10-Q/A

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q/A

(Mark One)
x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended July 31, 2004
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	94-2615258
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
500 Howard Street, San Francisco, California	94105
(Address of principal executive offices)	(Zip code)

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

700 Airport Boulevard, Suite 200, Burlingame, California 94010-1912
(Former address, if changed since last report)

          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   o

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

Yes   x No   o

          As of August 28, 2004, 30,748,807 shares of the registrant’s common stock were outstanding.

This amendment on Form 10-Q/A amends the Registrant’s Quarterly Report on Form 10-Q for the period ended July 31, 2004, as filed by the Registrant on September 9, 2004 (“Original Filing”), and is being filed to reflect the restatement of the Registrant’s condensed consolidated financial statements (the “restatement”).  This restatement reflects (i) adjustments to conform the Registrant’s lease accounting to the Generally Accepted Accounting Principles expressed by the Office of the Chief Accountant of the Securities and Exchange Commission in a letter dated February 7, 2005, as described in Note 10 to the condensed consolidated financial statements, (ii) reclassification of certain auction rate securities from cash and cash equivalents to marketable securities, as described in Note 10 to the condensed consolidated financial statements, and (iii) presentation of the United Kingdom and Ireland operations as discontinued operations subsequent to the period ended July 31, 2004, as described in Note 9 to the condensed consolidated financial statements.  Amendments to the Registrant’s Quarterly Reports on Form 10-Q for the periods ended May 1, 2004 and October 30, 2004, are being filed concurrently.

The following Items in Part I of the Original Filing have been amended as a result of the restatement:  Item 1 – Financial Statements; Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations; and Item 4 – Controls and Procedures.  In addition, pursuant to the rules of the SEC, Item 6 of Part II has been amended to contain the letter re: unaudited interim financial information from our independent registered public accounting firm and currently-dated certifications from our Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.  The letter from the independent registered public accounting firm and certifications of our Chief Executive Officer and Chief Financial Officer are attached to this Form 10-Q/A as Exhibits 15, 31.1, 31.2, 32.1 and 32.2, respectively.

For the convenience of the reader, this Form 10-Q/A sets forth the Original Filing in its entirety.  Except as otherwise expressly stated, the information in this Form 10-Q/A is as of September 9, 2004, the date on which the Original Filing was made and this Form 10-Q/A does not purport to provide an update or discussion of any developments subsequent to the Original Filing.

TABLE OF CONTENTS

			Page Number
Part I	Financial Information
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets (as restated)	4
		Condensed Consolidated Statements of Income (as restated)	5
		Condensed Consolidated Statements of Cash Flows (as restated)	6
		Notes to Condensed Consolidated Financial Statements	7
		Report of Independent Registered Public Accounting Firm	14
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	22
	Item 4.	Controls and Procedures	23
Part II	Other Information
	Item 1.	Legal Proceedings	24
	Item 4.	Submission of Matters to a Vote of Security Holders	24
	Item 6.	Exhibits	24
Signatures			25
Exhibit Index			26

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Part I  -  FINANCIAL  INFORMATION
Item 1.	FINANCIAL STATEMENTS

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

	July 31, 2004			January 31, 2004			August 2, 2003
	(Restated) (Note 10)			(Restated) (Note 10)			(Restated) (Note 10)
Assets
Current Assets
Cash and cash equivalents	$	18,495		$	21,553		$	20,440
Marketable securities		58,000			68,000			28,000
Accounts receivable		15,870			12,468			8,814
Merchandise inventories		74,931			70,674			65,462
Prepaid expenses		2,180			2,865			7,739
Deferred taxes		665			1,144			1,591
Current assets of discontinued operations		9,051			8,690			8,685
Total current assets		179,192			185,394			140,731
Property and Equipment
Land and buildings		10,376			10,375			10,371
Leasehold improvements		125,546			105,185			93,092
Furniture, fixtures and equipment		144,442			133,364			127,472
		280,364			248,924			230,935
Less accumulated depreciation and amortization		(150,466	)		(140,026	)		(130,283	)
		129,898			108,898			100,652
Deferred taxes		11,514			6,855			7,411
Lease Rights and Other Assets		1,709			1,253			1,093
Total Assets	$	322,313		$	302,400		$	249,887
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable		32,845		$	33,318		$	29,556
Income tax payable		414			7,839			121
Accrued liabilities		36,881			24,563			16,829
Current liabilities of discontinued operations		4,513			3,604			3,229
Total current liabilities		74,653			69,324			49,735
Long-Term Liabilities
Deferred rent and other liabilities		36,380			32,862			25,862
Total Liabilities		111,033			102,186			75,597
Stockholders’ Equity
Common stock, including excess paid-in capital ($.001 par value: 100,000,000 shares authorized, 30,747,672, 30,203,149 and 29,614,340 shares issued and outstanding at July 31, 2004, January 31, 2004 and August 2, 2003, respectively)		64,000			58,460			52,725
Retained earnings		147,554			142,271			122,816
Accumulated other comprehensive loss		(274	)		(517	)		(1,251	)
Total stockholders’ equity		211,280			200,214			174,290
Total Liabilities and Stockholders’ Equity	$	322,313		$	302,400		$	249,887

See notes to condensed consolidated financial statements.

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THE GYMBOREE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

	13 Weeks Ended						26 Weeks Ended
	July 31, 2004			August 2, 2003			July 31, 2004			August 2, 2003
	(Restated) (Note 10)			(Restated) (Note 10)			(Restated) (Note 10)			(Restated) (Note 10)
Net sales:
Retail	$	113,399		$	104,118		$	257,847		$	232,771
Play & Music and Other		2,585			2,734			5,252			6,107
Total net sales		115,984			106,852			263,099			238,878
Cost of goods sold, including buying and occupancy expenses		(74,756	)		(67,377	)		(159,513	)		(142,527	)
Gross profit		41,228			39,475			103,586			96,351
Selling, general and administrative expenses		(47,075	)		(41,523	)		(97,678	)		(86,451	)
Operating income (loss)		(5,847	)		(2,048	)		5,908			9,900
Other income, net		145			452			382			335
Income (loss) from continuing operations before income taxes		(5,702	)		(1,596	)		6,290			10,235
Income tax benefit (expense)		2,081			665			(2,296	)		(3,889	)
Income (loss) from continuing operations, net of income tax		(3,621	)		(931	)		3,994			6,346
Income (loss) from discontinued operations, net of income tax		(328	)		(175	)		62			(140	)
Income (loss) before cumulative effect of change in accounting principle		(3,949	)		(1,106	)		4,056			6,206
Cumulative effect of change in accounting principle, net of income tax		—			—			1,228			—
Net income (loss)	$	(3,949	)	$	(1,106	)	$	5,284		$	6,206
Basic per share amounts:
Income (loss) from continuing operations, net of income tax	$	(0.12	)	$	(0.03	)	$	0.13		$	0.22
Income (loss) from discontinued operations, net of income tax		(0.01	)		(0.01	)		—			—
Cumulative effect of change in accounting principle, net of income tax		—			—			0.04			—
Net income (loss)	$	(0.13	)	$	(0.04	)	$	0.17		$	0.21
Diluted per share amounts:
Income (loss) from continuing operations, net of income tax	$	(0.12	)	$	(0.03	)	$	0.13		$	0.21
Income (loss) from discontinued operations, net of income tax		(0.01	)		(0.01	)		—			—
Cumulative effect of change in accounting principle, net of income tax		—			—			0.04			—
Net income (loss)	$	(0.13	)	$	(0.04	)	$	0.17		$	0.20
Weighted average shares outstanding:
Basic		30,693			29,552			30,584			29,433
Diluted		30,693			29,552			31,374			30,723

See notes to condensed consolidated financial statements.

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THE GYMBOREE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

	26 Weeks Ended
	July 31, 2004			August 2, 2003
	(Restated) (Note 10)			(Restated) (Note 10)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	5,284		$	6,206
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Loss (income) from discontinued operations, net of income tax		(62	)		140
Cumulative effect of change in accounting principle, net of income tax		(1,228	)		—
Depreciation and amortization		13,296			12,766
Deferred income tax expense (benefit)		(4,182	)		104
Loss on disposal of property and equipment		85			55
Tax benefit from exercise of stock options		2,643			385
Change in assets and liabilities:
Accounts receivable		(4,697	)		(1,446	)
Merchandise inventories		(2,247	)		(5,980	)
Prepaid expenses and other assets		233			(234	)
Accounts payable		(471	)		2,520
Income tax payable		(8,164	)		(12,580	)
Accrued liabilities		6,258			(6,164	)
Deferred and other liabilities		4,790			411
Net cash provided by (used in) continuing operations		11,538			(3,817	)
Net cash provided by discontinued operations		1,052			1,589
Net cash provided by (used in) operating activities		12,590			(2,228	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of marketable securities		426,305			211,850
Purchases of marketable securities		(416,305	)		(199,850	)
Capital expenditures		(28,485	)		(11,796	)
Proceeds from sale of assets and other		108			386
Net cash provided by (used in) investing activities		(18,377	)		590
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock		2,897			2,258
Net cash provided by financing activities		2,897			2,258
Effect of exchange rate fluctuations on cash		(168	)		(808	)
Net Decrease in Cash and Cash Equivalents		(3,058	)		(188	)
CASH AND CASH EQUIVALENTS:
Beginning of Period		21,553			20,628
End of Period	$	18,495		$	20,440
NON-CASH INVESTING ACTIVITIES:
Capital expenditures incurred, but not yet paid	$	6,066		$	—

See notes to condensed consolidated financial statements.

6

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 footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. 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.
	The results of operations for the twenty-six weeks ended July 31, 2004 are not necessarily indicative of the operating results that may be expected for the fiscal year ending January 29, 2005 (“fiscal 2004”).
2.	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 2004.
3.	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.”  Had the Company recorded compensation expense for its stock option plans 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, net income (loss) and net income (loss) per share would have been as follows:

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	13 Weeks Ended						26 Weeks Ended
	July 31, 2004			August 2, 2003			July 31, 2004			August 2, 2003
	(In thousands, except per share data)
Net income (loss), as reported	$	(3,949	)	$	(1,106	)	$	5,284		$	6,206
Deduct:  Total stock-based employee compensation expense determined under fair value based method, for awards granted or settled, net of related tax effects		(1,309	)		(865	)		(2,450	)		(1,625	)
Pro forma net income (loss)	$	(5,258	)	$	(1,971	)	$	2,834		$	4,581
Basic income (loss) per share
As reported	$	(0.13	)	$	(0.04	)	$	0.17		$	0.21
Pro forma		(0.17	)		(0.07	)		0.09			0.16
Diluted income (loss) per share
As reported	$	(0.13	)	$	(0.04	)	$	0.17		$	0.20
Pro forma		(0.17	)		(0.07	)		0.09			0.15

The fair value of option grants and shares issued under stock option plans 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
	July 31, 2004			August 2, 2003
Expected dividend rate		0	%		0	%
Expected volatility		48.5	%		45.4	%
Risk-free interest rate		2.6	%		2.6	%
Expected lives (years)		4.0			4.0

4.

Net Income (Loss) Per Share

Basic net income (loss) per share is calculated by dividing net income (loss) 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 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				26 Weeks Ended
	July 31, 2004		August 2, 2003		July 31, 2004		August 2, 2003
	(In thousands)
Weighted average number of shares - basic		30,693		29,552		30,584		29,433
Add: effect of dilutive securities		—		—		790		1,290
Weighted average number of shares - diluted		30,693		29,552		31,374		30,723

Anti-dilutive options to purchase 3,621,542 and 2,617,924 shares of common stock for the 13 weeks ended July 31, 2004 and August 2, 2003, respectively, and 1,636,569 and 1,576,559 shares of common stock for the 26 weeks ended July 31, 2004 and August 2, 2003, respectively, were excluded from the above computations of weighted average shares.

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5.	Comprehensive Income (Loss)
	Comprehensive income (loss), which includes net income (loss), foreign currency translation adjustments and fluctuations in the fair market value of certain derivative financial instruments, is as follows:

	13 Weeks Ended						26 Weeks Ended
	July 31, 2004			August 2, 2003			July 31, 2004		August 2, 2003
	(In thousands)
Net income (loss)	$	(3,949	)	$	(1,106	)	$	5,284	$	6,206
Other comprehensive income (loss)		262			(507	)		243		(484	)
Total comprehensive income (loss)	$	(3,687	)	$	(1,613	)	$	5,527	$	5,722

6.	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 (in thousands).

	13 Weeks Ended July 31, 2004								26 Weeks Ended July 31, 2004
	Retail Stores			Play & Music and Other		Total			Retail Stores		Play & Music and Other		Total
Net sales	$	113,399		$	2,585	$	115,984		$	257,847	$	5,252	$	263,099
Depreciation and amortization		6,609			117		6,726			13,054		242		13,296
Operating income (loss)		(6,332	)		485		(5,847	)		5,102		806		5,908
Total assets		307,723			5,539		313,262			307,723		5,539		313,262
Capital expenditures		11,864			34		11,898			28,407		78		28,485

	13 Weeks Ended August 2, 2003								26 Weeks Ended August 2, 2003
	Retail Stores			Play & Music and Other		Total			Retail Stores		Play & Music and Other		Total
Net sales	$	104,118		$	2,734	$	106,852		$	232,771	$	6,107	$	238,878
Depreciation and amortization		6,274			71		6,345			12,524		242		12,766
Operating income (loss)		(2,239	)		191		(2,048	)		9,156		744		9,900
Total assets		234,276			6,926		241,202			234,276		6,926		241,202
Capital expenditures		6,541			38		6,579			11,716		80		11,796

	Net retail sales from our Canadian operations amounted to $4.7 million and $4.4 million for the 13 weeks ended July 31, 2004 and August 2, 2003, respectively, and $10.3 million and $9.1 million for the 26 weeks ended July 31, 2004 and August 2, 2003, respectively.  Long-lived assets held by our Canadian operations amounted to $3.1 million and $2.3 million as of July 31, 2004 and August 2, 2003, respectively.
7.	Co-Branded Credit Card
	In late 2003, the Company entered into 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 program, which was launched in April 2004, offers incentives to cardholders, including a 5% discount on in-store purchases using the Gymboree Visa card and annual rewards in the form of a Gymboree gift certificate or gift card equal to 1% of total non-Gymboree purchases.  The Bank is the sole owner of the accounts issued under the program and will absorb all losses associated with non-payment

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by the cardholder and any fraudulent usage of the accounts by third parties.  The Company is responsible for redeeming the incentives, including the issuance of any gift certificates or gift cards. 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.  Cardholder incentives are funded from the fees paid by the Bank to the Company.  The Company recognizes revenues related to these Agreements as follows:

• New account fees will be recognized as other revenues on a straight-line basis over the estimated life of the credit card relationship, currently estimated to be 3 years.

• Credit card usage fees will be recognized as other revenues as actual usage occurs.

• Minimum guaranteed annual payments which exceed amounts earned based on the number of accounts opened and card usage, will be recognized as other revenues on a straight-line basis over the estimated life of the credit card relationship, currently estimated to be 3 years.

• Annual rewards earned will be shown as gift certificate liabilities and recognized as retail revenues when the gift certificates are redeemed.

	As of July 31, 2004 and as of January 31, 2004, the Company has received $6.0 million in advance payments under these Agreements.  During the quarter ended July 31, 2004, the Company recognized approximately $76,000 in new account and credit card usage fees, which are included in Play & Music and Other net sales in the respective condensed consolidated statement of operations.  As of July 31, 2004, $5.3 million and $0.7 million in advance payments under these Agreements are included in accrued liabilities and other long-term liabilities, respectively, in the respective condensed consolidated balance sheet.
8.	New Corporate Office Lease
	In March 2004, the Company signed a lease agreement for a new corporate office building in San Francisco, California.  The lease, which expires on April 14, 2018, requires base rent payments of approximately $4.7 million annually, subject to market value adjustments after 11 years.  The lease requires the Company to provide a $2.4 million standby letter of credit, which the Company may choose to reduce on each anniversary of the lease commencement.  As part of the agreement, the Company’s new landlord will assume the Company’s lease obligations for its Burlingame, California headquarters through the 2006 expiration of such lease.  When the Company ceases to use the Burlingame headquarters, which is expected in the fourth quarter of fiscal 2004, it will record a non-cash charge that cannot yet be determined.  At the same time, the same amount will be recorded as a deferred lease incentive from the new landlord, which will be amortized over the life of the new lease as a reduction of rent expense in accordance with generally accepted accounting principles.
9.	Subsequent Event
	On August 16, 2004, the Board of Directors authorized the Company to proceed with the closure of its United Kingdom and Ireland operations (22 stores and one distribution center), as a result of their continued poor financial performance.  The Company anticipates recording charges related to the closure of approximately $9.5 million, net of income taxes, exclusive of operating costs incurred during the wind

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down process. These charges, largely related to costs of lease disposition, asset write-offs and severances, are expected to be realized in the third and fourth quarters of fiscal 2004.  As of October 30, 2004, substantially all such operations had ceased.  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 net loss from discontinued operations were as follows:

	13 Weeks Ended						26 Weeks Ended
	July 31, 2004			August 2, 2003			July 31, 2004			August 2, 2003
	(In thousands)
Net retail sales	$	6,395		$	6,239		$	13,328		$	13,667
Loss from discontinued operations	$	(517	)	$	(283	)	$	97		$	(225	)
Income tax benefit		189			108			(36	)		85
Loss from discontinued operations, net of income taxes	$	(328	)	$	(175	)	$	62		$	(140	)

10.	Restatement of Previously Issued Condensed Consolidated Financial Statements
	On February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange Commission (“SEC”) issued a letter to the American Institute of Certified Public Accountants expressing its views regarding certain operating lease accounting issues and their application under accounting principles generally accepted in the United States of America (“GAAP”). The Company’s management subsequently initiated a review of its lease-related accounting practices and determined that, like many other retailers, the period over which it recognized rent expense and amortized tenant allowances was not in accordance with Financial Accounting Standards Board (“FASB”) Technical Bulletin 85-3, “Accounting for Operating Leases with Scheduled Rent Increases,” (“FTB No. 85-3”) and Technical Bulletin No. 88-1 “Issues Relating to Accounting for Leases” (“FTB No. 88-1”).  As a result, the Company’s condensed consolidated financial statements as of and for the thirteen and twenty-six week periods ended July 31, 2004 and August 2, 2003, have been restated from the amounts previously reported.
	Under the requirements of FTB No. 85-3, rent expense should be recognized on a straight-line basis over the term of the lease, including any rent holiday period.  In prior periods, the Company determined that the term of the lease begins on the rent commencement date of the lease, which generally coincides with the store opening date, instead of at the time the Company takes physical possession of the property to start construction of leasehold improvements.  This had the effect of excluding the construction period of the stores from the calculation of the period over which rent is expensed.  The Company now considers possession to occur on the date it enters the space and begins construction build-out.
	With respect to lease incentives such as tenant allowances received from the landlord to cover construction costs incurred, FTB No. 88-1 states that lease incentives should be treated by the Company as a reduction of rental expense and amortized on a straight-line basis over the term of the lease in accordance with FTB No. 85-3.  The Company’s policy related to lease incentives had been to record such incentives as deferred liabilities and amortize them as a reduction to rent expense over the term of the lease which generally coincides with the store opening date, instead of at the time the Company takes physical possession of the property to start construction of leasehold improvements.  This had the effect of excluding the construction period of the stores from the calculation of the period over which lease incentives are amortized.

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     For all periods presented herein, the Company determined that investments in auction rate securities should have been classified as marketable securities and not as cash and cash equivalents.  As a result, securities that have stated maturities beyond three months, but are priced and traded as short-term investments due to the liquidity provided through the interest rate reset mechanism approximately every 30 days, are now shown as marketable securities.  The purchase and sale of marketable securities previously presented as cash and cash equivalents have been reclassified to investing activities in the Condensed Consolidated Statements of Cash Flows.

     The following tables present a summary of the effects of this restatement and reclassification on the Company’s Condensed Consolidated Balance Sheets as of July 31, 2004 and August 2, 2003, Condensed Consolidated Statements of Operations for the thirteen and twenty-six weeks ended July 31, 2004 and August 2, 2003, and Condensed Consolidated Statements of Cash Flows for the thirteen and twenty-six weeks ended July 31, 2004 and August 2, 2003 (in thousands, except per share data):

	As of July 31, 2004
	As Previously Reported			Reclassifications*			Restatement Adjustments			As Restated
Cash and cash equivalents	$	76,495		$	—		$	(58,000	)	$	18,495
Marketable securities		—			—			58,000			58,000
Accounts receivable		14,575			(224	)		1,519			15,870
Current assets of discontinued operations		—			8,892			159			9,051
Lease Rights, Deferred Taxes and Other Assets		11,039			(769	)		2,953			13,223
Total assets		317,682			—			4,631			322,313
Current liabilities of discontinued operations		—			3,812			701			4,513
Deferred rent and other liabilities		27,905			(263	)		8,738			36,380
Retained earnings		152,318			—			(4,764	)		147,554
Accumulated other comprehensive income		(230	)		—			(44	)		(274	)
Total stockholders’ equity		216,088			—			(4,808	)		211,280

	As of August 2, 2003
	As Previously Reported			Reclassifications*			Restatement Adjustments			As Restated
Cash and cash equivalents	$	48,440		$	—		$	(28,000	)	$	20,440
Marketable securities		—			—			28,000			28,000
Accounts receivable		7,943			(223	)		1,094			8,814
Current assets of discontinued operations		—			8,658			27			8,685
Lease Rights, Deferred Taxes and Other Assets		7,303			(1,017	)		2,218			8,504
Total assets		246,548			—			3,339			249,887
Current liabilities of discontinued operations		—			2,448			781			3,229
Deferred rent and other liabilities		20,151			(332	)		6,043			25,862
Retained earnings		126,301			—			(3,485	)		122,816
Accumulated other comprehensive income		(1,251	)		—			—			(1,251	)
Total stockholders’ equity		177,775			—			(3,485	)		174,290

12

	13 Weeks Ended July 31, 2004
	As Previously Reported			Reclassifications*			Restatement Adjustments			As Restated
Cost of goods sold, including buying and occupancy expenses	$	78,271		$	(4,720	)	$	1,205		$	74,756
Income tax benefit		1,820			(179	)		440			2,081
Loss from discontinued operations, net of tax		—			(310	)		(18	)		(328	)
Net loss		(3,166	)		—			(783	)		(3,949	)
Net loss per share:
Basic	$	(0.10	)	$	—		$	(0.03	)	$	(0.13	)
Diluted	$	(0.10	)	$	—		$	(0.03	)	$	(0.13	)

	13 Weeks Ended August 2, 2003
	As Previously Reported			Reclassifications*			Restatement Adjustments			As Restated
Cost of goods sold, including buying and occupancy expenses	$	71,855		$	(4,607	)	$	129		$	67,377
Income tax benefit		744			(128	)		49			665
Loss from discontinued operations, net of tax		—			(208	)		33			(175	)
Net loss		(1,059	)		—			(47	)		(1,106	)
Net loss per share:
Basic	$	(0.04	)	$	—		$	—		$	(0.04	)
Diluted	$	(0.04	)	$	—		$	—		$	(0.04	)

	26 Weeks Ended July 31, 2004
	As Previously Reported			Reclassifications*			Restatement Adjustments			As Restated
Cost of goods sold, including buying and occupancy expenses	$	166,540		$	(8,952	)	$	1,925		$	159,513
Income tax expense		(3,038	)		1,445			(703	)		(2,296	)
Income from discontinued operations, net of tax		—			69			(7	)		62
Net income		6,513			—			(1,229	)		5,284
Net income per share:
Basic	$	0.21		$	—		$	(0.04	)	$	0.17
Diluted	$	0.21		$	—		$	(0.04	)	$	0.17

	26 Weeks Ended August 2, 2003
	As Previously Reported			Reclassifications*			Restatement Adjustments		As Restated
Cost of goods sold, including buying and occupancy expenses	$	152,489		$	(10,036	)	$	74	$	142,527
Income tax expense		(3,801	)		(116	)		28		(3,889	)
Loss from discontinued operations, net of tax		—			(190	)		50		(140	)
Net income		6,202			—			4		6,206
Net income per share:
Basic	$	0.21		$	—		$	—	$	0.21
Diluted	$	0.20		$	—		$	—	$	0.20

	26 Weeks Ended July 31, 2004
	As Previously Reported			Reclassifications*			Restatement Adjustments		As Restated
Net cash used in investing activities	$	(28,125	)	$	(252	)	$	10,000	$	(18,377	)

	26 Weeks Ended August 2, 2003
	As Previously Reported			Reclassifications*		Restatement Adjustments		As Restated
Net cash used in investing activities	$	(11,534	)	$	124	$	12,000	$	590

*     In the third quarter of fiscal 2004, the Company reclassified the assets, liabilities and results of operations of its United Kingdom and Ireland operations to discontinued operations for all periods presented.  

13

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 July 31, 2004 and August 2, 2003, and the related condensed consolidated statements of operations for the thirteen week and twenty-six week periods then ended, and cash flows for the twenty-six 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 2 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.

As discussed in Note 10 to the condensed consolidated financial statements, the condensed consolidated financial statements have been restated.

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 31, 2004, 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 an explanatory paragraph relating to the restatement).  In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 31, 2004, 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
September 9, 2004 (April 22, 2005 as to the discontinued operations discussed in Note 9 and the effects of the restatement discussed in Note 10)

14

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

Forward-looking statements

          You should read the following discussion and analysis in conjunction with our consolidated 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, future cash needs and the wind down of our United Kingdom and Ireland operations. 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, concepts and marketing activity, gross margin achievement, our ability to manage inventory levels appropriately, general economic conditions, success in meeting delivery targets, competitive market conditions, trade restrictions, unexpected complications with the wind down of our United Kingdom and Ireland operations, 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 do not intend 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 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.

Restatement of Financial Statements

     On February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange Commission (“SEC”) issued a letter to the American Institute of Certified Public Accountants expressing its views regarding certain operating lease accounting issues and their application under accounting principles generally accepted in the United States of America (“GAAP”). The Company’s management subsequently initiated a review of its lease-related accounting practices and determined that, like many other retailers, the period over which it recognized rent expense and amortized tenant allowances was not in accordance with Financial Accounting Standards Board (“FASB”) Technical Bulletin 85-3, “Accounting for Operating Leases with Scheduled Rent Increases,” (“FTB No. 85-3”) and Technical Bulletin No. 88-1 “Issues Relating to Accounting for Leases” (“FTB No. 88-1”).  As a result, the Company’s condensed consolidated financial statements as of and for the thirteen and twenty-six week periods ended July 31, 2004 and August 2, 2003, have been restated from the amounts previously reported.

     Under the requirements of FTB No. 85-3, rent expense should be recognized on a straight-line basis over the term of the lease, including any rent holiday period.  In prior periods, the Company determined that the term of the lease begins on the rent commencement date of the lease, which generally coincides with the store opening date, instead of at the time the Company takes physical possession of the property to start construction of leasehold improvements.  This had the effect of excluding the construction period of the stores from the calculation of the period over which rent is expensed.  The Company now considers possession to occur on the date it enters the space and begins construction build-out.  

15

     With respect to lease incentives such as tenant allowances received from the landlord to cover construction costs incurred, FTB No. 88-1 states that lease incentives should be treated by the Company as a reduction of rental expense and amortized on a straight-line basis over the term of the lease in accordance with FTB No. 85-3.  The Company’s policy related to lease incentives had been to record such incentives as deferred liabilities and amortize them as a reduction to rent expense over the term of the lease which generally coincides with the store opening date, instead of at the time the Company takes physical possession of the property to start construction of leasehold improvements.  This had the effect of excluding the construction period of the stores from the calculation of the period over which lease incentives are amortized.  

     For all periods presented herein, the Company determined that investments in auction rate securities should have been classified as marketable securities and not as cash and cash equivalents.  As a result, securities that have stated maturities beyond three months, but are priced and traded as short-term investments due to the liquidity provided through the interest rate reset mechanism approximately every 30 days, are now shown as marketable securities.  The purchase and sale of marketable securities previously presented as cash and cash equivalents have been reclassified to investing activities in the Condensed Consolidated Statements of Cash Flows.

     See Note 10 in the notes to the condensed consolidated financial statements of this Report for a summary of the effects of these changes on the Company’s Condensed Consolidated Balance Sheets as of July 31, 2004 and August 2, 2003, Condensed Consolidated Statements of Operations for the thirteen and twenty-six weeks ended July 31, 2004 and August 2, 2003, and Condensed Consolidated Statements of Cash Flows for the thirteen and twenty-six weeks ended July 31, 2004 and August 2, 2003.

General

     The Gymboree Corporation is an international specialty retailer operating stores selling high quality apparel and accessories for women and children under the GYMBOREE®, JANIE AND JACK®, JANEVILLE™ brands, as well as play programs for children under the GYMBOREE PLAY & MUSIC™ brand. As of July 31, 2004, the Company conducted its business through four primary divisions: Gymboree, Janie and Jack, Janeville and Gymboree Play & Music. As of July 31, 2004, we had 646 stores, including 596 stores in the United States (including all 46 Janie and Jack shops and all 7 Janeville stores), 28 stores in Canada and 22 stores in Europe. The Company also operates two on-line stores at www.gymboree.com and www.janieandjack.com.

     Our plan for the remainder of fiscal 2004 is to continue to grow our domestic store base for Gymboree, Janie and Jack and Janeville, bringing the total number of store openings for the fiscal year to approximately 24, 24 and 14 new stores, respectively.  We will also continue to invest in Gymboree retail stores in the United States, upgrading our fixture and merchandise display systems to better and more consistently display our products.

16

     On August 16, 2004, the Board of Directors authorized the Company to proceed with the closure of its United Kingdom and Ireland operations (22 stores and one distribution center), as a result of their continued poor financial performance.  As of October 30, 2004, substantially all such operations had ceased.  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 July 31, 2004 compared to thirteen weeks ended August 2, 2003

Net Sales

     Net retail sales in the thirteen weeks ended July 31, 2004 increased to $113.4 million from $104.1 million in the same period last year, an increase of $9.3 million or 8.9%.  Comparable store sales increased 2% or $2.9 million over the same period last year.  This increase was primarily due to an increase in the average transaction value.  Strong product performance in our newborn, baby boy, baby girl, and kid girl departments was slightly offset by weakness in our accessories and kid boy departments.  Non-comparable store sales increased $7.2 million due to net store and square footage growth of 52 stores and 114,000 square feet, respectively.  The increase was also due to a $319,000 increase in shipping income related to our web business.  These increases were offset by a decrease of $1.3 million in sales to off-price retailers as a result of our seasonal clearance strategy whereby markdown merchandise is primarily sold at our retail stores.  The number of stores open at the end of the quarter was 646 compared to 594 as of the end of the same period last year. 

     Play & Music net sales in the second quarter of fiscal 2004 decreased to $2.6 million from $2.7 million in the same period last year, a decrease of $0.1 million or 3.7%.  The decrease was primarily due to the sale and closure of 7 corporate owned sites as part of our ongoing restructuring of the Play & Music business. 

Gross Profit

     Gross profit for the second quarter of fiscal 2004 increased to $41.2 million from $39.5 million in the same period last year.  As a percentage of net sales, gross profit decreased 1.4 percentage points to 35.5% in the second quarter of fiscal 2004 from 36.9% in the same period last year.  The decrease in our gross profit margin was primarily due to increased buying costs related to our new concepts, Janie and Jack and Janeville, as well as higher occupancy costs as a percent of net sales.  Gross profit in fiscal 2004 was calculated using the cost method compared to the retail method in fiscal 2003.  The impact of this change cannot be determined.

17

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 $47.1 million in the second quarter of fiscal 2004 from $41.5 million in the same period last year.  As a percentage of net sales, SG&A expenses increased 1.7 percentage points to 40.6% in the second quarter of fiscal 2004 from 38.9% in the same period last year.  The increase in SG&A was primarily due to higher corporate expenses related to compensation, benefits and marketing.  Compensation increased primarily due to the increased headcount needed to support our new concepts, Janie and Jack and Janeville.  Benefits increased due to increased headcount, higher medical insurance premiums and expanded employee benefits.  Marketing expenses increased primarily as a result of more extensive in-store marketing campaigns for Gymboree.

Other Income, Net

     Other income decreased to $145,000 in the second quarter of fiscal 2004 from $452,000 in the same period last year primarily due to foreign exchange losses.  These losses resulted from foreign currency fluctuations on inter-company transactions between our United States operations and foreign subsidiaries.  The amount of foreign exchange gains or losses is dependent on both monthly currency fluctuations and balances held in those associated currencies.  These losses were offset by an increase of $163,000 in interest income due to higher cash and cash equivalent balances on a quarter-over-quarter basis.

Income Taxes

     Our effective tax rate for the second quarters of fiscal 2004 and 2003 was 36.5% and 38.0%, respectively.  Our estimated fiscal 2004 effective tax rate was reduced to 36.5% as we expect to benefit from higher tax-free interest income and other permanent deductions. 

Discontinued Operations

     Income reported for the discontinued United Kingdom and Ireland operations includes operating results in the second quarter of fiscal 2004 and 2003, which were close to break even.

Twenty-six weeks ended July 31, 2004 compared to twenty-six weeks ended August 2, 2003

Net Sales

     Net retail sales for the twenty-six weeks ended July 31, 2004 increased to $257.8 million from $232.8 million in the same period last year, an increase of $25.0 million or 10.7%.    Comparable store sales increased 5% or $13.1 million over the same 26-week period last year.  This increase was primarily due to an increase in the number of transactions resulting from higher traffic levels and a higher conversion rate, as well as an increase in average transaction value.  Product performance was strong in our newborn, baby boy, baby girl and kid girl departments, offset by weak performance in our kid boy department.  Non-comparable store sales increased $13.4 million due to net store and square footage growth of 52 stores and 114,000 square feet, respectively.  The increase was also due to a $370,000 increase in shipping income related to our web business.  These increases were offset by a decrease of $2.1 million in sales to off-price retailers as a result of our seasonal clearance strategy whereby markdown merchandise is primarily sold at our retail stores. The number of stores open at the end of the quarter was 646 compared to 594 as of the end of the same period last year.

18

     Play & Music net sales for the twenty-six weeks ended July 31, 2004 decreased to $5.2 million from $6.1 million in the same period last year, a decrease of $0.9 million or 15%.  The decrease was primarily due to a decrease in new franchise sales, lower royalties from existing franchisees, and the sale and closure of a total of 13 corporate owned sites as part of our ongoing restructuring of the Play & Music business. 

Gross Profit

     Gross profit for the twenty-six weeks ended July 31, 2004 increased to $103.6 million from $96.4 million in the same period last year, an increase of $7.2 million.  As a percentage of net sales, gross profit decreased 0.9 percentage points to 39.4% in the twenty-six weeks ended July 31, 2004 from 40.3% in the same period last year.  The decrease in our gross profit margin was primarily due to increased buying costs related to our new concepts, Janie and Jack and Janeville, as well as higher occupancy costs as a percent of net sales.  This effect was offset by markdown optimization, whereby markdowns are targeted to maximize SKU level sales and margins.  Gross profit in fiscal 2004 was calculated using the cost method compared to the retail method in fiscal 2003.  The impact of this change cannot be determined.

Selling, General and Administrative Expenses

     SG&A expenses increased to $97.7 million in the twenty-six weeks ended July 31, 2004 from $86.5 million in the same period last year.  As a percentage of net sales, SG&A expenses increased 0.9 percentage points to 37.1% in the twenty-six weeks ended July 31, 2004 from 36.2% in the same period last year.  The increase in SG&A was primarily due to higher corporate expenses related to compensation, marketing and benefits.  Compensation increased primarily due to the increased headcount needed to support our new concepts, Janie and Jack and Janeville. Marketing expenses increased as a result of more extensive in-store marketing campaigns for Gymboree.  Benefits increased due to increased headcount, higher medical insurance premiums and expanded employee benefits.

Other Income, Net

     Other income increased to $382,000 in the twenty-six weeks ended July 31, 2004 from $335,000 in the same period last year primarily due to an increase in interest income, offset in part by foreign exchange losses.  These losses resulted from foreign currency fluctuations on inter-company transactions between our United States operations and foreign subsidiaries.  The amount of foreign exchange gains or losses is dependent on both monthly currency fluctuations and balances held in those associated currencies. 

Income Taxes

     Our effective tax rate for the twenty-six weeks ended July 31, 2004 and August 2, 2003 was 36.5% and 38.0%, respectively.  Our estimated fiscal 2004 effective tax rate was reduced to 36.5%, as we expect to benefit from higher tax-free interest income and other permanent deductions.

19

Discontinued Operations

     Income reported for the discontinued United Kingdom and Ireland operations includes operating results for the twenty-six weeks ended July 31, 2004 and August 2, 2003, which were close to break even.

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. 

Financial Condition

Liquidity and Capital Resources

     Net cash provided by operating activities for the twenty-six weeks ended July 31, 2004 was $12.6 million compared to $2.2 million used in operating activities in the same period last year.  This increase was primarily due to changes in working capital items.

     Net cash used in investing activities for the twenty-six weeks ended July 31, 2004 was $18.4 million (excluding $6.1 million in capital expenditures incurred, but not yet paid) and consisted of capital expenditures for the opening of 30 new stores, relocation and/or expansion of 8 existing stores, expenditures related to store openings and relocations currently in progress, and information technology improvements, as well as a net increase of $10.0 million in marketable securities.  The Company estimates that capital expenditures, net of allowances, will be approximately $45 to $50 million during fiscal 2004, and will primarily be used to relocate 16 Gymboree stores, re-brand 200 existing Gymboree stores, open 24 new Gymboree stores, 24 new Janie and Jack shops and 14 new Janeville stores ($28 million for all stores), build-out our new corporate headquarters ($8 million) and continue our systems infrastructure replacement ($9 million). 

     Cash provided by financing activities for the twenty-six weeks ended July 31, 2004 totaled $2.9 million compared to $2.3 million in the same period last year.  This increase was due to an increase in proceeds from stock option exercises.

     Because of the seasonal nature of our business, our cash needs vary throughout the year.  In the second quarter, our cash and cash equivalents and working capital typically decrease.  This effect was more pronounced this year due to increased merchandise requirements related to our new concepts, Janie and Jack and Janeville, as well as the increase in capital expenditures discussed above.  Cash and cash equivalents were $18.5 million at July 31, 2004, a decrease of $3.1 million from January 31, 2004.  Marketable securities were $58.0 million at July 31, 2004, a decrease of $10.0 million from January 31, 2004.  Working capital as of July 31, 2004 was $104.5 million compared to $116.1 million as of January 31, 2004.

     The Company has an unsecured revolving credit facility for borrowings of up to $70 million (increased from $60 million in August 2004). This credit facility has a three-year term expiring in August 2006, and may be used for working capital and capital expenditure needs, as well as the issuance of documentary and standby letters of credit.  As of July 31, 2004, $50.3 million of documentary and standby letters of credit were outstanding.  The increase in documentary and standby letters of credit outstanding is primarily due to the increased merchandise requirements discussed above. 

20

     In late 2003, the Company entered into 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 program, which was launched in April 2004, offers incentives to cardholders, including a 5% discount on in-store purchases using the Gymboree Visa card and annual rewards in the form of a Gymboree gift certificate or gift card equal to 1% of total non-Gymboree purchases.  The Bank is the sole owner of the accounts issued under the program and will absorb all losses associated with non-payment by the cardholder and any fraudulent usage of the accounts by third parties.  The Company is responsible for redeeming the incentives, including the issuance of any gift certificates or gift cards. 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.  Cardholder incentives are funded from the fees paid by the Bank to the Company.  The Company recognizes revenues related to these Agreements as follows:

• New account fees will be recognized as other revenues on a straight-line basis over the estimated life of the credit card relationship, currently estimated to be 3 years.

• Credit card usage fees will be recognized as other revenues as actual usage occurs.

• Minimum guaranteed annual payments which exceed amounts earned based on the number of accounts opened and card usage, will be recognized as other revenues on a straight-line basis over the estimated life of the credit card relationship, currently estimated to be 3 years.

• Annual rewards earned will be shown as gift certificate liabilities and recognized as retail revenues when the gift certificates are redeemed.

     As of July 31, 2004 and as of January 31, 2004, the Company has received $6.0 million in advance payments under these Agreements.  During the quarter ended July 31, 2004, the Company recognized approximately $76,000 in new account and credit card usage fees, which are included in Play & Music and Other net sales in the respective condensed consolidated statement of operations.  As of July 31, 2004, $5.3 million and $0.7 million in advance payments under these Agreements are included in accrued liabilities and other long-term liabilities, respectively, in the respective condensed consolidated balance sheet.

     In March 2004, the Company signed a lease agreement for a new corporate office building in San Francisco, California.  The lease, which expires on April 14, 2018, requires base rent payments of approximately $4.7 million annually, subject to market value adjustments after 11 years.  The lease requires the Company to provide a $2.4 million standby letter of credit, which the Company may choose to reduce on each anniversary of the lease commencement.  As part of the agreement, the Company’s new landlord will assume the Company’s lease obligations for its Burlingame, California headquarters through the 2006 expiration of such lease.  When the Company ceases to use the Burlingame headquarters, which is expected in the fourth quarter of fiscal 2004, it will record a non-cash charge that cannot yet be determined.  At the same time, the same amount will be recorded as a deferred lease incentive from the new landlord, which will be amortized over the life of the new lease as a reduction of rent expense.

21

     On August 16, 2004, the Board of Directors authorized the Company to proceed with the closure of its United Kingdom and Ireland operations (22 stores and one distribution center), as a result of their continued poor financial performance.  The Company expects the wind down of its United Kingdom and Ireland operations to be substantially complete by the end of the third quarter of fiscal 2004.  The Company anticipates recording charges related to the closure of approximately $9.5 million, net of income taxes, exclusive of operating costs incurred during the wind down process. These charges, largely related to costs of lease disposition, asset write-offs and severances, are expected to be realized in the third and fourth quarters of fiscal 2004.

     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 31, 2004, except for the lease obligations related to the Company’s new corporate offices described above.

     The Company does not believe it has any potential liability in connection with the Company’s guarantees of lease agreements for Zutopia stores sold to Wet Seal in 2000.  Wet Seal has announced that it has closed all Zutopia stores and that it will negotiate early lease buyouts of the Zutopia leases.  The Company remains liable on lease agreements for 3 Play & Music sites sold to franchisees.  However, the Company does not believe that payment by the Company of its maximum potential amount of future payments under the Play & Music lease agreements would have a material current or future effect on its liquidity or capital resources.

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 as of July 31, 2004 and August 2, 2003.

22

	July 31, 2004
	Notional Amount		Fair Value Gain/(Loss)			Weighted Average Rate
	(in thousands, except weighted average rate data)
British pounds sterling	$	5,264	$	(47	)	$	1.81
Canadian dollars		8,049		77			0.75
Euro		1,636		49			1.20
Total	$	14,949	$	79

 

	August 2, 2003
	Notional Amount		Fair Value Loss			Weighted Average Rate
	(in thousands, except weighted average rate data )
British pounds sterling	$	9,695	$	(138	)	$	1.59
Canadian dollars		8,912		(516	)		0.71
Euro		67		—			1.13
Total	$	18,674	$	(654	)

 

Item 4. 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 ensure 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 and 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) under the Securities Exchange Act of 1934, as amended (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.  Due to the facts and circumstances surrounding the correction in the Company’s lease accounting practices described in Note 10 of our Condensed Consolidated Financial Statements, the Chief Executive Officer and the Chief Operating Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of the end of the period covered by this report in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s reports filed or submitted under the Exchange Act.

     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). No changes in our internal control over financial reporting occurred during the quarter ended July 31, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

23

Part II – OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

     The Company is subject to various legal proceedings and claims arising in the ordinary course of business.  Our management does not expect that the results in any of these legal proceedings, either individually or in the aggregate, would have a material adverse effect on our financial position, results of operations or cash flow.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     The Gymboree Corporation Annual Meeting of Stockholders (“the annual meeting”) was held on June 16, 2004, at which time the stockholders voted on the following proposals:

	Votes for		Votes Against or Withheld		Abstentions and Non-Votes
Election of Class II Directors:
Lisa M. Harper		29,253,861		333,763		—
Barbara L. Rambo		29,159,626		427,998		—
Advisory Vote on the Appointment of Deloitte & Touche LLP as Independent Auditors		28,876,471		703,807		7,345
Adoption of 2004 Equity Incentive Plan		21,352,103		5,373,974		8,062

     At the annual meeting, Lisa M. Harper and Barbara L. Rambo were elected as Class II directors, whose terms will expire at the annual meeting in 2007.  Continuing Class III directors, whose terms will expire at the annual meeting in 2005, are Stuart G. Moldaw, John C. Pound and William U. Westerfield.  Continuing Class I directors, whose terms will expire at the annual meeting in 2006, are Blair W. Lambert and Gary M. Heil. 

     The advisory vote on the appointment of Deloitte & Touche LLP as the independent auditors of the Company for the fiscal year ending January 29, 2005 was approved at the meeting.

     The Gymboree Corporation 2004 Equity Incentive Plan was approved at the meeting.

Item 6.	EXHIBITS
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.

24

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)
April 22, 2005
Date	By:	/s/ BLAIR W. LAMBERT
		Blair W. Lambert Chief Operating Officer and Chief Financial Officer

25

Exhibit Index

Exhibit Number	Description
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.

26

EX-15

Exhibit 15

April 22, 2005

The Gymboree Corporation:

We have made reviews, in accordance with standards established by the Public Company Oversight Board (United States), of the unaudited interim financial information of The Gymboree Corporation and subsidiaries for the thirteen and twenty-six week periods ended July 31, 2004 and August 2, 2003 as indicated in our report dated September 9, 2004 (April 22, 2005 with respect to the discontinued operations discussed in Note 9 and the effects of the restatement discussed in Note 10) (which report includes an explanatory paragraph regarding a change in accounting principle and an explanatory paragraph related to the restatement); because we did not perform an audit, we expressed no opinion on that information.

We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q/A for the quarter ended July 31, 2004, is incorporated by reference in Registration Statement Nos. 33-90452, 33-94594, 333-10811, 333-74269, 333-89962, 333-107564 and 333-116785 of The Gymboree Corporation and subsidiaries each on Form S-8.

We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act.

Yours truly,
/s/Deloitte & Touche LLP
San Francisco, California

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Lisa M. Harper, certify that:

1.	I have reviewed this quarterly report on Form 10-Q/A of The Gymboree Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
		(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
		(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
		(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
		(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

April 22, 2005	By:	/s/ LISA M. HARPER
Date
		Lisa M. Harper
		Chief Executive Officer and Chairman of the Board

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Blair W. Lambert, certify that:

1.	I have reviewed this quarterly report on Form 10-Q/A of The Gymboree Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
		(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
		(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
		(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
		(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

April 22, 2005	By:	/s/ BLAIR W. LAMBERT
Date
		Blair W. Lambert
		Chief Operating Officer and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

          In connection with the Quarterly Report of The Gymboree Corporation (the “Company”) on Form 10-Q/A for the period ended July 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-Q”), I, Lisa M. Harper, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1)	The Form 10-Q/A fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2)	The information contained in the Form 10-Q/A fairly presents, in all material respects, the financial condition and results of operations of the Company.

April 22, 2005	By:	/s/ LISA M. HARPER
Date
		Lisa M. Harper
		Chief Executive Officer and Chairman of the Board

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

          In connection with the Quarterly Report of The Gymboree Corporation (the “Company”) on Form 10-Q/A for the period ended July 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-Q”), I, Blair W. Lambert, Chief Operating Officer and Acting Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

(1)	The Form 10-Q/A fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2)	The information contained in the Form 10-Q/A fairly presents, in all material respects, the financial condition and results of operations of the Company.

April 22, 2005	By:	/s/ BLAIR W. LAMBERT
Date
		Blair W. Lambert
		Chief Operating Officer and Chief Financial Officer