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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(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 29, 2006

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF 1934
|- | -----------------------------------------------------------------------------

For the transition period from  to

Commission
file number 0-14970

COST PLUS, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|California                                                     |  | 94-1067973                          
|(State or other jurisdiction of incorporation or Organization) |  | (I.R.S. Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|200 4th Street, Oakland, California      |  | 94607     
|(Address of principal executive offices) |  | (Zip Code)

Registrants telephone number, including area code (510) 893-7300

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

Yes  x    No ̈

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ̈Accelerated filer  x                Non-accelerated filer ̈

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

Yes ̈No  x

The number of shares of Common
Stock, $0.01 par value, outstanding on September 6, 2006 was 22,065,038.



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COST PLUS, INC.

FORM 10-Q

For the Quarter Ended July 29, 2006

INDEX



|               |  |                                                                                             |  |      
|-------------- |  | ------------------------------------------------------------------------------------------- |  | -----
|               |  |                                                                                             |  | Page 
|PART I.        |  | FINANCIAL INFORMATION                                                                       |  |      
|               |  |                                                                                            
|ITEM 1.        |  | Condensed Consolidated Financial Statements (unaudited)                                     |  |      
|               |  |                                                                                            
|               |  | Balance Sheets as of July 29, 2006, January 28, 2006 and July 30, 2005                      |  | 3    
|               |  |                                                                                            
|               |  | Statements of Operations for the three and six months ended July 29, 2006 and July 30, 2005 |  | 4    
|               |  |                                                                                            
|               |  | Statements of Cash Flows for the six months ended July 29, 2006 and July 30, 2005           |  | 5    
|               |  |                                                                                            
|               |  | Notes to Condensed Consolidated Financial Statements                                        |  | 6-11 
|               |  |                                                                                            
|ITEM 2.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations       |  | 12-16
|               |  |                                                                                            
|ITEM 3.        |  | Quantitative and Qualitative Disclosures about Market Risk                                  |  | 16   
|               |  |                                                                                            
|ITEM 4.        |  | Controls and Procedures                                                                     |  | 16   
|               |  |                                                                                            
|PART II.       |  | OTHER INFORMATION                                                                           |  |      
|               |  |                                                                                            
|ITEM 1A.       |  | Risk Factors                                                                                |  | 16-20
|               |  |                                                                                            
|ITEM 4.        |  | Submission of Matters to a Vote of Security Holders                                         |  | 21   
|               |  |                                                                                            
|ITEM 6.        |  | Exhibits                                                                                    |  | 22   
|               | 
|SIGNATURE PAGE |  | 23                                                                                         



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PART I. FINANCIAL INFORMATION



|ITEM 1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|------- | -------------------------------------------

COST PLUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts, unaudited)



|                                                                                                                                 |  |              |         |                 |   |         |              |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | --------------- | - | ------- | ------------ |  | - | ------- | -
|                                                                                                                                 |  | July 29,2006 |         | January 28,2006 |   |         | July 30,2005 | 
|ASSETS                                                                                                                           |  |              |         |                 |   |         |              |  |   |         |  
|Current assets:                                                                                                                  |  |              |         |                 |   |         |              |  |   |         |  
|Cash and cash equivalents                                                                                                        |  | $            | 2,905   |                 | $ | 40,382  |              |  | $ | 3,564   |  
|Merchandise inventories                                                                                                          |  |              | 276,002 |                 |   | 252,791 |              |  |   | 277,531 |  
|Other current assets                                                                                                             |  |              | 33,267  |                 |   | 15,294  |              |  |   | 18,898  |  
|                                                                                                                                 |  |              |         |                 |   |         |              |  |   |         |  
|Total current assets                                                                                                             |  |              | 312,174 |                 |   | 308,467 |              |  |   | 299,993 |  
|Property and equipment, net                                                                                                      |  |              | 203,505 |                 |   | 203,873 |              |  |   | 191,830 |  
|Goodwill, net                                                                                                                    |  |              | 4,178   |                 |   | 4,178   |              |  |   | 4,178   |  
|Other assets, net                                                                                                                |  |              | 16,161  |                 |   | 15,433  |              |  |   | 12,570  |  
|                                                                                                                                 |  |              |         |                 |   |         |              |  |   |         |  
|Total assets                                                                                                                     |  | $            | 536,018 |                 | $ | 531,951 |              |  | $ | 508,571 |  
|                                                                                                                                 |  |              |         |                 |   |         |              |  |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                             |  |              |         |                 |   |         |              |  |   |         |  
|Current liabilities:                                                                                                             |  |              |         |                 |   |         |              |  |   |         |  
|Accounts payable                                                                                                                 |  | $            | 63,053  |                 | $ | 57,351  |              |  | $ | 47,631  |  
|Income taxes payable                                                                                                             |  |              |        |                 |   | 10,618  |              |  |   |        |  
|Current deferred taxes                                                                                                           |  |              | 6,781   |                 |   | 6,781   |              |  |   | 7,094   |  
|Accrued compensation                                                                                                             |  |              | 12,357  |                 |   | 13,084  |              |  |   | 11,659  |  
|Revolving line of credit                                                                                                         |  |              | 8,000   |                 |   |        |              |  |   | 21,500  |  
|Current portion of long-term debt                                                                                                |  |              | 3,622   |                 |   | 5,267   |              |  |   | 4,706   |  
|Other current liabilities                                                                                                        |  |              | 19,527  |                 |   | 21,217  |              |  |   | 17,809  |  
|                                                                                                                                 |  |              |         |                 |   |         |              |  |   |         |  
|Total current liabilities                                                                                                        |  |              | 113,340 |                 |   | 114,318 |              |  |   | 110,399 |  
|Capital lease obligations                                                                                                        |  |              | 11,455  |                 |   | 12,268  |              |  |   | 13,099  |  
|Long-term debt                                                                                                                   |  |              | 67,791  |                 |   | 50,051  |              |  |   | 52,916  |  
|Other long-term obligations                                                                                                      |  |              | 41,372  |                 |   | 39,233  |              |  |   | 35,886  |  
|Commitments and contingencies                                                                                                    |  |              |         |                 |   |         |              |  |   |         |  
|Shareholders equity:                                                                                                            |  |              |         |                 |   |         |              |  |   |         |  
|Preferred stock, $.01 par value: 5,000,000 shares authorized; none issued and outstanding                                        |  |              |        |                 |   |        |              |  |   |        |  
|Common stock, $.01 par value: 67,500,000 shares authorized; issued and outstanding, 22,065,038; 22,060,788 and 22,020,989
shares |  |              | 221     |                 |   | 220     |              |  |   | 220     |  
|Additional paid-in capital                                                                                                       |  |              | 165,372 |                 |   | 163,571 |              |  |   | 163,252 |  
|Retained earnings                                                                                                                |  |              | 136,397 |                 |   | 152,442 |              |  |   | 133,589 |  
|Accumulated other comprehensive income (loss)                                                                                    |  |              | 70      |                 |   | (152    | )            |  |   | (790    | )
|                                                                                                                                 |  |              |         |                 |   |         |              |  |   |         |  
|Total shareholders equity                                                                                                       |  |              | 302,060 |                 |   | 316,081 |              |  |   | 296,271 |  
|                                                                                                                                 |  |              |         |                 |   |         |              |  |   |         |  
|Total liabilities and shareholders equity                                                                                       |  | $            | 536,018 |                 | $ | 531,951 |              |  | $ | 508,571 |  
|                                                                                                                                 |  |              |         |                 |   |         |              |  |   |         |  

See notes to condensed consolidated financial statements.



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COST PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts, unaudited)



|                                              |  |                    |         |                  |               |   |               |  |   |               |   |  |   |        
|--------------------------------------------- |  | ------------------ | ------- | ---------------- | ------------- | - | ------------- |  | - | ------------- | - |  | - | -------
|                                              |  | Three Months Ended |         | Six Months Ended
|                                              |  | July 29, 2006      |         |                  | July 30, 2005 |   | July 29, 2006 |  |   | July 30, 2005
|Net sales                                     |  | $                  | 215,275 |                  |               | $ | 202,766       |  | $ | 428,239       |   |  | $ | 402,789
|Cost of sales and occupancy                   |  |                    | 156,726 |                  |               |   | 133,545       |  |   | 306,383       |   |  |   | 266,849
|                                              |  |                    |         |                  |               |   |               |  |   |               |   |  |   |        
|Gross profit                                  |  |                    | 58,549  |                  |               |   | 69,221        |  |   | 121,856       |   |  |   | 135,940
|Selling, general and administrative expenses  |  |                    | 74,554  |                  |               |   | 63,152        |  |   | 143,261       |   |  |   | 128,309
|Store preopening expenses                     |  |                    | 738     |                  |               |   | 2,296         |  |   | 2,263         |   |  |   | 3,357  
|                                              |  |                    |         |                  |               |   |               |  |   |               |   |  |   |        
|Income (loss) from operations                 |  |                    | (16,743 | )                |               |   | 3,773         |  |   | (23,668       | ) |  |   | 4,274  
|Net interest expense                          |  |                    | 1,517   |                  |               |   | 1,381         |  |   | 2,579         |   |  |   | 2,107  
|                                              |  |                    |         |                  |               |   |               |  |   |               |   |  |   |        
|Income (loss) before income taxes             |  |                    | (18,260 | )                |               |   | 2,392         |  |   | (26,247       | ) |  |   | 2,167  
|Income tax expense (benefit)                  |  |                    | (7,008  | )                |               |   | 874           |  |   | (10,203       | ) |  |   | 787    
|                                              |  |                    |         |                  |               |   |               |  |   |               |   |  |   |        
|Net income (loss)                             |  | $                  | (11,252 | )                |               | $ | 1,518         |  | $ | (16,044       | ) |  | $ | 1,380  
|                                              |  |                    |         |                  |               |   |               |  |   |               |   |  |   |        
|Net income (loss) per weighted average share: |  |                    |         |                  |               |   |               |  |   |               |   |  |   |        
|Basic                                         |  | $                  | (0.51   | )                |               | $ | 0.07          |  | $ | (0.73         | ) |  | $ | 0.06   
|Diluted                                       |  | $                  | (0.51   | )                |               | $ | 0.07          |  | $ | (0.73         | ) |  | $ | 0.06   
|Weighted average shares outstanding:          |  |                    |         |                  |               |   |               |  |   |               |   |  |   |        
|Basic                                         |  |                    | 22,065  |                  |               |   | 22,017        |  |   | 22,063        |   |  |   | 21,966 
|Diluted                                       |  |                    | 22,065  |                  |               |   | 22,135        |  |   | 22,063        |   |  |   | 22,126 

See notes to condensed consolidated financial statements.



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COST PLUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)



|                                                                              |  |                  |         |   |              |   |         |  
|----------------------------------------------------------------------------- |  | ---------------- | ------- | - | ------------ | - | ------- | -
|                                                                              |  | Six Months Ended |        
|                                                                              |  | July 29,2006     |         |   | July 30,2005 |  
|Cash Flows from Operating Activities:                                         |  |                  |         |   |              |   |         |  
|Net income (loss)                                                             |  | $                | (16,044 | ) |              | $ | 1,380   |  
|Adjustments to reconcile net income to net cash used in operating activities: |  |                  |         |   |              |   |         |  
|Depreciation and amortization                                                 |  |                  | 15,978  |   |              |   | 14,019  |  
|Share-based compensation expense                                              |  |                  | 1,736   |   |              |   | 630     |  
|Tax effect of disqualifying common stock dispositions                         |  |                  | 6       |   |              |   | 238     |  
|Deferred income taxes                                                         |  |                  |        |   |              |   | (435    | )
|Changes in assets and liabilities:                                            |  |                  |         |   |              |   |         |  
|Merchandise inventories                                                       |  |                  | (23,211 | ) |              |   | (24,412 | )
|Other assets                                                                  |  |                  | (18,701 | ) |              |   | 594     |  
|Accounts payable                                                              |  |                  | 13,212  |   |              |   | (24,819 | )
|Income taxes payable                                                          |  |                  | (10,618 | ) |              |   | (9,692  | )
|Other liabilities                                                             |  |                  | (94     | ) |              |   | 1,513   |  
|                                                                              |  |                  |         |   |              |   |         |  
|Net cash used in operating activities                                         |  |                  | (37,736 | ) |              |   | (40,984 | )
|                                                                              |  |                  |         |   |              |   |         |  
|Cash Flows from Investing Activities:                                         |  |                  |         |   |              |   |         |  
|Purchases of property and equipment                                           |  |                  | (23,124 | ) |              |   | (41,857 | )
|Proceeds from sale of property and equipment                                  |  |                  | 3       |   |              |   | 10      |  
|                                                                              |  |                  |         |   |              |   |         |  
|Net cash used in investing activities                                         |  |                  | (23,121 | ) |              |   | (41,847 | )
|                                                                              |  |                  |         |   |              |   |         |  
|Cash Flows from Financing Activities:                                         |  |                  |         |   |              |   |         |  
|Net borrowings under revolving line of credit                                 |  |                  | 8,000   |   |              |   | 21,500  |  
|Proceeds from long-term debt                                                  |  |                  | 36,279  |   |              |   | 20,000  |  
|Prepayment of long-term debt                                                  |  |                  | (18,208 | ) |              |   |        |  
|Principal payments on long-term debt                                          |  |                  | (1,976  | ) |              |   | (1,509  | )
|Principal payments on capital lease obligations                               |  |                  | (774    | ) |              |   | (717    | )
|Proceeds from the issuance of common stock                                    |  |                  | 59      |   |              |   | 4,203   |  
|                                                                              |  |                  |         |   |              |   |         |  
|Net cash provided by financing activities                                     |  |                  | 23,380  |   |              |   | 43,477  |  
|                                                                              |  |                  |         |   |              |   |         |  
|Net decrease in cash and cash equivalents                                     |  |                  | (37,477 | ) |              |   | (39,354 | )
|Cash and cash equivalents:                                                    |  |                  |         |   |              |   |         |  
|Beginning of period                                                           |  |                  | 40,382  |   |              |   | 42,918  |  
|                                                                              |  |                  |         |   |              |   |         |  
|End of period                                                                 |  | $                | 2,905   |   |              | $ | 3,564   |  
|                                                                              |  |                  |         |   |              |   |         |  
|Supplemental Disclosures of Cash Flow Information:                            |  |                  |         |   |              |   |         |  
|Cash paid for interest                                                        |  | $                | 2,597   |   |              | $ | 2,167   |  
|                                                                              |  |                  |         |   |              |   |         |  
|Cash paid for taxes                                                           |  | $                | 12,541  |   |              | $ | 11,079  |  
|                                                                              |  |                  |         |   |              |   |         |  

See notes to condensed consolidated financial statements.



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COST PLUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and Six Months Ended July 29, 2006 and July 30, 2005

(Unaudited)



|1. | BASIS OF PRESENTATION
|-- | ---------------------

The accompanying unaudited condensed
consolidated financial statements have been prepared from the records of Cost Plus, Inc. (the Company) without audit and, in the opinion of management, include all adjustments that are normal and recurring in nature necessary to present
fairly the Companys financial position at July 29, 2006 and July 30, 2005, the interim results of operations for the three and six months ended July 29, 2006 and July 30, 2005, and changes in cash flows for the six months
ended July 29, 2006 and July 30, 2005. The balance sheet at January 28, 2006, presented herein, has been derived from the audited financial statements of the Company for the fiscal year then ended.

Accounting policies followed by the Company are described in Note 1 to the audited consolidated financial statements for the fiscal year ended January 28, 2006.
Certain information and disclosures normally included in the notes to the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted for purposes of
presenting the interim condensed consolidated financial statements. Such statements should be read in conjunction with the audited consolidated financial statements, including notes thereto, for the fiscal year ended January 28, 2006.

The results of operations for the three and six month periods ended July 29, 2006, presented herein, are not indicative of the results to be expected
for the full year.



|2. | IMPACT OF NEW ACCOUNTING STANDARDS
|-- | ----------------------------------

In July 2006, the Financial
Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting
for uncertainty in tax positions. FIN 48 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination based on the technical merits. This
interpretation also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company will implement FIN 48 at the beginning of fiscal 2007, and any
cumulative effect resulting from the change in accounting principle will be recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact, if any, that the adoption of FIN 48 will have on its financial
statements.



|3. | SHARE-BASED COMPENSATION
|-- | ------------------------

The Company adopted Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)) at the beginning of fiscal 2006. SFAS 123(R) requires the measurement and recognition of compensation expense for all share-based
payment awards made to employees and non-employee directors including stock options and performance share awards based on estimated fair values.

Prior to
fiscal 2006, the Company accounted for share-based awards granted to employees and non-employee directors in accordance with the measurement and recognition provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations, and complied with the disclosure provisions of Financial Accounting Standards Board (FASB) Statement No. 123 Accounting for Stock-Based Compensation, (SFAS
123) and FASB Statement No. 148, Accounting for Stock-Based Compensation Transition and Disclosure, an Amendment of FASB Statement No. 123.

The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of the first day of the Companys 2006 fiscal year. The
Companys consolidated financial statements as of and for the three and six month periods ended July 29, 2006 include the impact of share-based payment expense in accordance with SFAS 123(R). Also, in accordance with the modified
prospective transition method, the Companys consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R).



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The Company recognized share-based compensation expense of $1.2 million (before any related tax benefit) in the three
months ended July 29, 2006 and recognized $1.7 million (before any related tax benefit) in the six months ended July 29, 2006. Share-based compensation expense is included as a component of selling, general and administrative expenses. As
of July 29, 2006, there was $7.1 million (before any related tax benefit) of total unrecognized compensation cost related to nonvested share-based payments that is expected to be recognized over a weighted-average period of approximately 1.5
years.

Share-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately
expected to vest. Share-based compensation expense recognized in the Companys consolidated statement of operations for the three and six months ended July 29, 2006 includes compensation expense for share-based payment awards granted prior
to but not yet vested as of January 29, 2006 based on the fair value estimate at the grant date in accordance with the provisions of SFAS 123, and compensation expense for the share-based payment awards granted subsequent to January 28,
2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). In accordance with SFAS 123(R), compensation expense for all share-based payment awards granted prior to January 29, 2006 will continue to be
recognized based on the multiple option approach (accelerated method) and compensation expense for all share-based payment awards granted subsequent to January 28, 2006 will be recognized using the straight-line method. SFAS
123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Prior to the adoption of SFAS 123(R), the Company presented all benefits of tax deductions resulting from the exercise of share-based payment awards as operating cash flows in its Statements of Cash Flows. SFAS
123(R) requires the benefits of tax deductions in excess of the compensation cost recognized for those stock awards (excess tax benefits) to be classified as financing cash flows. For the six months ended July 29, 2006, the Company had no
excess tax benefits required to be reported as a financing cash flow.

The following table presents the weighted average assumptions used in the option
pricing model for the stock options granted during the three and six month periods ended July 29, 2006 and July 30, 2005:



|                              |  |                    |      |   |                  |   |   |              |  |   |              |   |  |   |       |  
|----------------------------- |  | ------------------ | ---- | - | ---------------- | - | - | ------------ |  | - | ------------ | - |  | - | ----- | -
|                              |  | Three Months Ended |      |   | Six Months Ended |  
|                              |  | July 29,2006       |      |   | July 30,2005     |   |   | July 29,2006 |  |   | July 30,2005 |  
|                              |  |                    |      |   | (Pro forma)      |   |   |              |  |   | (Pro forma)  |  
|Expected dividend rate        |  |                    |     | % |                  |   |  | %            |  |   |             | % |  |   |      | %
|Volatility                    |  |                    | 45.4 | % |                  |   |  | %            |  |   | 46.8         | % |  |   | 50.0  | %
|Risk-free interest rate       |  |                    | 5.2  | % |                  |   |  | %            |  |   | 4.6          | % |  |   | 4.0   | %
|Expected lives (years)        |  |                    | 4.75 |   |                  |   |  |              |  |   | 4.75         |   |  |   | 4.2   |  
|Fair value per option granted |  | $                  | 6.73 |   |                  | $ |  |              |  | $ | 8.59         |   |  | $ | 11.47 |  

The fair value of each option grant was estimated using the Black-Scholes option-pricing model, which was also
used for the Companys pro forma disclosure required under SFAS 123. The Company used its historical stock price volatility for a period approximating the expected life as the basis for its expected volatility assumption consistent with SFAS
123(R) and SEC Staff Accounting Bulletin No. 107 (SAB 107). The expected life of stock options represents the weighted-average period the stock options are expected to remain outstanding. The Company has elected to follow the
guidance of SAB 107 and adopt the simplified method in determining expected life for its stock option awards. The expected dividend yield assumption is based on the Companys history of zero dividend payouts and the expectation that no
dividends will be paid in the foreseeable future. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with a term equivalent to the expected life of the stock option.



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Had stock-based employee compensation expense been determined based upon the fair values at the grant dates for awards
under the Companys stock plan in accordance with SFAS 123 for the three and six month periods ended July 30, 2005, the Companys pro forma net earnings, basic and diluted earnings per common share would have been as follows:



|                                                                                                                                           |  |                                |        |   |                              |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------ | ------ | - | ---------------------------- | - | ------ | -
|(In thousands, except per share data)                                                                                                      |  | Three MonthsEndedJuly 30, 2005 |        |   | Six MonthsEndedJuly 30, 2005 |  
|Net income, as reported                                                                                                                    |  | $                              | 1,518  |   |                              | $ | 1,380  |  
|Add: Stock-based compensation expense included in reported net income, net of related tax effect                                           |  |                                |       |   |                              |   | 381    |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effect |  |                                | (1,399 | ) |                              |   | (2,845 | )
|                                                                                                                                           |  |                                |        |   |                              |   |        |  
|Pro forma net income (loss)                                                                                                                |  | $                              | 119    |   |                              | $ | (1,084 | )
|                                                                                                                                           |  |                                |        |   |                              |   |        |  
|Basic net income (loss) per weighted average share:                                                                                        |  |                                |        |   |                              |   |        |  
|As reported                                                                                                                                |  | $                              | 0.07   |   |                              | $ | 0.06   |  
|Pro forma                                                                                                                                  |  | $                              | 0.01   |   |                              | $ | (0.05  | )
|Diluted net income (loss) per weighted average share:                                                                                      |  |                                |        |   |                              |   |        |  
|As reported                                                                                                                                |  | $                              | 0.07   |   |                              | $ | 0.06   |  
|Pro forma                                                                                                                                  |  | $                              | 0.01   |   |                              | $ | (0.05  | )

The following table summarizes stock option activity during the six months ended
July 29, 2006:



|                              |  |           |   |  |                                        |       |                                         |     |                                       |   |  
|----------------------------- |  | --------- | - |  | -------------------------------------- | ----- | --------------------------------------- | --- | ------------------------------------- | - | -
|                              |  | Options   |   |  | WeightedAverageExercise PricePer Share |       | WeightedAverageRemainingContractualTerm |     | AggregateIntrinsicValue(In thousands)
|Outstanding, January 28, 2006 |  | 1,912,904 |   |  | $                                      | 25.24 |                                         |     |                                       |   |  
|Granted                       |  | 543,000   |   |  |                                        | 18.82 |                                         |     |                                       |   |  
|Exercised                     |  | (4,250    | ) |  |                                        | 13.76 |                                         |     |                                       |   |  
|Cancelled                     |  | (113,027  | ) |  |                                        | 29.00 |                                         |     |                                       |   |  
|                              |  |           |   |  |                                        |       |                                         |     |                                       |   |  
|Outstanding, July 29, 2006    |  | 2,338,627 |   |  | $                                      | 23.59 |                                         | 5.8 |                                       | $ | 
|                              |  |           |   |  |                                        |       |                                         |     |                                       |   |  
|Exercisable, July 29, 2006    |  | 1,031,290 |   |  | $                                      | 24.77 |                                         | 5.2 |                                       | $ | 

Intrinsic value for stock options is defined as the difference between the market value and the grant price. The
total intrinsic value of stock options exercised during the six months ended July 29, 2006 was $14,500. Cash received as a result of stock options exercised during the six months ended July 29, 2006 was $58,500, and the actual tax benefit
realized for tax deductions from stock options exercised totaled $6,000.

During the first quarter of fiscal 2006, the Company granted performance share
awards (Performance Shares) to certain key employees under the 2004 Stock Plan. Performance Shares entitle the holder to receive a number of shares of Cost Plus, Inc. common stock within a specified range of shares at the end of the
vesting period. Performance shares are earned using a non-discretionary formula that is based on the Company achieving certain thresholds of comparable store sales growth and income from operations during the performance period. The fair value of
performance shares are measured on the grant date and recognized in earnings over the requisite service period in accordance with SFAS 123(R).



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The following table summarizes Performance Share activity during the six months ended July 29, 2006, with the shares
granted representing the maximum number of shares that could be achieved:



|                                |  |        |  |                                               |      
|------------------------------- |  | ------ |  | --------------------------------------------- | -----
|                                |  | Shares |  | WeightedAverage GrantDate Fair ValuePer Share
|Outstanding at January 28, 2006 |  |       |  | $                                             |     
|Granted                         |  | 89,250 |  |                                               | 17.00
|Vested                          |  |       |  |                                               |     
|Forfeited                       |  |       |  |                                               |     
|                                |  |        |  |                                               |      
|Outstanding at July 29, 2006    |  | 89,250 |  | $                                             | 17.00
|                                |  |        |  |                                               |      

The 2004 Stock Plan permits the granting of up to 2,800,000 shares, which includes 900,000 new shares, 100,000
shares transferred from the 1995 plan, 800,000 shares subject to outstanding options under the 1995 Plan if they expire without being exercised, and 1,000,000 shares approved by both the Board of Directors and shareholders in 2006. Under the 2004
Plan, incentive stock options must be granted at fair market value as of the grant date and non-statutory options may be granted at 25% to 100% of the fair market value on the grant date. The term of the options granted under the 2004 Plan and the
date when the options become exercisable is determined by the Board of Directors. However, in no event will a stock option granted under the 2004 Plan be exercised more than ten years after the date of grant. The 2004 Plan also includes the ability
to grant restricted stock, stock appreciation rights, performance shares, and deferred stock units.

The 1996 Director Option Plan permits the granting of
options for up to 703,675 shares of common stock to non-employee directors at fair market value as of the date of grant. Options are exercisable over a maximum term of ten years and vest as determined by the Board of Directors, generally over four
years. The number of shares of common stock reserved for issuance under the Director Option Plan increased by 150,000 in 2002, 100,000 in 2004, and 200,000 in 2006. All increases were approved by the Board of Directors and shareholders and are
included in the share count above.



|4. | RECONCILIATION OF BASIC SHARES TO DILUTED SHARES
|-- | ------------------------------------------------

The following is
a reconciliation of the weighted average number of shares (in thousands) used in the Companys basic and diluted earnings per share computations:



|              |  |                    |        |   |                                                        |   |            |  |   |          |   |  |                                                       |        |            |  |   |      |  |   |        |  
|------------- |  | ------------------ | ------ | - | ------------------------------------------------------ | - | ---------- |  | - | -------- | - |  | ----------------------------------------------------- | ------ | ---------- |  | - | ---- |  | - | ------ | -
|              |  | Three Months Ended |        |   | Six Months Ended                                       |  
|              |  | BasicEPS           |        |   | Effect of DilutiveStock Options
(treasury stockmethod) |   | DilutedEPS |  |   | BasicEPS |   |  | Effect of DilutiveStock Options(treasury stockmethod) |        | DilutedEPS | 
|July 29, 2006 |  |                    |        |   |                                                        |   |            |  |   |          |   |  |                                                       |        |            |  |   |      |  |   |        |  
|Shares        |  |                    | 22,065 |   |                                                        |   |           |  |   | 22,065   |   |  |                                                       | 22,063 |            |  |   |     |  |   | 22,063 |  
|Amount        |  | $                  | (0.51  | ) |                                                        | $ | 0.00       |  | $ | (0.51    | ) |  | $                                                     | (0.73  | )          |  | $ | 0.00 |  | $ | (0.73  | )
|July 30, 2005 |  |                    |        |   |                                                        |   |            |  |   |          |   |  |                                                       |        |            |  |   |      |  |   |        |  
|Shares        |  |                    | 22,017 |   |                                                        |   | 118        |  |   | 22,135   |   |  |                                                       | 21,966 |            |  |   | 160  |  |   | 22,126 |  
|Amount        |  | $                  | 0.07   |   |                                                        | $ | 0.00       |  | $ | 0.07     |   |  | $                                                     | 0.06   |            |  | $ | 0.00 |  | $ | 0.06   |  

Certain options to purchase common stock were outstanding but were not included in the computation of diluted
earnings per share because the effect would be antidilutive. For the three months ended July 29, 2006 and July 30, 2005 total options excluded were 2,338,627 and 1,269,345. For the six months ended July 29, 2006 and July 30, 2005
total options excluded were 2,338,627 and 982,916.



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|5. | COMPREHENSIVE INCOME
|-- | --------------------

Comprehensive income (loss) for the three and six month periods ended July 29, 2006 and July 30, 2005 was as follows:



|                                                                       |  |                    |         |                  |              |   |              |  |   |              |   |  |   |      
|---------------------------------------------------------------------- |  | ------------------ | ------- | ---------------- | ------------ | - | ------------ |  | - | ------------ | - |  | - | -----
|                                                                       |  | Three Months Ended |         | Six Months Ended
|(In thousands)                                                         |  | July 29,2006       |         |                  | July 30,2005 |   | July 29,2006 |  |   | July 30,2005
|Net income (loss), as reported                                         |  | $                  | (11,252 | )                |              | $ | 1,518        |  | $ | (16,044      | ) |  | $ | 1,380
|Other comprehensive income net of related tax effect - cash flow hedge |  |                    | 18      |                  |              |   | 196          |  |   | 222          |   |  |   | 297  
|                                                                       |  |                    |         |                  |              |   |              |  |   |              |   |  |   |      
|Comprehensive income (loss)                                            |  | $                  | (11,234 | )                |              | $ | 1,714        |  | $ | (15,822      | ) |  | $ | 1,677
|                                                                       |  |                    |         |                  |              |   |              |  |   |              |   |  |   |      



|6. | LONG-TERM DEBT AND REVOLVING LINE OF CREDIT
|-- | -------------------------------------------

In May 2004, the
Company completed the $26.5 million purchase of its existing 500,000 square foot Virginia distribution center, which it had previously held under a capital lease. The Company financed $20 million of the purchase through a new 10 year fully
amortizing commercial real estate loan, which bears interest at LIBOR plus 0.9% and matures in June 2014. The Company entered into an interest rate swap agreement to effectively fix the interest rate on this loan at 4.82%. The swap is accounted for
as a cash flow hedge in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activity (SFAS 133).

In 2004, the Company also began construction on a 500,000 square foot expansion to the existing Virginia distribution center to help meet its future growth requirements. The expansion project was completed and placed in service in the first
quarter of fiscal 2005. The Company funded the majority of the expansion project through a $20 million interest only revolving line of credit and the remaining amount was financed through internally generated funds. The Company retired the line of
credit in May 2005 with a new $20 million 10 year fully amortizing commercial real estate loan. This loan bears interest at LIBOR plus 0.9%. The Company entered into interest rate swap agreements to effectively fix interest on this loan at a
weighted average rate of 6.58%. The swaps are accounted for as a cash flow hedge in accordance with SFAS No. 133.

On April 7, 2006, the Company
prepaid a fully amortizing commercial real estate loan in the amount of $18.2 million and terminated a related swap commitment. The loan agreement had been entered into to finance a portion of the acquisition costs of the building and land in
Stockton, CA. See Note 7 for a more detailed discussion.

In November 2004, the Company entered into an unsecured five year revolving line of credit
agreement (the Agreement) with a group of banks that terminated and replaced an existing revolving credit facility. The Agreement allows for cash borrowings and letters of credit under an unsecured revolving credit facility of up to
$50.0 million from January through June of each year, increasing to $125.0 million from July through December of each year to coincide with the Companys Holiday borrowing needs. The Agreement includes a one-time option to increase the size of
the revolving credit facility to $150.0 million. Interest is paid quarterly in arrears and bears interest, at the Companys election, based on a rate equal to Bank of Americas prime rate or LIBOR plus an applicable margin that is based on
the Companys Consolidated Adjusted Leverage Ratio, as defined in the Agreement. The Agreement requires a 30-day clean-up period in which Adjusted Total Outstandings, as defined in the Agreement, do not exceed $30.0 million for not
less than 30 consecutive days during the period from January 1 through March 31 of each year. The Company is subject to a minimum consolidated tangible net worth requirement, and annual capital expenditures are limited under the Agreement.
The Agreement includes limitations on the ability of the Company to incur debt, grant liens, make acquisitions and dispose of assets and also prohibits the Company from making cash dividend payments with respect to any capital stock. The events of
default under the Agreement include payment defaults, cross defaults with certain other indebtedness, breaches of covenants and bankruptcy events. In the case of a continuing event of default, the lenders under the Agreement may, among other
remedies, eliminate their commitments to make credit available, declare due all unpaid principal amounts outstanding, and require cash collateral for any letter of credit obligations. As of July 29, 2006, the Company



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was in compliance with its loan covenant requirements, had outstanding borrowings of $8.0 million under its line of credit and had $21.5 million outstanding
in letters of credit.

In April 2006, the Company entered into an unsecured 18 month revolving credit facility agreement with Bank of America, N.A. as the
lender (the Credit Facility). The Credit Facility allows for borrowings of up to $40.0 million to be used for costs and expenses related to the construction of an additional distribution facility adjacent to the Companys existing
facility in Stockton, CA. Accrued interest is paid monthly, and the outstanding principle balance is payable on October 27, 2007. The Credit Facility bears interest, at the Companys election, at a rate based on LIBOR plus a margin or Bank
of Americas prime rate (or the Federal Funds Rate plus 0.5%, if greater). In addition the Company must pay a fee on the unused portion of the Credit Facility (the Unused Fee). The Unused Fee is payable quarterly in arrears. The
applicable margin and the Unused Fee will be based upon the Companys consolidated adjusted leverage ratio, as defined in the agreement. The Credit Facilitys financial covenants are the same as those in the Agreement entered into in
November 2004, as discussed above. As of July 29, 2006, the Company was in compliance with its loan covenant requirements and had outstanding borrowings of $6.5 million under the Credit Facility. The borrowings under the Credit Facility are
classified as long-term debt in the Companys consolidated balance sheet.



|7. | SALE-LEASEBACK TRANSACTION
|-- | --------------------------

On April 7, 2006, the Company
entered into a sale-leaseback transaction with Inland Real Estate Acquisitions, Inc., a third party real estate investment trust (Inland). In connection with the transaction, the Company sold its Stockton, CA distribution center property
to Inland for net proceeds of $29.8 million. The property sold consists of an approximately 500,000 square foot building located on approximately 55 acres. The Company simultaneously entered into a lease agreement with Inland to lease the property
back.

The Company accounted for the transaction as a financing whereby the net book value of the asset remains on the Companys consolidated balance
sheet. The Company also recorded a financing obligation in the amount of approximately $29.8 million, which will be amortized over the 34 year period of the leases (including option periods) and approximates the discounted value of total maximum
lease payments under the leases. Monthly lease payments will be accounted for as principal and interest payments (at an approximate annual rate of 7.2%) on the recorded obligation. As of July 29, 2006, the balance of the financing obligation
was $29.8 million and was included on the Companys consolidated balance sheet as long-term debt.

The Company used a portion of the proceeds
from the sale of the property of approximately $29.8 million to retire $18.2 million of long-term debt related to the Companys purchase of the property, and the remaining proceeds were used for other business purposes. The Company also
terminated the interest rate swap agreement related to the aforementioned long-term debt.



|8. | SHAREHOLDERS EQUITY
|-- | --------------------

Stock Repurchase Program

In March 2003, the Company announced a stock repurchase program that was approved by its Board of Directors to repurchase up to 500,000 shares of its
common stock. In November 2004, the Companys Board of Directors authorized the repurchase of an additional 1,000,000 shares. The Company repurchased 425,500 shares under the program in fiscal 2004 and repurchased no shares in fiscal 2005 or
the first half of fiscal 2006. As of July 29, 2006, there were 1,074,500 shares available for repurchase under the program. The program does not require the Company to repurchase any common stock and may be discontinued at any time.



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

The following discussion and analysis of financial condition, results of operations, liquidity and capital resources should be read in conjunction with the accompanying unaudited condensed consolidated financial
statements and notes thereto for the three months and six months ended July 29, 2006.

This document contains forward-looking statements, which
reflect the Companys current beliefs and estimates with respect to future events and the Companys future financial performance, operations and competitive position. Forward looking statements may be identified, without limitation, by use
of the words may, should, expects, anticipates, estimates, believes, looking ahead, forecast, projects, continues,
intends, likely, plans and similar expressions. Actual results may differ materially from those discussed in such forward-looking statements, and shareholders of Cost Plus, Inc. should carefully review the
cautionary statements set forth in this form 10-Q. The Company may from time to time make additional written and oral forward-looking statements, including statements contained in the Companys filings with the Securities and Exchange
Commission. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company.

Overview

Cost Plus, Inc. is a leading specialty retailer of casual home furnishings and entertaining products. The stores feature an
ever-changing selection of casual home furnishings, housewares, gifts, decorative accessories, gourmet foods and beverages offered at competitive prices and imported from more than 50 countries. Many items are unique and exclusive to the Company.

Until recently, the Company had a strong history of sales growth and positive comparable store sales. Although the Company reported record total sales in
fiscal 2005 and for the first half of fiscal 2006, its same store sales decreased 2.6% in fiscal 2005 and decreased 3.7% in the first half of fiscal 2006. The Companys management is currently focused on the following five operating initiatives
that it believes are critical for its future success: improving customer traffic in stores; focusing efforts on improving performance in markets and stores that are underperforming; redefining the Companys pricing and promotion strategy to
emphasize the Companys value proposition; integrating the merchandising, marketing and advertising efforts to drive sales and maximize the return on marketing and advertising expenditures; and optimizing inventory to ensure the right
merchandise is in its stores at the right time.

The Company has taken actions which it believes will lead to the successful implementation of its
operating initiatives. While some of these actions, such as taking significant markdowns on selected merchandise and increasing spending on advertising, have had a material negative effect on the Companys profitability in the short run, the
Company believes its actions are necessary for future success.

In the second quarter of fiscal 2006, net sales increased 6.2% to $215.3 million from
$202.8 million last year. Comparable store sales for the quarter decreased 3.2% compared to a 1.7% decrease last year. Year-to-date, net sales were $428.2 million, a 6.3% increase from $402.8 million for the same period last year, with same store
sales decreasing 3.7% compared to a 1.8% decrease in the prior year.

Net loss for the second quarter of fiscal 2006 was $11.3 million, or $0.51 per
diluted share, versus net income of $1.5 million, or $0.07 per diluted share, for the second quarter of fiscal 2005. The net loss included approximately $0.17 per diluted share due to a markdown charge taken to lower retail pricing on certain
categories of home furnishings merchandise that the Company desires to sell through. The Company also took additional markdowns on primarily seasonal merchandise to sell through the items whereas the Companys past practice has been to pack and
hold merchandise until the next season. In addition, the Company increased its advertising expenditures during the quarter to promote its semi-annual clearance event and to increase brand awareness in targeted markets. The Company believes the
additional advertising and markdowns were necessary to position its stores to receive new merchandise and to position the Company for future success and growth. The net loss also included a non-cash share-based compensation charge of approximately
$0.03 per diluted share related to the adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (SFAS 123(R)).



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The year-to-date net loss was $16.0 million, or $0.73 per diluted share, compared with net income of $1.4 million, or $0.06 per diluted share, last year.

In the second quarter of fiscal 2006, the Company opened two new stores to end the quarter with 274 stores in 34 states. Although the Company believes
there is still ample room for more than 600 stores in the United States, it has decided to slow down new store growth to 24 stores in fiscal 2006. The new store openings, when combined with the closing of four stores, are expected to result in 287
locations at the end of the fiscal year.

Results of Operations

The three months (second quarter) and six months (year-to-date) ended July 29, 2006 as compared to the three months and six months ended July 30, 2005.

Net Sales Net sales primarily consist of sales from comparable stores and non-comparable stores. Net sales increased $12.5 million, or 6.2%, to $215.3 million in the second quarter of fiscal 2006 from
$202.8 million in the second quarter of fiscal 2005. Year-to-date, net sales were $428.2 million compared to $402.8 million for the same period last year, an increase of $25.5 million, or 6.3%. The increase in net sales for the quarter and
year-to-date was attributable to an increase in non-comparable store sales partially offset by a decrease in comparable store sales. Non-comparable store sales increased $18.8 million for the second quarter and $40.3 million year-to-date. Comparable
store sales decreased 3.2%, or $6.3 million, in the second quarter of fiscal 2006, compared to a decrease of 1.7%, or $3.1 million, in the second quarter of fiscal 2005. Year-to-date comparable store sales decreased 3.7% compared to a 1.8% decrease
for the same period last year. Comparable store sales decreased during the quarter and year-to-date as a result of decreased customer traffic and an average transaction size that was lower for the quarter and flat year-to-date. The average
transaction size was impacted by a shift in sales mix to consumables primarily due to lower furniture sales and increased promotional activity. As of July 29, 2006, the calculation of comparable store sales included a base of 239 stores. A
store is generally included as comparable at the beginning of the fourteenth month after its grand opening. As of July 29, 2006, the Company operated 274 stores, compared to 246 stores as of July 30, 2005.

The Company classifies its sales into the home furnishings and consumables product lines. In the second quarter, home furnishings accounted for 66.1% of total sales
versus 67.7% last year and consumables accounted for 33.9% of total sales versus 32.3% last year. Year-to-date, home furnishings accounted for 64.0% of total sales versus 65.6% last year and consumables accounted for 36.0% of total sales versus
34.4% last year.

Cost of Sales and Occupancy Cost of sales and occupancy, which consists of costs to acquire merchandise inventory, costs of
freight and distribution, as well as certain facilities costs, increased $23.2 million, or 17.4%, to $156.7 million in the second quarter of fiscal 2006 compared to the second quarter of fiscal 2005. Year-to-date, cost of sales and occupancy
increased $39.5 million, or 14.8%, to $306.4 million compared to the same period in fiscal 2005. As a percentage of net sales, second quarter cost of sales and occupancy were 72.8% compared to 65.9% for the second quarter of fiscal 2005 and 71.5%
compared to 66.3% year to date. Cost of sales as a percentage of net sales increased 590 basis points over last year for the second quarter and 430 basis points year to date. The increase was primarily attributable to significant markdowns the
Company recorded to clear discontinued merchandise and additional markdowns taken in the current year on primarily seasonal merchandise to sell through the merchandise versus packing and holding unsold merchandise as in the prior year. To a lesser
extent, lower initial markups and a shift in sales mix to consumable products also contributed to the increase in cost of sales as a percentage of net sales. Occupancy costs as a percentage of net sales increased 100 basis points over last year for
the second quarter and year to date primarily as a result of higher expenses associated with new stores and the de-leveraging of occupancy costs due to the decrease in comparable store sales.

Selling, General and Administrative (SG&A) Expenses SG&A expenses increased $11.4 million, or 18.1%, to $74.6 million in the second
quarter of fiscal 2006 compared to the $63.2 million in the second quarter of fiscal 2005 primarily as a result of new store openings, increased advertising expense to support a clearance event in the second quarter, the expensing of share-based
compensation, e-commerce expenses and increased employee benefit costs. As a percentage of net sales, SG&A expenses for the second quarter of fiscal 2006 were 34.6% compared to 31.1% for the second quarter of fiscal 2005. The increase in
SG&A expenses as a percentage of sales was primarily due to an increase in store payroll of 100 basis points related to higher employee benefit costs, an increase in advertising and marketing expense of 110 basis points to support the clearance
event, an increase in other SG&A expenses of 140 basis points that include additional expenses related to the Companys e-commerce operations and share-based compensation, and decreased leverage on sales as a result of lower comparable
store sales. The second quarter of fiscal 2006 included $1.2 million related to the expensing of share-based compensation due to the adoption of SFAS 123(R) at the



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beginning of fiscal 2006. Year-to-date, SG&A expenses increased $15.0 million, or 11.7%, to $143.3 compared to $128.3 million for the same period last
year. Year-to-date, SG&A expenses as a percentage of net sales were 33.5% compared to 31.9% for the same period last year. The year-to-date increase in SG&A expenses as a percentage of net sales was primarily due to higher store payroll, the
expensing of share-based compensation due to the adoption of SFAS 123(R), and decreased leverage on sales.

Store Preopening Expenses Store
preopening expenses, which include rent expense incurred prior to opening as well as grand opening advertising and preopening merchandise setup expenses, were $738,000 in the second quarter of fiscal 2006 compared to $2.3 million in the second
quarter of fiscal 2005. The Company opened two new stores in the second quarter of fiscal 2006 compared to ten stores in the second quarter of fiscal 2005. Year-to-date store preopening expenses were $2.3 million compared to $3.4 million for the
same period last year, with 9 stores opened year-to-date compared to 15 for the same period last year. Store preopening expenses vary depending on the amount of time between the possession date and the store opening, the particular store site and
whether it is located in a new or existing market.

Net interest expense Net interest expense, which includes interest on capital leases and
debt, net of interest earned on investments, was $1.5 million for the second quarter of fiscal 2006 compared to $1.4 million for the second quarter of fiscal 2005. Year-to-date, net interest expense was $2.6 million compared to $2.1 million for the
same period last year. The increase in net interest expense for the quarter and year-to-date was primarily due to additional long-term debt related to the acquisition and expansion of the Stockton distribution center, partially offset by lower
seasonal borrowings under the Companys revolving line of credit.

Income TaxesThe Companys effective tax rate was 38.4% in the
second quarter of fiscal 2006 compared to 36.5% in the second quarter of fiscal 2005. The increase in the effective tax rate was primarily due to the impact of adopting SFAS 123(R) and a one-time tax rate benefit received in the second quarter of
fiscal 2005 related to a change in Ohio state tax law. As a result of adopting SFAS 123 (R), the compensation expense associated with incentive stock options increased the Companys effective tax rate. Additionally, the effective tax rate is
expected to fluctuate from quarter to quarter, due to the timing of incentive stock option exercises and sales in relation to the level of earnings. The Company expects its effective tax rate to be approximately 38.9% for the remainder of the year.

Liquidity and Capital Resources

The Companys
cash and cash equivalents balance at July 29, 2006 was $2.9 million compared to $3.6 million at July 30, 2005. The Companys primary uses for cash are to fund operating expenses, inventory requirements and new store expansion.
Historically, the Company has financed its operations primarily from internally generated funds and seasonal borrowings under a revolving credit facility. The Company believes that the combination of its cash and cash equivalents, internally
generated funds and available borrowings will be sufficient to finance its working capital, new store expansion and distribution center project requirements for at least the next twelve months.

Distribution Center Activities On April 7, 2006, the Company entered into a sale-leaseback transaction with Inland Real Estate Acquisitions, Inc., a
third party real estate investment trust (Inland). In connection with the transaction, the Company sold its Stockton, CA distribution center property to Inland for net proceeds of $29.8 million. The property sold consists of a 500,000
square foot building located on approximately 55 acres. The Company simultaneously entered into a lease agreement with Inland to lease the property back.

The Company accounted for the transaction as a financing whereby the net book value of the asset remains on the Companys consolidated balance sheet. The Company also recorded a financing obligation in the amount of approximately $29.8
million, which will be amortized over the 34 year period of the leases (including option periods) and approximates the discounted value of total maximum lease payments under the leases. Monthly lease payments will be accounted for as principal and
interest payments (at an approximate annual rate of 7.2%) on the recorded obligation. As of July 29, 2006, the balance of the financing obligation was $29.8 million and was included on the Companys consolidated balance sheet as
long-term debt.

The Company used a portion of the proceeds from the sale of the property of approximately $29.8 million to retire $18.2 million of
long-term debt related to the Companys purchase of the property, and the remaining proceeds were used for other business purposes. The Company also terminated the interest rate swap agreement related to the aforementioned long-term debt.



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Cash Flows from Operating Activities Net cash used in operating activities totaled $37.7 million for the
first half of fiscal 2006 compared to $41.0 million in the first half of fiscal 2005, a decrease of $3.2 million. The decrease in net cash used in operations was primarily due to an increase in accounts payable largely due to the timing of inventory
receipts partially offset by the net loss for the first half of fiscal 2006 and the resulting increase in other assets due to an income tax receivable.

Cash Flows from Investing Activities Net cash used in investing activities totaled $23.1 million in the first half of fiscal 2006 compared to net cash used of $41.9 million in the first half of fiscal 2005. Net cash used in
investing activities decreased primarily because the Company spent $6.8 million in the first half of fiscal 2006 on the expansion of the Stockton distribution facility versus $30.2 million spent on the purchase and renovation of the facility in
the first half of fiscal 2005, and nine stores opened during the first half of fiscal 2006 versus 15 stores opened during the first half of fiscal 2005.

The Company estimates that fiscal 2006 capital expenditures will approximate $73.9 million; including approximately $13.1 million for new stores, $40.6 million to expand the distribution center in Stockton, CA, $8.1 million for management
information systems and distribution center projects, and $12.1 million allocated to investments in existing stores and various other corporate projects.

Cash Flows from Financing ActivitiesNet cash provided by financing activities was $23.4 million in the first half of fiscal 2006 compared to $43.5 million in the first half of fiscal 2005. The decrease was primarily due to
lower net borrowings under the Companys revolving line of credit of $8.0 million in the first half of fiscal 2006 versus $21.5 million in the first half of fiscal 2005. The Company had net proceeds from long-term debt of $36.3 million in the
first half of fiscal 2006 versus proceeds from long-term debt of $20.0 million in the first half of fiscal 2005. The $36.3 million in net proceeds from long-term debt is comprised of $29.8 million from the sale-leaseback of the Stockton distribution
facility and $6.5 million from a new Credit Facility that will finance the expansion of the Stockton, CA distribution facility. The Company used a portion of the net proceeds from the sale of the Stockton distribution facility of $29.8 million to
retire $18.2 million of long-term debt. The Company received $59,000 in the first half of fiscal 2006 from the issuance of common stock in connection with the exercise of employee stock options versus $4.2 million received in the first half of
fiscal 2005.

Revolving Line of Credit In November 2004, the Company entered into an unsecured five year revolving line of credit agreement
(the Agreement) with a group of banks that terminated and replaced an existing revolving credit facility. The Agreement allows for cash borrowings and letters of credit under an unsecured revolving credit facility of up to $50.0 million
from January through June of each year, increasing to $125.0 million from July through December of each year to coincide with the Companys Holiday borrowing needs. The Agreement includes a one-time option to increase the size of the revolving
credit facility to $150.0 million. Interest is paid quarterly in arrears and bears interest, at the Companys election, based on a rate equal to Bank of Americas prime rate or LIBOR plus an applicable margin that is based on the
Companys Consolidated Adjusted Leverage Ratio, as defined in the Agreement. The Agreement requires a 30-day clean-up period in which Adjusted Total Outstandings, as defined in the Agreement, do not exceed $30.0 million for not less
than 30 consecutive days during the period from January 1 through March 31 of each year. The Company is subject to a minimum consolidated tangible net worth requirement, and annual capital expenditures are limited under the Agreement. The
Agreement includes limitations on the ability of the Company to incur debt, grant liens, make acquisitions and dispose of assets and also prohibits the Company from making cash dividend payments with respect to any capital stock. The events of
default under the Agreement include payment defaults, cross defaults with certain other indebtedness, breaches of covenants and bankruptcy events. In the case of a continuing event of default, the lenders under the Agreement may, among other
remedies, eliminate their commitments to make credit available, declare due all unpaid principal amounts outstanding, and require cash collateral for any letter of credit obligations. As of July 29, 2006, the Company was in compliance with its
loan covenant requirements, had outstanding borrowings of $8.0 million under its line of credit and had $21.5 million outstanding in letters of credit.

In
April 2006, the Company entered into an unsecured 18 month revolving credit facility agreement with Bank of America, N.A. as the lender (the Credit Facility). The Credit Facility allows for borrowings of up to $40.0 million to be used
for costs and expenses related to the construction of an additional distribution facility adjacent to the Companys existing facility in Stockton, CA. Accrued interest is paid monthly, and the outstanding principle balance is payable on
October 27, 2007. The Credit Facility bears interest, at the Companys election, at a rate based on LIBOR plus a margin or Bank of Americas prime rate (or the Federal Funds Rate plus 0.5%, if greater). In addition the Company must
pay a fee on the unused portion of the Credit Facility (the Unused Fee). The Unused Fee is payable quarterly in arrears. The applicable margin and the Unused Fee will be based upon the Companys consolidated adjusted leverage ratio,
as defined in the agreement. The Credit Facilitys financial covenants are the same as those in the Agreement entered into in November 2004, as discussed above. As of July 29, 2006, the Company was in compliance with its loan covenant
requirements and had outstanding borrowings of $6.5 million



15



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##### Table of Contents

under the Credit Facility. The borrowings under the Credit Facility are classified as long-term debt in the Companys consolidated balance sheet.

Seasonality

The Companys business is highly
seasonal, reflecting the general pattern associated with the retail industry of peak sales and earnings during the fourth quarter (Holiday) selling season. Due to the importance of the Holiday selling season, the fourth quarter of each fiscal year
has historically contributed, and the Company expects it will continue to contribute, a disproportionate percentage of the Companys net sales and most of its net income for the entire fiscal year.

Available Information

The Companys Internet web-site address
is http://www.worldmarket.com. The Company makes available through its Internet web-site, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Definitive Proxy Statement and
Section 16 filings and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the
Securities and Exchange Commission.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

There
are no material changes to the Companys market risk as disclosed its Form 10-K filed for the fiscal year ended January 28, 2006.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Evaluation of Disclosure Controls and
Procedures

The Companys management evaluated, with the participation of its principal executive officer and its principal financial officer, the
effectiveness of its disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Companys principal executive officer and its principal financial officer have
concluded that its disclosure controls and procedures are effective to ensure that information it is required to disclose in reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to its
management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.

Changes in Internal Control Over Financial Reporting

There was no change in the Companys internal control over financial reporting that occurred during the quarter ended July 29, 2006 that has materially
affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.

PART II. OTHER
INFORMATION



|ITEM 1A. | RISK FACTORS
|-------- | ------------

The following information describes certain
significant risks and uncertainties inherent in our business. You should carefully consider these risks and uncertainties, together with the other information contained in this Quarterly Report on Form 10-Q and in the Companys other public
filings. If any of such risks and uncertainties actually occurs, the Companys business, financial condition or operating results could differ materially from the plans, projections and other forward-looking statements included in the section
titled Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report and in the Companys other public filings. In addition, if any of the following risks and uncertainties,
or if any other disclosed risks and uncertainties, actually occurs, the Companys business, financial condition or operating results could be harmed substantially, which could cause the market price of our stock to decline, perhaps
significantly.



16



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##### Table of Contents

Our business is highly seasonal and our operating results fluctuate significantly from quarter to quarter.

Our business is highly seasonal, reflecting the general pattern associated with the retail industry of peak sales and earnings during the Holiday
season. Due to the importance of the Holiday selling season, the fourth quarter of each fiscal year has historically contributed, and we expect will continue to contribute, a large percentage of our net sales and much of our net income for the
entire fiscal year. Any factors that have a negative effect on our business during the Holiday selling season in any year, including unfavorable economic conditions, would materially and adversely affect our financial condition and results of
operations. We generally experience lower sales and earnings during the first three quarters and, as is typical in the retail industry, may incur losses in these quarters. The results of our operations for these interim periods are not necessarily
indicative of the results for our full fiscal year.

We also must make decisions regarding merchandise well in advance of the season in which it will be
sold. If the demand for our merchandise is significantly different than we have projected, it would harm our business and operating results, either as a result of lost sales due to insufficient inventory or lower gross margin due to the need to mark
down excess inventory.

Our quarterly operating results may also fluctuate based on such factors as:



| |  |  | delays in the flow of merchandise to our stores,
| | - |  | ------------------------------------------------



| |  |  | the number and timing of new store openings and related store pre-opening expenses,
| | - |  | -----------------------------------------------------------------------------------



| |  |  | the amount of sales contributed by new and existing stores,
| | - |  | -----------------------------------------------------------



| |  |  | the mix of products sold,
| | - |  | -------------------------



| |  |  | the timing and level of markdowns,
| | - |  | ----------------------------------



| |  |  | store closings or relocations,
| | - |  | ------------------------------



| |  |  | competitive factors,
| | - |  | --------------------



| |  |  | changes in fuel and other shipping costs,
| | - |  | -----------------------------------------



| |  |  | general economic conditions,
| | - |  | ----------------------------



| |  |  | labor market fluctuations,
| | - |  | --------------------------



| |  |  | the impact of terrorist activities,
| | - |  | -----------------------------------



| |  |  | changes in accounting rules and regulations, and
| | - |  | ------------------------------------------------



| |  |  | unseasonable weather conditions.
| | - |  | --------------------------------

These
fluctuations may also cause a decline in the market price of our common stock.

Our success depends to a significant extent upon the overall level of
consumer spending.

As a retail business our success depends to a significant extent upon the overall level of consumer spending. Among the factors that
affect consumer spending are the general state of the economy, the level of consumer debt, prevailing interest rates and consumer confidence in future economic conditions. A substantial number of our stores are located in the western United States,
especially in California. Lower levels of consumer spending in this region could have a material adverse affect on our financial condition and results of operations. Reduced consumer confidence and spending may result in reduced demand for our
merchandise, may limit our ability to increase prices and may require us to incur higher selling and promotional expenses, which in turn would harm our business and operating results.



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##### Table of Contents

The occurrence or the threat of international conflicts or terrorist activities could harm our business and result in
business interruptions.

Most of the merchandise that we sell is purchased in other countries and must be shipped to the United States, transported from
the port of entry to our distribution centers in California or Virginia and distributed to our stores from the distribution centers. The precise timing and coordination of these activities is crucial to our business. The occurrence or threat of
international conflicts or terrorist activities and the responses to those developments, for example, the temporary shutdown of a port that we use, could have a significant impact upon our business, our personnel and facilities, our customers and
suppliers, the retail and financial markets and general economic conditions.

Our business and operating results are sensitive to changes in energy and
transportation costs.

We incur significant costs for the purchase of fuel in transporting goods from foreign ports and to our distribution centers and
stores and for utility services in our stores, distribution centers and corporate offices. We continually negotiate pricing for certain transportation contracts and, in a period of rising fuel costs such as we have recently experienced, expect that
our vendors for these services will increase their rates to compensate for the higher energy costs. We may not be able to pass these increased costs on to our customers.

We must continue to open new stores and increase sales from existing stores to carry out our growth strategy.

Our
ability to increase our sales and earnings depends in part on our ability to continue to open new stores and to operate these stores on a profitable basis. Our continued growth also depends on our ability to increase sales in our existing stores. We
opened a net of 30 stores in fiscal 2005 and presently anticipate opening a net of 20 stores in fiscal 2006. We intend to open stores in both existing and new geographic markets. When we open additional stores in existing markets it can result in
lower sales from existing stores in that market. The success of our planned expansion will depend upon many factors, including the following:



| |  |  | our ability to identify suitable markets for expansion,
| | - |  | -------------------------------------------------------



| |  |  | the selection, availability and leasing of suitable sites on acceptable terms,
| | - |  | ------------------------------------------------------------------------------



| |  |  | the hiring, training and retention of qualified management and other store personnel,
| | - |  | -------------------------------------------------------------------------------------



| |  |  | satisfaction of regulatory requirements in new markets, including alcoholic beverage regulations,
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | control of costs associated with entering new markets, including advertising and distribution costs, and
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | our ability to maintain adequate systems, controls and procedures, including product distribution facilities, store management, financial controls and information systems.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We cannot assure that we will be able to achieve our planned expansion, integrate new stores effectively into our existing operations or
operate our new stores profitably.

Our operating results will be harmed if we are unable to improve our comparable store sales.

Our success depends, in part, upon our ability to improve sales at our existing stores. Our comparable store sales, which are defined as sales by stores that have
completed 14 full fiscal months of sales, fluctuate from year to year. To ensure a meaningful comparison, we measure comparable store sales on a 52-week basis. In first half of fiscal 2006, comparable store sales decreased by 3.7% compared to a
decrease of 1.8% in the first half of fiscal 2005. Various factors affect comparable store sales, including:



| |  |  | the general retail sales environment,
| | - |  | -------------------------------------



| |  |  | our ability to source and distribute products efficiently,
| | - |  | ----------------------------------------------------------



| |  |  | changes in our merchandise mix,
| | - |  | -------------------------------



| |  |  | competition,
| | - |  | ------------



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##### Table of Contents

| |  |  | current economic conditions,
| | - |  | ----------------------------



| |  |  | the timing of release of new merchandise and promotional events,
| | - |  | ----------------------------------------------------------------



| |  |  | the success of marketing programs, and
| | - |  | --------------------------------------



| |  |  | weather conditions.
| | - |  | -------------------

These factors and others may cause our comparable
store sales to differ significantly from prior periods and from expectations. If we fail to meet the comparable store sales expectations of investors and security analysts in one or more future periods, the price of our common stock could decline.

We face a number of risks because we import much of our merchandise.

We import a significant amount of our merchandise from over 50 countries and numerous suppliers. We have no long-term contracts with our suppliers, but instead rely on long-term relationships that we have established
with many of these suppliers. Our future success will depend to a significant extent on our ability to maintain our relationships with our suppliers or to develop new ones. As an importer, our business is subject to the risks generally associated
with doing business abroad such as the following:



| |  |  | foreign governmental regulations,
| | - |  | ---------------------------------



| |  |  | economic disruptions,
| | - |  | ---------------------



| |  |  | delays in shipments,
| | - |  | --------------------



| |  |  | freight cost increases,
| | - |  | -----------------------



| |  |  | changes in political or economic conditions in countries from which we purchase products, and
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | the effect of trade regulation by the United States, including quotas, duties and taxes and other charges or restrictions on imported merchandise.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------

If these factors or others made the conduct of business in particular countries undesirable or impractical or if additional quotas, duties taxes or other charges or
restrictions were imposed by the United States on the importation of our products, our business and operating results would be harmed.

Our dependence
on our distribution centers carries certain risks.

Merchandise distribution for all of our stores is currently handled from facilities in Stockton,
California and Windsor, Virginia. Any significant interruption in the operation of these facilities, including any interruption as a result of the planned expansion of the Stockton facility, would harm our business and operating results, as would
operational inefficiencies or failure to coordinate the operations of these facilities successfully.

We may not be able to forecast customer
preferences accurately in our merchandise selections.

Our success depends in part on our ability to anticipate the tastes or our customers and to
provide merchandise that appeals to their preferences. Our strategy requires our merchandising staff to introduce products from around the world that meet current customer preferences and that are affordable, distinctive in quality and design and
that are not widely available from other retailers. Many of our products require long order lead times. In addition, a large percentage of our merchandise changes regularly. Our failure to anticipate, identify or react appropriately to changes in
consumer trends could cause excess inventories and higher markdowns or a shortage of products and could harm our business and operating results.



19



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##### Table of Contents

We face intense competition from a variety of other retailers.

The markets that we serve are very competitive. We compete against a diverse group of retailers ranging from specialty stores to department stores and discounters. Our
product offerings compete with such retailers as Bed Bath & Beyond, Target, Linens n Things, Crate & Barrel, Pottery Barn, Michaels Stores, Pier 1 Imports, Trader Joes and Williams-Sonoma. We compete with these and
other retailers for customers, suitable retail locations and qualified management personnel. Many of our competitors have considerably greater financial, marketing and other resources than we have.

We rely on various key management personnel to ensure our success and have had significant management changes in the past year.

Our success will continue to depend on our key management personnel. The loss of the services of one or more of these executives could harm our business and operating
results. We do not maintain any key man life insurance policies. In the recent past, we have had significant changes in our management, including our Chief Executive Officer and our Chief Financial Officer. Moreover, we have recently added a Senior
Vice President, Marketing, and a Senior Vice President, Supply Chain, and our Executive Vice President of Merchandising and Marketing has terminated employment and has not yet been replaced.

Our common stock may be subject to substantial price and volume fluctuations.

The market price of our common stock is affected by factors such as fluctuations in our operating results, a downturn in the retail industry, changes in stock market analysts recommendations regarding our company, other retail
companies or the retail industry in general and general market and economic conditions. In addition, the stock market can experience price and volume fluctuations that are unrelated to the operating performance of particular companies.

Our business is subject to risks associated with fluctuations in the values of foreign currencies against the United States dollar.

We have significant purchase obligations with suppliers outside of the United States. During the first half of fiscal 2006, approximately 4.5% of these purchases were
settled in currencies other than the United States dollar. Fluctuations in the rates of exchange between the dollar and other currencies could harm our operating results. We have not hedged our currency risk in the past and do not currently
anticipate doing so in the future.

Provisions in our charter documents as well as our stockholders rights plan could prevent or delay a change in
control of our company and may reduce the market price of our common stock.

Certain provisions of our articles of incorporation and bylaws may have the
effect of making it more difficult for a third party to acquire, or may discourage a third party from attempting to acquire, control of the Company. Such provisions could limit the price that certain investors might be willing to pay in the future
for shares of our common stock. Certain of these provisions allow us to issue preferred stock without any vote or further action by the shareholders. In addition, the right to cumulate votes in the election of directors has been eliminated. These
provisions may make it more difficult for shareholders to take certain corporate actions and could have the effect of delaying or preventing a change in control of the Company. In addition, our board of directors has adopted a preferred share
purchase rights agreement. Pursuant to the rights agreement, our board of directors declared a dividend of one right to purchase one one-thousandth share of our Series A Participating Preferred Stock for each outstanding share of our common
stock. These rights could have the effect of delaying, deferring or preventing a change of control of our company, discouraging a proxy contest or making more difficult the acquisition of a substantial block of our common stock. The rights agreement
could also limit the price that investors might be willing to pay in the future for our common stock.

Lawsuits and other claims against our company may
adversely affect our operating results.

We are involved in litigation, claims and assessments incidental to our business, the disposition of which is
not expected to have a material effect on our financial position or results of operations. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in our
assumptions related to these matters. We accrue our best estimate of the probable cost for the resolution of claims. When appropriate, such estimates are developed in consultation with outside counsel handling the matters and are based upon a
combination of litigation and settlement strategies. To the extent additional information arises or our strategies change, it is possible that our best estimate of our probable liability may change.



20



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##### Table of Contents

|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

At the
Companys 2006 Annual Meeting of Shareholders held on June 22, 2006, the shareholders voted on four proposals, each of which was approved. The following is a brief description of each matter voted upon at the meeting and a statement of the
number of votes cast for, against or withheld and the number of abstentions and the number of broker non-votes with respect to each matter:

Proposal 1. To elect six directors to serve until the 2007 Annual Meeting of Shareholders and until their successors are elected.



|                     |  |            |  |          
|-------------------- |  | ---------- |  | ---------
|Name                 |  | For        |  | Withheld 
|Joseph H. Coulombe   |  | 19,862,201 |  | 659,465  
|Christopher V. Dodds |  | 19,996,487 |  | 525,071  
|Barry J. Feld        |  | 17,365,339 |  | 3,156,327
|Danny W. Gurr        |  | 19,744,520 |  | 777,146  
|Kim D. Robbins       |  | 17,555,265 |  | 2,966,401
|Fredric M. Roberts   |  | 17,568,073 |  | 2,953,485

Proposal 2. To approve an amendment to the Companys 2004 Stock Plan to increase the number of shares
reserved for issuance thereunder by 1,000,000 shares.



|                                                   |  |            |  |           |  |         |  |                 
|-------------------------------------------------- |  | ---------- |  | --------- |  | ------- |  | ----------------
|                                                   |  | For        |  | Against   |  | Abstain |  | Broker Non-Votes
|Approve Amendment to the Companys 2004 Stock Plan |  | 10,314,632 |  | 4,527,102 |  | 802,411 |  | 4,877,521       

Proposal 3. To approve an amendment to the Companys 1996 Director Option Plan to increase the number
of shares reserved for issuance thereunder by 200,000 shares.



|                                                             |  |            |  |           |  |         |  |                 
|------------------------------------------------------------ |  | ---------- |  | --------- |  | ------- |  | ----------------
|                                                             |  | For        |  | Against   |  | Abstain |  | Broker Non-Votes
|Approve Amendment to the Companys 1996 Director Option Plan |  | 11,235,256 |  | 3,603,720 |  | 805,169 |  | 4,877,521       

Proposal 4. To ratify and approve the appointment of Deloitte & Touche LLP as the independent
registered public accounting firm of the Company for the fiscal year ending February 3, 2007.



|                                            |  |            |  |         |  |        
|------------------------------------------- |  | ---------- |  | ------- |  | -------
|                                            |  | For        |  | Against |  | Abstain
|Ratify Appointment of Deloitte & Touche LLP |  | 20,493,595 |  | 20,228  |  | 7,843  



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##### Table of Contents

|ITEM 6. | EXHIBITS
|------- | --------



|(a) | Exhibits
|--- | --------



|     |  |                                                                                                                                                                                                       
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|10.1 |  | Form of Indemnification Agreement, as amended and restated, between the Company and each of its directors and officers.                                                                               
|     | 
|10.2 |  | Cost Plus, Inc. 1996 Director Option Plan, as amended June 22, 2006.                                                                                                                                  
|     | 
|10.3 |  | Cost Plus, Inc. 2004 Stock Plan, as amended June 22, 2006                                                                                                                                             
|     | 
|10.4 |  | Second Amended and Restated Employment Severance Agreement dated April 17, 2006, between Cost Plus, Inc. and Chris Miller.                                                                            
|     | 
|31.1 |  | Certification of the Chief Executive Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                            
|     | 
|31.2 |  | Certification of the Chief Financial Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                            
|     | 
|32.1 |  | Certification of the Chief Executive Officer and Chief Financial Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.



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##### Table of Contents

SIGNATURE

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.



|                        |  |  |  |                 |  |                          |  |                                                                         
|----------------------- |  |  |  | --------------- |  | ------------------------ |  | ------------------------------------------------------------------------
|                        |  |  |  | COST PLUS, INC.
|                        |  |  |  | Registrant     
|                        |  |  | 
|Date: September 7, 2006 |  |  |  | By:             |  | /S/ THOMAS D. WILLARDSON
|                        |  |  |  |                 |  |                          |  | Thomas D. Willardson                                                    
|                        |  |  |  |                 |  |                          |  | Executive Vice President Chief Financial Officer Duly Authorized
Officer



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##### Table of Contents

INDEX TO EXHIBITS



|     |  |                                                                                                                                                                                                       
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|10.1 |  | Form of Indemnification Agreement, as amended and restated, between the Company and each of its directors and officers.                                                                               
|     | 
|10.2 |  | Cost Plus, Inc. 1996 Director Option Plan, as amended June 22, 2006.                                                                                                                                  
|     | 
|10.3 |  | Cost Plus, Inc. 2004 Stock Plan, as amended June 22, 2006                                                                                                                                             
|     | 
|10.4 |  | Second Amended and Restated Employment Severance Agreement dated April 17, 2006, between Cost Plus, Inc. and Chris Miller.                                                                            
|     | 
|31.1 |  | Certification of the Chief Executive Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                            
|     | 
|31.2 |  | Certification of the Chief Financial Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                            
|     | 
|32.1 |  | Certification of the Chief Executive Officer and Chief Financial Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.



24