period last year as the increase in comparable store sales allowed us to leverage store operating costs. During the fourth quarter of fiscal 2005, the Company expects a reduction in SG&A expense as a percent of net sales compared to the same period last year.

Other Income, Net

     Other income increased in the third quarter of fiscal 2005 to $488,000 from $69,000 in the same period last year primarily due to an increase in net interest income of approximately $327,000. The increase in net interest income was due to higher investment balances coupled with higher interest rates.

Income Taxes

     Income tax expense for the thirteen weeks ended October 29, 2005 includes $1.9 million of additional expense related to the establishment of new valuation allowances for certain tax assets, an election to take bonus depreciation resulting in the impairment of an existing deferred tax asset and the adjustment of estimated income tax expense to match the final fiscal 2004 tax return filed in October 2005. Excluding the effect of this additional expense, the effective tax rate for the quarter would have approximated 37%. During the thirteen weeks ended October 30, 2004, the Company recorded a $0.3 million tax benefit due to the reversal of a $3.4 million tax reserve, which was largely attributable to the favorable resolution of a Canadian income tax audit. Excluding the effect of this tax benefit, the effective tax rate for the third quarter of fiscal 2004 would have approximated 36%.

Discontinued Operations

     The loss reported for the discontinued United Kingdom and Ireland operations in the third quarter of fiscal 2005 primarily represents the recognition of the cumulative foreign currency translation losses in connection with the liquidation of the United Kingdom and Ireland entities. The offsetting income tax benefit primarily represents the reconciliation of financial accounting records to the fiscal 2004 income tax return filed in the quarter. The loss reported in the third quarter of fiscal 2004 represents operating results, as well as charges related to asset write-offs, severance and lease disposition costs. The results of discontinued operations are presented net of income tax in the accompanying financial statements.

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Results of Operations

Thirty-nine weeks ended October 29, 2005 compared to thirty-nine weeks ended October 30, 2004

Net Sales

     Net retail sales for the thirty-nine weeks ended October 29, 2005 increased to $464.6 million from $410.7 million in the same period last year, an increase of $53.9 million, or 13.1%. Comparable store sales increased 7% over the same 39-week period last year. This increase was primarily driven by strong product performance, as well as the implementation of a key item strategy and the improved performance of our branded promotional events. Non-comparable store sales increased $19.7 million due to net store and square footage growth of 21 stores and 57,000 square feet, respectively. There were 663 stores open at the end of the period compared to 642 as of the end of the same period last year.

     Play & Music net sales for the thirty-nine weeks ended October 29, 2005 decreased to $7.5 million from $8.0 million in the same period last year, a decrease of $0.5 million, or 6.3%. This decrease was primarily due to the closure of corporate owned sites as part of our ongoing repositioning of the Play & Music business. There were 5 corporate owned sites open at the end of the period compared to 8 as of the end of the same period last year.

Gross Profit

     Gross profit for the thirty-nine weeks ended October 29, 2005 increased to $193.2 million from $165.3 million in the same period last year. As a percentage of net sales, gross profit increased 1.4 percentage points to 40.9% from 39.5% in the same period last year. This increase was attributable to the reduction in product costs as a result of our product costing strategy and a strong customer response to our product assortment. Our product costing strategy involved the improved coordination of product design, merchandising and development, as well as greater efficiencies in product sourcing. The increase in comparable sales also allowed us to leverage occupancy and buying costs. Management expects continued improvement in gross margins in the fourth quarter of fiscal 2005 compared to the same period last year.

Selling, General and Administrative Expenses

     SG&A expenses increased to $170.9 million in the thirty-nine weeks ended October 29, 2005 from $152.0 million in the same period last year. The increase in SG&A expense was due to higher store operating expenses related to new store openings and an increase in sales volume, as well as higher corporate expenses related to incentive compensation. SG&A expense also includes approximately $2.3 million related to the settlement of a class action lawsuit in the third quarter of fiscal 2005 and approximately $500,000 in severance charges related to the Company’s corporate workforce reduction in the first quarter of fiscal 2005. As a percentage of net sales, SG&A expenses decreased 0.1 percentage points to 36.2% in the thirty-nine weeks ended October 29, 2005 from 36.3% in the same period last year.

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Other Income, Net

     Other income increased to $989,000 in the thirty-nine weeks ended October 29, 2005 from $451,000 in the same period last year primarily due to an increase in net interest income of approximately $582,000, offset in part by foreign exchange losses. The increase in net interest income was due to a higher investment balances coupled with higher interest rates. The foreign exchange losses resulted from foreign currency fluctuations on inter-company transactions between our United States operations and Canadian subsidiary.

Income Taxes

     Income tax expense for the thirty-nine weeks ended October 29, 2005 includes $1.9 million of additional expense related to the establishment of new valuation allowances for certain tax assets, an election to take bonus depreciation resulting in the impairment of an existing deferred tax asset and the adjustment of estimated income tax expense to match the final fiscal 2004 tax return filed in October 2005. Excluding the effect of this additional expense, the effective tax rate for the thirty-nine weeks ending October 29, 2005 would have approximated 37%. During the thirty-nine weeks ended October 30, 2004, the effective tax rate for continuing operations was 15.9% due to the reversal of a $3.4 million tax reserve, which was largely attributable to the favorable resolution of a Canadian income tax audit. Excluding the effect of this tax benefit, the effective tax rate for the 39 weeks ended October 30, 2004 would have approximated 36%.

Discontinued Operations

     Income reported for the discontinued United Kingdom and Ireland operations for the thirty-nine weeks ended October 29, 2005 primarily represents the favorable resolution of lease terminations in connection with the liquidation of the United Kingdom and Ireland entities. The loss reported in the first three quarters of fiscal 2004 includes operating results, as well as charges related to asset write-offs, severance, and lease disposition costs. The results of discontinued operations are presented net of income tax in the accompanying financial statements.

Seasonality

     Our business is impacted by the general seasonal trends characteristic of the apparel and retail industries. Sales from retail operations have historically been highest during the fourth fiscal quarter, somewhat lower during the first and third fiscal quarters and lowest during the second fiscal quarter. Consequently, the results for any fiscal quarter are not necessarily indicative of results for the full year.

Recently Issued Accounting Standards

     On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. The statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R requires all entities to recognize compensation

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expense in an amount equal to the fair value of share-based payments, computed at the date of grant. Upon adoption, all employee stock option awards will be recognized as an expense in the Company’s statement of income, typically over the related vesting period of the options. Additionally, SFAS No. 123R requires companies to record compensation expense for the unvested portion of previously granted awards as they continue to vest, as calculated previously and included in the Company’s prior pro forma disclosures under SFAS No. 148. The Company plans to adopt SFAS No. 123R as of the beginning of the first quarter of fiscal 2006, as required. The Company expects the adoption of SFAS No. 123R to reduce earnings for fiscal 2006 by approximately $0.08 to $0.10 per diluted share.

Financial Condition

Liquidity and Capital Resources

     Net cash provided by operating activities for the thirty-nine weeks ended October 29, 2005 was $53.8 million compared to $29.8 million provided by operating activities in the same period last year. The increase was primarily due to significantly higher operating income and a slower increase in inventory levels in the thirty-nine weeks ended October 29, 2005 compared to the same period last year. In the thirty-nine weeks ended October 30, 2004, inventories were increased substantially to support the growth of the Company’s two new concepts, Janie and Jack and Janeville.

     Net cash used in investing activities for the thirty-nine weeks ended October 29, 2005 was $52.6 million compared to $29.9 million in the same period last year. Net cash used in investing activities for the thirty-nine weeks ended October 29, 2005 consisted of $24.4 million in capital expenditures for the opening of 26 new stores, relocation, remodeling and/or expansion of 15 existing stores, capital expenditures related to store openings and relocations currently in progress, capital expenditures related to improvements to the Company’s distribution center, and information technology improvements, as well as $28.3 million in net marketable securities purchases. The Company estimates that capital expenditures during the remainder of fiscal 2005 will be approximately $2.5 to $3.0 million, and will primarily be used to relocate, remodel or expand 1 Gymboree store, open 2 new Gymboree Outlet stores, open 2 new Janie and Jack shops and 1 new Janeville store, as well as to continue the investment in the Company’s distribution center, website and systems infrastructure replacement.

     Cash provided by financing activities for the thirty-nine weeks ended October 29, 2005 totaled $2.7 million compared to $3.4 million in the same period last year. This decrease was due to a decrease in proceeds from stock option exercises.

     Cash and cash equivalents were $34.1 million at October 29, 2005, an increase of $3.5 million from January 29, 2005. Working capital as of October 29, 2005 was $128.8 million compared to $98.3 million as of January 29, 2005.

     The Company has an unsecured revolving credit facility for borrowings of up to $70 million. The credit facility was amended on July 27, 2005, to extend the expiration to August 2008 and to provide the Company with the option to increase the credit facility up to $80 million if certain financial covenants are met. The credit facility may be used for the issuance of documentary and standby letters of credit, working capital and capital expenditure needs. This credit facility requires the Company

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to meet financial covenants on a quarterly basis and limits annual capital expenditures. As of October 29, 2005, the Company was in compliance with these covenants. As of October 29, 2005, $50.8 million of documentary and standby letters of credit were outstanding, and no borrowings were outstanding.

     The Company has co-branded credit card agreements (the “Agreements”) with a third-party bank (the “Bank”) and Visa U.S.A. Inc. for the issuance of a Visa credit card bearing the Gymboree brand and administration of an associated incentive program for cardholders. The Bank pays fees to the Company based on the number of credit card accounts opened and card usage and makes certain guaranteed minimum annual payments. Visa U.S.A. Inc. also pays fees to the Company based on card usage. For the thirty-nine weeks ended October 29, 2005, the Company recognized approximately $2.0 million in new account and credit card usage fees, which are included in net retail sales in the accompanying Condensed Consolidated Statement of Income. As of October 29, 2005, $2.2 million and $2.1 million of payments received under the Agreements are included in accrued liabilities and other long-term liabilities, respectively, in the accompanying Condensed Consolidated Balance Sheet.

     On November 2, 2005, the Board of Directors authorized the Company to utilize up to $55 million of the Company’s cash reserves to purchase shares of the Company’s outstanding common stock. Purchases will be made from time to time on the open market or in privately negotiated transactions. Depending on market conditions and other factors, purchases under this program may be commenced or suspended without prior notice at any time, or from time to time, through October 28, 2006.

     As discussed in Note 10 to the condensed consolidated financial statements, the Company entered into a binding Memorandum of Understanding which provides for a settlement in the total amount of up to approximately $2.3 million, payable on a claims-made basis. Court hearings to review the fairness of the terms of the settlement are expected to be held in the first quarter of fiscal 2006. If approved, the Company does not expect the settlement to have a material effect on future liquidity or cash flow.

     There have been no material changes to the Company’s contractual obligations since its Annual Report on Form 10-K for the year ended January 29, 2005.

     The Company remains liable on lease agreements for its previous Burlingame, California headquarters assigned to its current landlord and for 2 Play & Music sites sold to franchisees. The Company does not believe that payment by the Company of its maximum potential amount of future payments under these lease agreements would have a material current or future effect on its liquidity or capital resources.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company enters into forward foreign exchange contracts to hedge certain inter-company loans and inventory purchases. The term of the forward exchange contracts is generally less than one year. The purpose of our foreign currency hedging activities is to protect us from the risk that the eventual dollar net cash inflow resulting from the repayment of certain inter-company loans from our foreign subsidiaries and dollar margins resulting from inventory purchases will be adversely affected by changes in exchange rates.

     The tables below summarize by major currency the notional amounts and fair values of our forward foreign exchange contracts in U.S. dollars.

	October 29, 2005
	Notional		Fair Value			Weighted Average
	Amount		Loss			Rate
	(in thousands, except weighted average rate data)
Canadian dollars	$	2,849	$	(98	)	$	0.85
Total	$	2,849	$	(98	)

	October 30, 2004
	Notional		Fair Value			Weighted Average
	Amount		Loss			Rate
	(in thousands, except weighted average rate data)
British pounds sterling	$	1,358	$	(19	)	$	1.83
Canadian dollars		5,070		(262	)		0.82
Euro		1,238		(41	)		1.28
Total	$	7,666	$	(322	)

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Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

     We maintain a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), designed to provide reasonable assurance that information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The Company conducted an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Operating Officer/Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on their evaluation, the Chief Executive Officer and the Chief Operating Officer/Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report in providing reasonable assurance of achieving the Company’s control objectives.

Changes in Internal Control over Financial Reporting

     We also maintain a system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). During the third quarter of fiscal 2005, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II — OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

     The Company was served in a class action lawsuit filed against Gymboree Operations, Inc., a wholly owned subsidiary of the Company, in the Superior Court of Riverside County, California on April 21, 2005. The lawsuit alleged that Gymboree Operations failed to pay overtime wages and provide meal and rest breaks. As a result of mediation proceedings, the Company entered into a binding Memorandum of Understanding on November 18, 2005 to fully resolve all claims related to the lawsuit. The Memorandum of Understanding provides for a settlement in the total amount of up to approximately $2.3 million, payable on a claims-made basis. The settlement resulted in a charge of approximately $1.5 million after tax, which was recorded in the thirteen weeks ended October 29, 2005. Court hearings to review the fairness of the terms of the settlement are expected to be held in the first quarter of fiscal 2006.

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Item 6. EXHIBITS

3.2	Amended and Restated Bylaws of The Gymboree Corporation (1)
15	Letter re: Unaudited Interim Financial Information
31.1	Certification of Lisa M. Harper Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Blair W. Lambert Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Lisa M. Harper Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Blair W. Lambert Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.

(1) Incorporated by reference to the corresponding exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 1, 2005.

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SIGNATURES

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

	THE GYMBOREE CORPORATION
	(Registrant)
December 5, 2005 Date	By: /s/ Blair W. Lambert Blair W. Lambert Chief Operating Officer and Chief Financial Officer

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Exhibit Index

Exhibit
Number	Description
3.2	Amended and Restated Bylaws of The Gymboree Corporation (1)
15	Letter re: Unaudited Interim Financial Information
31.1	Certification of Lisa M. Harper Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Blair W. Lambert Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Lisa M. Harper Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Blair W. Lambert Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.

(1) Incorporated by reference to the corresponding exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 1, 2005.