##### Table of Contents



UNITED STATES
 SECURITIES AND EXCHANGE
    COMMISSION
 WASHINGTON, DC 20549
      FORM 10-Q
  (Mark One)þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended October 29, 2005ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period from
    
    to   Commission file number 001-09338
      MICHAELS STORES, INC.
   Delaware

75-1943604(State or other jurisdiction of
    incorporation or organization)

(I.R.S. employer
    identification number)   8000 Bent Branch Drive
 Irving, Texas 75063
 P.O. Box 619566
 DFW, Texas 75261-9566
   (972) 409-1300
       þ o
  Rule 12b-2 þ o
  Rule 12b-2 o þ
    Shares Outstanding as ofTitle

November 29, 2005Common Stock, par value $.10 per
    share

133,678,592




---



MICHAELS
    STORES, INC.FORM 10-Q
  
  Part
    IFINANCIAL INFORMATIONItem
    1.

Financial
    StatementsConsolidated
    Balance Sheets at October 29, 2005, January 29, 2005, and
    October 30, 2004 (unaudited)


3Consolidated
    Statements of Income for the quarter and nine months ended
    October 29, 2005 and October 30, 2004 (unaudited)


4Consolidated
    Statements of Cash Flows for the nine months ended October 29,
    2005 and October 30, 2004 (unaudited)


5Notes to
    Consolidated Financial Statements (unaudited)


6Item
    2.

Managements Discussion
    and Analysis of Financial Condition and Results of
    Operations


15Item
    3.

Quantitative and Qualitative
    Disclosures About Market Risk


24Item
    4.

Controls and
    Procedures


25Part
    IIOTHER INFORMATIONItem
    1.

Legal Proceedings


26Item
    2.

Changes in Securities, Use of
    Proceeds and Issuer Purchases of Equity Securities


27Item
    6.

Exhibits


28Signatures


29Certifications Pursuant to Section 302Certifications Pursuant to Section 302Certifications Pursuant to Section 906   2




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##### Table of Contents



MICHAELS
    STORES, INC.

Part IFINANCIAL INFORMATION Item 1.  Financial
    Statements. MICHAELS
    STORES, INC.



CONSOLIDATED
    BALANCE SHEETS



(In
    thousands, except share data)



(Unaudited)  October 29,


January 29,


October 30,2005


2005


2004ASSETSCurrent assets:Cash and equivalents

$
112,517


$
535,852


$
222,171Short-term investments






50,379



50,235Merchandise inventories


1,214,504



936,395



1,096,400Prepaid expenses and other


49,033



26,613



34,633Deferred and prepaid income taxes


30,405



22,032



19,471Total current assets


1,406,459



1,571,271



1,422,910Property and equipment, at
    cost


990,171



913,174



863,421Less accumulated depreciation


(571,554
)


(506,193
)


(469,867
)418,617



406,981



393,554Goodwill


115,839



115,839



115,839Other assets


18,676



17,569



16,810134,515



133,408



132,649Total assets

$
1,959,591


$
2,111,660


$
1,949,113LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
253,034


$
256,266


$
257,023Accrued liabilities and other


259,211



242,682



222,248Income taxes payable






12,992



6,066Total current liabilities


512,245



511,940



485,33791/4%
    Senior Notes due 2009






200,000



200,000Deferred income taxes


26,848



30,355



27,550Other long-term
    liabilities


85,582



72,200



41,256Total long-term liabilities


112,430



302,555



268,806624,675



814,495



754,143Commitments and contingenciesStockholders
    equity:Preferred Stock, $0.10 par value,
    2,000,000 shares authorized; none issued










Common Stock, $0.10 par value,
    350,000,000 shares authorized; shares issued and
    outstanding of 134,800,844 at October 29, 2005, 135,726,717
    at January 29, 2005, and 135,093,810 at October 30,
    2004


13,480



13,573



13,509Additional paid-in capital


386,330



451,449



438,850Retained earnings


922,907



826,821



733,069Accumulated other comprehensive
    income


12,199



5,322



9,542Total stockholders equity


1,334,916



1,297,165



1,194,970Total liabilities and
    stockholders equity

$
1,959,591


$
2,111,660


$
1,949,113     3




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##### Table of Contents



MICHAELS
    STORES, INC.



CONSOLIDATED
    STATEMENTS OF INCOME



(In
    thousands, except per share data)



(Unaudited)  Quarter Ended


Nine Months EndedOctober 29,


October 30,


October 29,


October 30,2005


2004


2005


2004Net sales

$
839,663


$
799,905


$
2,406,172


$
2,208,691Cost of sales and occupancy expense


511,545



504,236



1,491,084



1,395,492Gross profit


328,118



295,669



915,088



813,199Selling, general, and
    administrative expense


239,048



220,489



681,530



633,348Store pre-opening costs


2,456



2,408



6,649



7,534Operating income


86,614



72,772



226,909



172,317Interest expense


229



5,042



20,819



15,439Other (income) and expense, net


(3,039
)


(1,077
)


(8,088
)


(2,743
)Income before income
    taxes


89,424



68,807



214,178



159,621Provision for income taxes


33,982



26,319



81,388



61,055Net income

$
55,442


$
42,488


$
132,790


$
98,566Earnings per common
    share:Basic

$
0.41


$
0.31


$
0.98


$
0.72Diluted

$
0.40


$
0.31


$
0.96


$
0.71Dividends per common share

$
0.10


$
0.07


$
0.27


$
0.19    4




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##### Table of Contents



MICHAELS
    STORES, INC.



CONSOLIDATED
    STATEMENTS OF CASH FLOWS



(In
    thousands)



(Unaudited)  Nine Months EndedOctober 29,


October 30,2005


2004Operating activities:Net income

$
132,790


$
98,566Adjustments:Depreciation


72,656



65,756Amortization


292



294Loss from early extinguishment of
    debt


12,136



Other


391



780Changes in assets and liabilities:Merchandise inventories


(278,109
)


(203,477
)Prepaid expenses and other


(22,420
)


(5,435
)Deferred income taxes and other


(4,871
)


(3,342
)Accounts payable


(3,232
)


84,315Income taxes payable


(2,445
)


16,917Accrued liabilities and other


24,679



33,157Other long-term liabilities


10,265



4,099Net cash (used in) provided by
    operating activities


(57,868
)


91,630Investing activities:Additions to property and equipment


(85,785
)


(71,663
)Purchases of short-term investments


(226
)


(50,235
)Sales of short-term investments


50,605



Net proceeds from sales of
    property and equipment






60Net cash used in investing
    activities


(35,406
)


(121,838
)Financing activities:Repayment of Senior Notes


(209,250
)


Proceeds from stock options
    exercised


32,285



28,595Repurchase of Common Stock


(119,133
)


(94,582
)Cash dividends paid to stockholders


(36,709
)


(25,867
)Proceeds from issuance of Common
    Stock and other


2,746



2,408Net cash used in financing
    activities


(330,061
)


(89,446
)Net decrease in cash and
    equivalents


(423,335
)


(119,654
)Cash and equivalents at
    beginning of period


535,852



341,825Cash and equivalents at end of
    period

$
112,517


$
222,171    5




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##### Table of Contents

MICHAELS
    STORES, INC.



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS



For the Nine Months Ended October 29, 2005

(Unaudited)



|        |                          
|------- | -------------------------
|Note 1. | Basis of
    Presentation







Form 10-Q Regulation S-X.




Form 10-K




two-for-one






6



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##### Table of Contents





MICHAELS
    STORES, INC.




NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS (Continued)




For the Nine Months Ended October 29, 2005


(Unaudited)




|        |                       
|------- | ----------------------
|Note 2. | Earnings
    per Share







|                                                                                                                   |  |                                           |         |  |                   |   |         |             |  |   |             |  |  |   |         | 
|------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------- | ------- |  | ----------------- | - | ------- | ----------- |  | - | ----------- |  |  | - | ------- | 
|                                                                                                                   |  | Quarter Ended                             |         |  | Nine Months Ended |  
|                                                                                                                   |  | October 29,                               |         |  | October 30,       |   |         | October 29, |  |   | October 30, | 
|                                                                                                                   |  | 2005                                      |         |  | 2004              |   |         | 2005        |  |   | 2004        | 
|                                                                                                                   |  | (In thousands, except per share
    data) |        
|                                                                                                                  
|Numerator:                                                                                                         |  |                                           |         |  |                   |   |         |             |  |   |             |  |  |   |         | 
|Net income                                                                                                         |  | $                                         | 55,442  |  |                   | $ | 42,488  |             |  | $ | 132,790     |  |  | $ | 98,566  | 
|                                                                                                                   |  |                                           |         |  |                   |   |         |             |  |   |             |  |  |   |         | 
|Denominator:                                                                                                       |  |                                           |         |  |                   |   |         |             |  |   |             |  |  |   |         | 
|Denominator for basic earnings per
    common share-weighted average shares                                        |  |                                           | 135,395 |  |                   |   | 135,550 |             |  |   | 135,729     |  |  |   | 136,138 | 
|Effect of dilutive securities:                                                                                     |  |                                           |         |  |                   |   |         |             |  |   |             |  |  |   |         | 
|Employee stock options                                                                                             |  |                                           | 2,605   |  |                   |   | 3,246   |             |  |   | 3,072       |  |  |   | 3,119   | 
|                                                                                                                   |  |                                           |         |  |                   |   |         |             |  |   |             |  |  |   |         | 
|Denominator for diluted earnings
    per common share-weighted average shares adjusted for dilutive
    securities |  |                                           | 138,000 |  |                   |   | 138,796 |             |  |   | 138,801     |  |  |   | 139,257 | 
|                                                                                                                   |  |                                           |         |  |                   |   |         |             |  |   |             |  |  |   |         | 
|Earnings per common
    share:                                                                                     |  |                                           |         |  |                   |   |         |             |  |   |             |  |  |   |         | 
|Basic                                                                                                              |  | $                                         | 0.41    |  |                   | $ | 0.31    |             |  | $ | 0.98        |  |  | $ | 0.72    | 
|                                                                                                                   |  |                                           |         |  |                   |   |         |             |  |   |             |  |  |   |         | 
|Diluted                                                                                                            |  | $                                         | 0.40    |  |                   | $ | 0.31    |             |  | $ | 0.96        |  |  | $ | 0.71    | 
|                                                                                                                   |  |                                           |         |  |                   |   |         |             |  |   |             |  |  |   |         | 









|        |                             
|------- | ----------------------------
|Note 3. | Stock-Based
    Compensation



Accounting for Stock Issued to Employees




Accounting for
    Stock-Based Compensation Accounting for Stock-Based CompensationTransition and
    Disclosure


7



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##### Table of Contents





MICHAELS
    STORES, INC.




NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS (Continued)




For the Nine Months Ended October 29, 2005


(Unaudited)




Note 3.  Stock-Based Compensation
    (Continued)








|                                                                |  |                                           |         |  |                   |   |         |             |  |   |             |  |  |   |         | 
|--------------------------------------------------------------- |  | ----------------------------------------- | ------- |  | ----------------- | - | ------- | ----------- |  | - | ----------- |  |  | - | ------- | 
|                                                                |  | Quarter Ended                             |         |  | Nine Months Ended |  
|                                                                |  | October 29,                               |         |  | October 30,       |   |         | October 29, |  |   | October 30, | 
|                                                                |  | 2005                                      |         |  | 2004(1)           |   |         | 2005        |  |   | 2004(1)     | 
|                                                                |  | (In thousands, except per share
    data) |        
|                                                               
|Net income, as reported                                         |  | $                                         | 55,442  |  |                   | $ | 42,488  |             |  | $ | 132,790     |  |  | $ | 98,566  | 
|Stock-based employee compensation
    cost:                     |  |                                           |         |  |                   |   |         |             |  |   |             |  |  |   |         | 
|As if the fair value method were
    applied, net of income tax |  |                                           | 8,019   |  |                   |   | 6,233   |             |  |   | 14,619      |  |  |   | 12,266  | 
|                                                                |  |                                           |         |  |                   |   |         |             |  |   |             |  |  |   |         | 
|Pro forma net income                                            |  | $                                         | 47,423  |  |                   | $ | 36,255  |             |  | $ | 118,171     |  |  | $ | 86,300  | 
|                                                                |  |                                           |         |  |                   |   |         |             |  |   |             |  |  |   |         | 
|Earnings per common share, as
    reported:                     |  |                                           |         |  |                   |   |         |             |  |   |             |  |  |   |         | 
|Basic                                                           |  | $                                         | 0.41    |  |                   | $ | 0.31    |             |  | $ | 0.98        |  |  | $ | 0.72    | 
|                                                                |  |                                           |         |  |                   |   |         |             |  |   |             |  |  |   |         | 
|Diluted                                                         |  | $                                         | 0.40    |  |                   | $ | 0.31    |             |  | $ | 0.96        |  |  | $ | 0.71    | 
|                                                                |  |                                           |         |  |                   |   |         |             |  |   |             |  |  |   |         | 
|Pro forma earnings per common
    share:                        |  |                                           |         |  |                   |   |         |             |  |   |             |  |  |   |         | 
|Basic                                                           |  | $                                         | 0.35    |  |                   | $ | 0.27    |             |  | $ | 0.87        |  |  | $ | 0.63    | 
|                                                                |  |                                           |         |  |                   |   |         |             |  |   |             |  |  |   |         | 
|Diluted                                                         |  | $                                         | 0.35    |  |                   | $ | 0.26    |             |  | $ | 0.86        |  |  | $ | 0.62    | 
|                                                                |  |                                           |         |  |                   |   |         |             |  |   |             |  |  |   |         | 
|Pro forma weighted average
    shares outstanding:              |  |                                           |         |  |                   |   |         |             |  |   |             |  |  |   |         | 
|Basic                                                           |  |                                           | 135,395 |  |                   |   | 135,550 |             |  |   | 135,729     |  |  |   | 136,138 | 
|Diluted                                                         |  |                                           | 137,270 |  |                   |   | 138,012 |             |  |   | 137,716     |  |  |   | 138,304 | 









|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The pro forma information for the quarter and nine months ended
    October 30, 2004 was revised based on the results of
    managements review of prior years calculations. The
    effects on the pro forma information resulting from the
    difference between previously reported stock-based employee
    compensation cost, net of tax, and the revised presentation are
    as follows: for the third quarter of fiscal 2004, an increase in
    stock-based employee compensation cost, net of tax, with a
    corresponding decrease in pro forma net income of
    $1.2 million, an increase in pro forma diluted weighted
    average shares outstanding of 360,000, and a decrease in pro
    forma basic and diluted earnings per share of $0.01; for the
    nine months ended October 30, 2004, an increase in
    stock-based employee compensation cost, net of tax, with a
    corresponding decrease in pro forma net income of $254,000, an
    increase in pro forma diluted weighted average shares
    outstanding of 293,000, and a decrease in pro forma basic and
    diluted earnings per share of $0.01.



|        |     
|------- | ----
|Note 4. | Debt



91/4%
    Senior Notes due 2009




1 4


8



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##### Table of Contents



MICHAELS
    STORES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  For the Nine Months Ended October 29, 2005
 (Unaudited)
  Note 4.
    Debt
    (Continued)   Credit
    Agreement
      Note 5.
    Comprehensive
    Income      Quarter Ended


Nine Months EndedOctober 29,


October 30,


October 29,


October 30,2005


2004


2005


2004(In thousands)Net income

$
55,442


$
42,488


$
132,790


$
98,566Other comprehensive income (loss):Foreign currency translation
    adjustment and other


2,721



5,154



6,877



5,324Comprehensive income

$
58,163


$
47,642


$
139,667


$
103,890    Note 6.
    Legal
    Proceedings  Derivative
    Claims
   9




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##### Table of Contents



MICHAELS
    STORES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  For the Nine Months Ended October 29, 2005
 (Unaudited)
  Note 6.
    Legal
    Proceedings (Continued)      Cotton
    Claim
    Clark
    Claim
   10




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##### Table of Contents



MICHAELS
    STORES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  For the Nine Months Ended October 29, 2005
 (Unaudited)
  Note 6.
    Legal
    Proceedings (Continued)    Morris
    Claim
    General
    Note 7.
    Segments  Disclosures About Segments of an
    Enterprise and Related Information
 11




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##### Table of Contents



MICHAELS
    STORES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  For the Nine Months Ended October 29, 2005
 (Unaudited)
  Note 7.
    Segments
    (Continued)     Net Sales


Operating Income


Total Assets(In thousands)Quarter ended October 29,
    2005:United States

$
784,536


$
77,463


$
1,867,518Canada


55,127



9,151



92,073Consolidated Total

$
839,663


$
86,614


$
1,959,591Quarter ended October 30,
    2004:United States

$
756,597


$
68,964


$
1,878,045Canada


43,308



3,808



71,068Consolidated Total

$
799,905


$
72,772


$
1,949,113Nine months ended
    October 29, 2005:United States

$
2,264,724


$
204,922


$
1,867,518Canada


141,448



21,987



92,073Consolidated Total

$
2,406,172


$
226,909


$
1,959,591Nine months ended
    October 30, 2004:United States

$
2,096,983


$
159,731


$
1,878,045Canada


111,708



12,586



71,068Consolidated Total

$
2,208,691


$
172,317


$
1,949,113     Note 8.
    Changes
    in Accounting Policies  Stock-Based
    Compensation
  Share-Based
    Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees Statement of Cash Flows
   12




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##### Table of Contents



MICHAELS
    STORES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  For the Nine Months Ended October 29, 2005
 (Unaudited)
  Note 8.
    Changes
    in Accounting Policies (Continued)   
  Inventory
    Costs
  Inventory Costs
      Accounting Changes, Reporting Accounting
    Changes in Interim Financial Statements
 13




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##### Table of Contents



MICHAELS
    STORES, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS (Continued)
  For the Nine Months Ended October 29, 2005
 (Unaudited)
  Note 9.
    Certain
    Issues Under the Securities Exchange Act of 1934     14




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations.    Disclosure
    Regarding Forward-Looking Information
  Form 10-Q. Form 10-Q, Form 10-K
  
    our ability to remain competitive in the areas of merchandise
    quality, price, breadth of selection, customer service, and
    convenience;
    our ability to anticipate and/or react to changes in customer
    demand and preferences for products and supplies used in
    creative activities and the related potential impact to
    merchandise inventories in categories that represent a
    significant portion of our business;
    changes in consumer confidence resulting in a reduction in
    consumer spending on items perceived to be discretionary;
    unexpected consumer responses to changes in promotional programs;
    the execution and management of our store growth, including new
    concepts, the impact of new competitor stores in locations near
    our existing stores, and the availability of acceptable real
    estate locations for new store openings;
    the effective optimization and maintenance of our perpetual
    inventory and automated replenishment systems and related
    impacts to inventory levels;
    the identification and implementation of enhancements to our
    supply chain to enable us to distribute additional SKUs through
    our distribution centers;
    delays in the receipt of merchandise ordered from our suppliers
    due to delays in connection with either the manufacture or
    shipment of such merchandise;
    transportation delays (including dock strikes and other work
    stoppages) and increases in transportation costs due to fuel
    surcharges and transportation regulations;
    restrictive actions by foreign governments or changes in United
    States laws and regulations affecting imports or domestic
    distribution;
    significant increases in inflation or commodity prices, such as
    petroleum, natural gas, steel, and paper, which may adversely
    affect our costs, including cost of merchandise;
    significant increases in tariffs or duties levied on imports
    which may limit the availability of certain merchandise from our
    foreign suppliers;
    changes in political, economic, and social conditions;
    significant fluctuations in exchange rates; 15




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##### Table of Contents




    financial difficulties of any of our key vendors, suppliers, or
    service providers;
    the design and implementation of new management information
    systems as well as the maintenance and enhancement of existing
    systems, particularly in light of our continued store growth and
    the addition of new concepts;
    our ability to maintain the security of electronic and other
    confidential information;
    our ability to establish effective internal controls over
    financial reporting for inventories and cost of sales under our
    proposed weighted average cost method;
    our ability to comply with the terms and restrictions of our
    Credit Agreement;
    our ability to attract and retain qualified personnel to
    successfully execute our operating plans;
    the seasonality of the retail business; and
    other factors as set forth in our Annual Report on
    Form 10-K for the
    fiscal year ended January 29, 2005, particularly in
    Critical Accounting Policies and Estimates and
    Risk Factors, and in our other Securities and
    Exchange Commission filings.  Form 10-Q
  General
   16




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##### Table of Contents



Quarter Ended


Nine Months EndedOctober 29,


October 30,


October 29,


October 30,2005


2004


2005


2004Michaels stores:Retail stores open at beginning of
    period


870



827



844



804Retail stores opened during the
    period


19



22



46



45Retail stores opened (relocations)
    during the period


7



8



18



30Retail stores closed during the
    period










(1
)


Retail stores closed (relocations)
    during the period


(7
)


(8
)


(18
)


(30
)Retail stores open at end of period


889



849



889



849Aaron Brothers
    stores:Retail stores open at beginning of
    period


165



160



164



158Retail stores opened during the
    period


1



4



2



7Retail stores opened (relocations)
    during the period






1







1Retail stores closed during the
    period














(1
)Retail stores closed (relocations)
    during the period






(1
)






(1
)Retail stores open at end of period


166



164



166



164Recollections stores:Retail stores open at beginning of
    period


11



5



8



2Retail stores opened during the
    period






3



3



6Retail stores open at end of period


11



8



11



8Star Wholesale
    stores:Wholesale stores open at beginning
    of period


4



3



3



3Wholesale stores opened during the
    period










1



Wholesale stores open at end of
    period


4



3



4



3Total store count at end of period


1,070



1,024



1,070



1,024Other operating data:Average inventory per Michaels
    store(1)

$
1,264


$
1,213


$
1,264


$
1,213Comparable store sales increase(2)


0.8
%


0.9
%


4.2
%


3.9
%     (1)
    
    Average inventory per Michaels store calculation excludes our
    Aaron Brothers, Recollections, and Star Wholesale stores.(2)
    
    Comparable store sales increase represents the increase in net
    sales for stores open the same number of months in the indicated
    period and the comparable period of the previous year, including
    stores that were relocated or expanded during either period. A
    store is deemed to become comparable in its 14th month of
    operation in order to eliminate grand opening sales distortions.
    A store temporarily closed more than 2 weeks due to a
    catastrophic event is not considered comparable during the month
    it closed. If a store is closed longer than 2 weeks but
    less than 2 months, it becomes comparable in the month in
    which it reopens, subject to a mid-month convention. A store
    closed longer than 2 months becomes comparable in its 14th
    month of operation after its reopening. 17




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##### Table of Contents



Results
    of Operations
    Quarter Ended


Nine Months EndedOctober 29,


October 30,


October 29,


October 30,2005


2004


2005


2004Net sales


100.0
%


100.0
%


100.0
%


100.0
%Cost of sales and occupancy expense


60.9



63.0



62.0



63.2Gross profit


39.1



37.0



38.0



36.8Selling, general, and
    administrative expense


28.5



27.6



28.3



28.7Store pre-opening costs


0.3



0.3



0.3



0.3Operating income


10.3



9.1



9.4



7.8Interest expense






0.6



0.8



0.7Other (income) and expense, net


(0.3
)


(0.1
)


(0.3
)


(0.1
)Income before income
    taxes


10.6



8.6



8.9



7.2Provision for income taxes


4.0



3.3



3.4



2.7Net income


6.6
%


5.3
%


5.5
%


4.5
%   Quarter
    Ended October 29, 2005 Compared to the Quarter Ended
    October 30, 2004
  Net Sales 12-month
    Cost of Sales and Occupancy Expense
   18




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##### Table of Contents



Selling, General, and Administrative
    Expense
    Operating Income
  Interest Expense 1 4
  Other Income
  Provision for Income Taxes
  Net Income
  Nine
    Months Ended October 29, 2005 Compared to the Nine Months
    Ended October 30, 2004
  Net Sales
    Cost of Sales and Occupancy Expense
   19




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##### Table of Contents



Selling, General, and Administrative
    Expense
    Operating Income
  Interest Expense 1 4
  Other Income
  Provision for Income Taxes
  Net Income
  Liquidity
    and Capital Resources
    day-to-day
 20




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##### Table of Contents



Cash Flow
    from Operating Activities
      Cash Flow
    used in Investing Activities
    Nine Months EndedOctober 29,


October 30,2005(1)


2004(2)(In thousands)New and relocated stores and
    stores not yet opened

$
31,725


$
41,296Existing stores


23,489



8,270Distribution system expansion


4,839



6,998Information systems


17,485



11,917Corporate and other


8,247



3,182$
85,785


$
71,663     (1)
    
    In the first nine months of fiscal 2005, we incurred capital
    expenditures related to the opening of 46 Michaels, two Aaron
    Brothers, three Recollections, and one Star Wholesale store, and
    the relocation of 18 Michaels stores. Capital expenditures for
    existing stores for the first nine months of fiscal 2005
    increased $15.2 million over the first nine months of
    fiscal 2004 primarily due to incremental expenditures associated
    with the Perfect Store concept and new radio frequency guns for
    our stores.(2)
    
    In the first nine months of fiscal 2004, we incurred capital
    expenditures related to the opening of 45 Michaels, seven Aaron
    Brothers, and six Recollections stores, the relocation of 30
    Michaels and one Aaron Brothers store, and the completion of our
    New Lenox, Illinois distribution center.      Cash Flow
    used in Financing Activities
   21




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##### Table of Contents



Shares





SharesAuthorized for


Shares


Available forRepurchase


Repurchased


RepurchaseDecember 5, 2000 repurchase
    plan (variable portion)


72,510



(72,509
)


1
(1)February 2, 2004 repurchase
    plan


5,000,000



(5,000,000
)



(2)March 15, 2005 repurchase plan


3,000,000



(1,394,488
)


1,605,512
(3)8,072,510



(6,466,997
)


1,605,513     (1)
    
    Our Board of Directors provided that proceeds of the exercise of
    options under our 2001 General Stock Option Plan may be used to
    repurchase shares under the 2000 repurchase plan and that the
    maximum number of shares authorized to be repurchased under the
    2000 repurchase plan may be increased to the extent necessary to
    so use the proceeds from such option exercises. In fiscal 2004,
    we repurchased and subsequently retired 54,551 shares of
    our Common Stock at an average price of $27.03 per share. During
    the first nine months of fiscal 2005, we repurchased and
    subsequently retired 17,958 shares of our Common Stock at
    an average price of $40.93 per share. The share repurchases were
    made using proceeds from exercises of stock options granted
    under the 2001 General Stock Option Plan that were exercised
    during fiscal 2004 and fiscal 2005.(2)
    
    In the first nine months of fiscal 2005, we repurchased and
    subsequently retired approximately 1.9 million shares of
    our Common Stock authorized to be repurchased under the 2004
    repurchase plan at an average price of $36.78 per share. As a
    result of these repurchases, and those made in the prior fiscal
    year, we exhausted our availability for further share
    repurchases under the 2004 repurchase plan.(3)
    
    On March 15, 2005, our Board of Directors authorized an
    additional repurchase plan for up to 3.0 million shares of
    our outstanding Common Stock. In the first nine months of fiscal
    2005, we repurchased and subsequently retired approximately
    1.4 million shares of our Common Stock authorized to be
    repurchased under the 2005 repurchase plan at an average price
    of $34.79 per share. As a result of these repurchases, we had
    1,605,512 shares available for repurchase under the 2005
    repurchase plan as of October 29, 2005.      Debt
  1 4
   22




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##### Table of Contents



General
    Contractual
    Obligations
  Form 10-K
  Recent
    Accounting Pronouncements
  Stock-Based
    Compensation
  Share-Based
    Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees Statement of Cash Flows
   23




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##### Table of Contents



Inventory
    Costs
  Inventory Costs
  Proposed
    Change in Accounting for Merchandise Inventories
      Accounting Changes, Reporting Accounting
    Changes in Interim Financial Statements
  Item 3.
    Quantitative
    and Qualitative Disclosures About Market Risk.   24




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##### Table of Contents



Item 4.
    Controls
    and Procedures.  Evaluation
    of Disclosure Controls and Procedures
  Rules 13a-15(e) 15d-15(e) Form 10-Q.
  Change in
    Internal Control Over Financial Reporting
  Rules 13a-15(f) 15d-15(f)
 25




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##### Table of Contents



MICHAELS
    STORES, INC.
    Part IIOTHER INFORMATION  Item 1.
    Legal
    Proceedings.  Derivative
    Claims
      Cotton
    Claim
    Clark
    Claim
   26




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##### Table of Contents



Morris
    Claim
    General
    Item 2.
    Changes
    in Securities, Use of Proceeds and Issuer Purchases of Equity
    Securities.     27




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##### Table of Contents



Issuer
    Purchases of Equity Securities
  Total Number


Maximumof Shares


Number ofPurchased as


Shares ThatPart of Publicly


May Yet BeTotal Number


Average


Announced


Purchasedof Shares


Price Paid


Plans or


Under the PlansPurchased(1)


per Share


Programs(1)


or Programs(2)July 31, 2005 through
    August 27, 2005


542,100



38.31



542,100



2,444,013August 28, 2005 through
    October 1, 2005


294,400



32.55



294,400



2,149,613October 2, 2005 through
    October 29, 2005


544,100



32.33



544,100



1,605,513Total


1,380,600


$
34.72



1,380,600



1,605,513     (1)
    Repurchased and subsequently retired 1,380,600 shares under
    the 2005 repurchase plan.(2)
    Under our 2000 repurchase plan, the Board of Directors
    authorized us to repurchase up to 4.0 million shares of our
    outstanding Common Stock, with the ability to increase the
    maximum number of shares authorized to be repurchased under the
    plan to the extent necessary to use the proceeds from stock
    options exercised under our 2001 General Stock Option Plan to
    make repurchases. We have used the entire 4.0 million share
    fixed portion of the authority originally provided in the 2000
    repurchase plan. We have used the entire 5.0 million share
    authorization provided under the 2004 repurchase plan. As of
    October 29, 2005, we had 1,605,512 shares available
    for repurchase under the 2005 repurchase plan.  Item 6.
    Exhibits.    10.1

Forms of Award Agreements under
    the Registrants 2005 Incentive Compensation Plan
    (incorporated by reference to Exhibit 10.1 to Form 8-K,
    filed by Registrant on August 4, 2005, SEC File No. 001-09338).10.2

Credit Agreement, entered into as
    of November 18, 2005, among Registrant, Bank of America, N.A.,
    and the other lenders party thereto, and Bank of America, N.A.,
    as Administrative Agent for itself and the other lenders, as
    Swing Line Lender as Letter of Credit Issuer (incorporated by
    reference to Exhibit 10.1 to Form 8-K, filed by Registrant on
    November 22, 2005, SEC File No. 001-09338).31.1

Certifications of R. Michael
    Rouleau pursuant to §302 of the Sarbanes-Oxley Act of 2002
    (filed herewith).31.2

Certifications of Jeffrey N. Boyer
    pursuant to §302 of the Sarbanes-Oxley Act of 2002 (filed
    herewith).32.1

Certification pursuant to 18
    U.S.C. §1350, as adopted pursuant to §906 of the
    Sarbanes-Oxley Act of 2002 (filed herewith).  28




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##### Table of Contents



MICHAELS
    STORES, INC.
    SIGNATURES      By:
    /s/  Jeffrey N. Boyer 
      29




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##### Table of Contents



INDEX TO
    EXHIBITS
  ExhibitNumber

Description of Exhibit10
.1

Forms of Award Agreements under
    the Registrants 2005 Incentive Compensation Plan
    (previously filed as Exhibit 10.1 to
    Form 8-K, filed by
    Registrant on August 4, 2005, SEC File
    No. 001-09338).10
.2

Credit Agreement, entered into as
    of November 18, 2005, among Registrant, Bank of America,
    N.A., and the other lenders party thereto, and Bank of America,
    N.A., as Administrative Agent for itself and the other lenders,
    as Swing Line Lender as Letter of Credit Issuer (previously
    filed as Exhibit 10.1 to
    Form 8-K, filed by
    Registrant on November 22 2005, SEC File
    No. 001-09338).31
.1

Certifications of R. Michael
    Rouleau pursuant to §302 of the Sarbanes-Oxley Act of 2002
    (filed herewith).31
.2

Certifications of Jeffrey N. Boyer
    pursuant to §302 of the Sarbanes-Oxley Act of 2002 (filed
    herewith).32
.1

Certification pursuant to 18
    U.S.C. §1350, as adopted pursuant to §906 of the
    Sarbanes-Oxley Act of 2002 (filed herewith).