**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 1,
                2006


or


o
            
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**





Commission
      File Number: **1-32227**





**CABELA’S
      INCORPORATED**


(Exact
      name of registrant as specified in its charter)


**Delaware**
            
            **20-0486586**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (I.R.S.
                Employer
              Identification
                Number)**One
                Cabela Drive, Sidney, Nebraska**
            
            **69160**(Address
                of principal executive offices)
            
            (Zip
                Code)





**(308)
      254-5505**


(Registrant’s
      telephone number, including area code)





**Not
      applicable**


(Former
      name, former address and former fiscal year, if changed since last
      report)





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


Yes x No o





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 filerx
            Accelerated
                filero
            Non-accelerated
                filero





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


Yes o No x





Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable date.





Common
      stock, $0.01 par value: 65,241,635 shares, including 8,073,205 shares of
      non-voting common stock, as of July 28, 2006.








CABELA’S
      INCORPORATED


FORM
      10-Q


QUARTERLY
      PERIOD ENDED JULY 1, 2006


TABLE
      OF
      CONTENTS








PART
                I - FINANCIAL INFORMATION
            PageItem
                1.
            Financial
                StatementsCondensed
                Consolidated Balance Sheets
            3Condensed
                Consolidated Statements of Income
            4Condensed
                Consolidated Statements of Cash Flows
            5Notes
                to Condensed Consolidated Financial Statements
            6Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            20Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            36Item
                4.
            Controls
                and Procedures
            37PART
                II - OTHER INFORMATIONItem
                1.
            Legal
                Proceedings
            39Item
                1A.
            Risk
                Factors
            39Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            39Item
                3.
            Defaults
                Upon Senior Securities
            39Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            39Item
                5.
            Other
                Information
            40Item
                6.
            Exhibits
            40SIGNATURES
            41INDEX
                TO EXHIBITS
            42





2
 Table
          of Contents


**PART
      I - FINANCIAL INFORMATION**


**Item
      1.**  **Financial
      Statements.**





**CABELA'S
                INCORPORATED AND SUBSIDIARIES**
              **CONDENSED
                CONSOLIDATED BALANCE SHEETS**
              **(Dollar
                Amounts in Thousands Except Share and Per Share
                Amounts)**
              **(Unaudited)****ASSETS**
            
            **July
                1,**
              **2006**
            
            **December
                31,**
              **2005**CURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            117,658
            
            $
            86,923Short-term
                investments
            
            
            3,000
            
            
            -Accounts
                receivable, net of allowance for doubtful accounts of $1,750 at July
                1,
                2006 and $1,404
              at
                December 31, 2005
            
            
            30,037
            
            
            35,342Credit
                card loans held for sale (Note 3)
            
            
            90,861
            
            
            77,690Credit
                card loans receivable, net of allowance of $512 at July 1, 2006 and
                $536
                at December 31, 2005
              (Note
                3)
            
            
            13,996
            
            
            11,968Inventories
            
            
            461,805
            
            
            396,635Prepaid
                expenses and deferred catalog costs
            
            
            43,846
            
            
            42,725Other
                current assets
            
            
            47,633
            
            
            42,744Total
                current assets
            
            
            808,836
            
            
            694,027PROPERTY
                AND EQUIPMENT, NET
            
            
            544,215
            
            
            459,622OTHER
                ASSETS:Land
                held for sale or development
            
            
            8,633
            
            
            12,599Retained
                interests in securitized loans (Note 3)
            
            
            37,972
            
            
            34,465Marketable
                securities
            
            
            109,515
            
            
            145,744Other
            
            
            18,771
            
            
            19,823Total
                other assets
            
            
            174,891
            
            
            212,631Total
                assets
            
            $
            1,527,942
            
            $
            1,366,280**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**CURRENT
                LIABILITIES:Accounts
                payable
            
            $
            163,883
            
            $
            162,305Unpresented
                checks net of bank balance
            
            
            18,769
            
            
            21,652Accrued
                expenses and other liabilities
            
            
            46,221
            
            
            55,941Gift
                certificates and credit card reward points
            
            
            112,112
            
            
            121,120Accrued
                employee compensation and benefits
            
            
            31,980
            
            
            60,247Time
                deposits
            
            
            45,159
            
            
            62,683Current
                maturities of long-term debt
            
            
            27,704
            
            
            29,049Income
                taxes payable
            
            
            3,466
            
            
            31,477Deferred
                income taxes
            
            
            7,769
            
            
            3,994Total
                current liabilities
            
            
            457,063
            
            
            548,468LONG-TERM
                LIABILITIES:Long-term
                debt, less current maturities
            
            
            310,225
            
            
            90,777Long-term
                time deposits
            
            
            61,895
            
            
            46,805Deferred
                compensation
            
            
            4,992
            
            
            7,169Deferred
                grant income
            
            
            9,957
            
            
            13,018Deferred
                income taxes
            
            
            22,971
            
            
            20,190Total
                long-term liabilities
            
            
            410,040
            
            
            177,959COMMITMENTS
                AND CONTINGENCIES (Note 10)STOCKHOLDERS’
                EQUITY: (Note 7)Common
                stock, $0.01 par value:Class
                A Voting, 245,000,000 shares authorized; 57,150,080 and 56,691,249
                shares
                issued
              and
                outstanding at July 1, 2006 and December 31, 2005,
                respectively
            
            
            572
            
            
            568Class
                B Non-voting, 245,000,000 shares authorized; 8,073,205 and 8,073,205
                shares issued
              and
                outstanding at July 1, 2006 and December 31, 2005,
                respectively
            
            
            80
            
            
            80Preferred
                stock, 10,000,000 shares authorized, no shares issued or
                outstanding
            
            
            -
            
            
            -Additional
                paid-in capital
            
            
            244,016
            
            
            239,868Retained
                earnings
            
            
            416,802
            
            
            399,363Accumulated
                other comprehensive income (loss)
            
            
            (631
            )
            
            (26
            )Total
                stockholders’ equity
            
            
            660,839
            
            
            639,853Total
                liabilities and stockholders’ equity
            
            $
            1,527,942
            
            $
            1,366,280See
                notes to unaudited condensed consolidated financial
                statements.





3
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          of Contents





**CABELA'S
                INCORPORATED AND SUBSIDIARIES**
              **CONDENSED
                CONSOLIDATED STATEMENTS OF INCOME**
              **(Dollar
                Amounts in Thousands Except Per Share and Share
                Amounts)**
              **(Unaudited****)****Three
                months ended**
            
            **Six
                months ended****July
                1,**
              **2006**
            
            **July
                2,**
              **2005**
            
            **July
                1,**
              **2006**
            
            **July
                2,**
              **2005**REVENUE:Merchandise
                sales
            
            $
            346,458
            
            $
            294,086
            
            $
            720,672
            
            $
            621,958Financial
                services revenue
            
            
            33,020
            
            
            27,357
            
            
            61,554
            
            
            47,895Other
                revenue
            
            
            7,785
            
            
            22,429
            
            
            9,842
            
            
            24,608Total
                revenue
            
            
            387,263
            
            
            343,872
            
            
            792,068
            
            
            694,461COST
                OF REVENUE:Cost
                of merchandise sales
            
            
            226,449
            
            
            188,848
            
            
            468,332
            
            
            402,217Cost
                of other revenue
            
            
            3,070
            
            
            19,864
            
            
            3,476
            
            
            19,856Total
                cost of revenue (exclusive of depreciation and
                amortization)
            
            
            229,519
            
            
            208,712
            
            
            471,808
            
            
            422,073GROSS
                PROFIT
            
            
            157,744
            
            
            135,160
            
            
            320,260
            
            
            272,388SELLING,
                GENERAL AND ADMINISTRATIVE EXPENSES
            
            
            143,199
            
            
            126,338
            
            
            291,512
            
            
            252,543OPERATING
                INCOME
            
            
            14,545
            
            
            8,822
            
            
            28,748
            
            
            19,845OTHER
                INCOME (EXPENSE):Interest
                income
            
            
            936
            
            
            16
            
            
            1,337
            
            
            450Interest
                expense
            
            
            (4,791
            )
            
            (2,435
            )
            
            (8,135
            )
            
            (4,505
            )Other
                income, net
            
            
            2,623
            
            
            2,939
            
            
            5,600
            
            
            5,612(1,232
            )
            
            520
            
            
            (1,198
            )
            
            1,557INCOME
                BEFORE PROVISION FOR INCOME TAXES
            
            
            13,313
            
            
            9,342
            
            
            27,550
            
            
            21,402INCOME
                TAX EXPENSE
            
            
            4,957
            
            
            3,326
            
            
            10,111
            
            
            7,619NET
                INCOME
            
            $
            8,356
            
            $
            6,016
            
            $
            17,439
            
            $
            13,783EARNINGS
                PER SHARE:Basic
            
            $
            0.13
            
            $
            0.09
            
            $
            0.27
            
            $
            0.21Diluted
            
            $
            0.13
            
            $
            0.09
            
            $
            0.26
            
            $
            0.21WEIGHTED
                AVERAGE SHARES OUTSTANDING:Basic
            
            
            65,201,266
            
            
            64,648,768
            
            
            65,135,553
            
            
            64,618,424Diluted
            
            
            66,401,158
            
            
            66,267,571
            
            
            66,422,914
            
            
            66,282,574See
                notes to unaudited condensed consolidated financial
                statements.





4
 Table
          of Contents





**CABELA’S
                INCORPORATED AND SUBSIDIARIES**
              **CONDENSED
                CONSOLIDATED STATEMENTS OF CASH FLOWS**
              **(Dollar
                Amounts in Thousands)**
              **(Unaudited)****Six
                months ended****July
                1, 2006**
            
            **July
                2, 2005**
              **As
                Restated**
              **(Note
                14)**CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            17,439
            
            $
            13,783Adjustments
                to reconcile net income to net cash flows from operating
                activities:Depreciation
            
            
            20,189
            
            
            15,621Amortization
            
            
            445
            
            
            564Stock
                based compensation
            
            
            1,564
            
            
            470Deferred
                income taxes
            
            
            6,907
            
            
            736Other
            
            
            1,626
            
            
            883Change
                in operating assets and liabilities:Accounts
                receivable
            
            
            3,370
            
            
            3,338Origination
                of credit card loans held for sale, net of collections
            
            
            (13,171
            )
            
            4,556Retained
                interests
            
            
            (2,257
            )
            
            (3,089
            )Inventories
            
            
            (65,170
            )
            
            (98,014
            )Prepaid
                expenses and deferred catalog costs
            
            
            (1,117
            )
            
            (5,426
            )Other
                current assets
            
            
            (4,957
            )
            
            (7,279
            )Land
                held for sale or development
            
            
            2,999
            
            
            7,626Accounts
                payable (Note 12)
            
            
            (30,311
            )
            
            13,453Accrued
                expenses and other liabilities
            
            
            (10,378
            )
            
            (12,481
            )Gift
                certificates and credit card reward points
            
            
            (9,008
            )
            
            (4,326
            )Accrued
                compensation and benefits
            
            
            (28,267
            )
            
            (22,748
            )Income
                taxes payable
            
            
            (28,018
            )
            
            (12,195
            )Deferred
                grant income
            
            
            (608
            )
            
            (328
            )Deferred
                compensation
            
            
            (2,177
            )
            
            1,233Net
                cash flows from operating activities
            
            
            (140,900
            )
            
            (103,623
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Capital
                expenditures (Note 12)
            
            
            (67,999
            )
            
            (113,994
            )Purchases
                of marketable securities
            
            
            (16,727
            )
            
            (19,525
            )Retirement
                of marketable securities
            
            
            53,000
            
            
            -Purchases
                of short-term investments
            
            
            (131,225
            )
            
            (21,000
            )Sales
                or maturities of short-term investments
            
            
            128,225
            
            
            145,250Change
                in credit card loans receivable
            
            
            (2,221
            )
            
            (3,111
            )Change
                in cash reserves for retained interests
            
            
            (1,250
            )
            
            750Maturities
                of marketable securities
            
            
            765
            
            
            1,828Other,
                net
            
            
            9
            
            
            584Net
                cash flows from investing activities
            
            
            (37,423
            )
            
            (9,218
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Advances
                on lines of credit
            
            
            142,630
            
            
            149,713Payments
                on lines of credit
            
            
            (142,855
            )
            
            (47,713
            )Change
                in unpresented checks net of bank balance
            
            
            (2,883
            )
            
            (20,709
            )Proceeds
                from issuance of long-term debt
            
            
            215,000
            
            
            -Payments
                on long-term debt
            
            
            (2,546
            )
            
            (1,944
            )Change
                in time deposits, net
            
            
            (2,434
            )
            
            (20,752
            )Other,
                net
            
            
            (449
            )
            
            -Excess
                tax benefits from exercise of stock options
            
            
            271
            
            
            -Proceeds
                from exercise of employee stock options and stock purchase
                plan
            
            
            2,324
            
            
            1,380Net
                cash flows from financing activities
            
            
            209,058
            
            
            59,975NET
                (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
            
            
            30,735
            
            
            (52,866
            )CASH
                AND CASH EQUIVALENTS, Beginning of Period
            
            
            86,923
            
            
            123,934CASH
                AND CASH EQUIVALENTS, End of Period
            
            $
            117,658
            
            $
            71,068See
                notes to unaudited condensed consolidated financial
                statements.


5
 Table
          of Contents


**CABELA’S
      INCORPORATED AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Dollar
      Amounts in Thousands Except Share and Per Share Amounts)**


**(Unaudited)**





**1.**   **MANAGEMENT
      REPRESENTATIONS**





The
      condensed consolidated financial statements included herein are unaudited and
      have been prepared by Cabela’s Incorporated and its wholly-owned subsidiaries
      (the “Company”) pursuant to the rules and regulations of the United States
      Securities and Exchange Commission (“SEC”). Certain information and footnote
      disclosures normally included in financial statements prepared in accordance
      with accounting principles generally accepted in the United States of America
      have been condensed or omitted pursuant to such rules and regulations. The
      consolidated balance sheet of the Company as of December 31, 2005, was derived
      from the Company’s audited consolidated balance sheet as of that date. All other
      consolidated financial statements contained herein are unaudited and reflect
      all
      adjustments which are, in the opinion of management, necessary to summarize
      fairly the financial position of the Company and the results of the Company’s
      operations and cash flows for the periods presented. All of these adjustments
      are of a normal recurring nature. All significant intercompany balances and
      transactions have been eliminated in consolidation. Because of the seasonal
      nature of the Company’s operations, results of operations of any single
      reporting period should not be considered as indicative of results for a full
      year. These consolidated financial statements should be read in conjunction
      with
      the Company’s audited consolidated financial statements for the fiscal year
      ended 2005.





***Reclassifications*** -
      Certain reclassifications have been made to prior year financial statements
      and
      the notes to conform to the current year presentation. The Company has
      reclassified a portion of the retained interest of $3,089 related to its
      Financial Services business from investing activities to operating activities
      in
      the statement of cash flows for the six months ended July 2, 2005. This
      change did not impact the total net (decrease) increase in cash and cash
      equivalents. There were no covenant calculations affected by this change in
      the
      presentation of the Company’s cash flow statement line items. The amount was
      deemed to be immaterial to the Company’s financial statements.





***Recast
      -*** On
      March
      22, 2006, the Company changed the manner in which it reports and evaluates
      segment information. The Company changed the fee structure between its Financial
      Services segment and the Company’s other segments to more appropriately reflect
      current market conditions. This change was effective January 1, 2006. As
      required by Statement of Financial Accounting Standards No. 131 (“Statement
      131”), consolidated financial statements issued by the Company in the future
      will reflect modifications to its reportable segments resulting from these
      changes, including recasting all comparative prior period segment information.
      Accordingly, in this Form 10-Q, the Company is providing the required recast
      segment information related to prior periods.





**2.**   **STOCK-BASED
      COMPENSATION**





Effective
      January 1, 2006, the Company adopted the provisions of Statement No. 123
      (revised 2004), “Share-Based Payment” (“Statement 123R”) which requires the
      measurement and recognition of compensation expense for all share-based payment
      awards made to employees and directors including employee stock option awards
      and employee stock purchases made under an employee stock purchase plan. The
      Company previously applied the provision of Accounting Principles Board (“APB”)
      Opinion No. 25, Accounting for Stock Issued to Employees and related
      interpretations and provided the required pro forma disclosures under Statement
      No. 123, “Accounting for Stock-Based Compensation.”





In
      March
      2004, the Company adopted the Cabela’s Incorporated 2004 Stock Plan (the “2004
      Plan”). The 2004 Plan provides for the grant of non-qualified stock options,
      incentive stock options, stock appreciation rights, restricted stock, restricted
      stock units and other stock-based awards to employees, directors and
      consultants. A maximum of 2,752,500 shares, subject to adjustment in the event
      of a stock split, consolidation or stock dividend, of the Company’s common stock
      are available for awards under the 2004 Plan. Options granted under the 2004
      Plan will have a term of no greater than ten years from the grant date and
      will
      become exercisable in accordance with the vesting schedule determined at the
      time the awards are granted. As of July 1, 2006, there were 2,701,918 shares
      subject to options under the 2004 Plan and 34,434 shares available for
      grant.





6
 Table
          of Contents


In
      March
      2004, the Company adopted an Employee Stock Purchase Plan (the “ESPP”), under
      which shares of common stock are available to be purchased by the Company’s
      employees. The maximum number of shares of common stock available for issuance
      under the ESPP is 1,835,000, subject to adjustment in the event of a stock
      split, consolidation or stock dividend. Employees are eligible to participate
      in
      the ESPP immediately upon hire. The employee’s purchase price is 85% of the fair
      market value of the stock on the date of purchase. Each year, employees may
      purchase shares having a fair market value of up to $25,000. As of July 1,
      2006,
      201,136 shares had been issued under the ESPP and 1,633,864 shares were
      available for issuance.





The
      Company’s 1997 Stock Option Plan (the “1997 Plan”) provided for the granting of
      incentive stock options and nonqualified stock options to purchase shares of
      the
      Company’s common stock to officers, directors and key employees. As of July 1,
      2006, there were 2,301,021 shares subject to options under the 1997 plan and
      there were no future shares available for grant under the 1997 Plan. During
      2003, the Company allowed employees to exercise options prior to vesting in
      exchange for a call option, as provided for in the 1997 Plan. At the end of
      fiscal year 2005, 238,546 shares had been exercised prior to vesting. There
      were
      18,350 shares remaining unvested as of July 1, 2006 with an estimated call
      value
      of approximately $71. These shares have been included in the tables below.





***Pro
      forma Information for Periods Prior to the Adoption of Statement
      123R:***




Because
      the Company went public in 2004, all options granted prior to 2004 are accounted
      for in accordance with APB No. 25. The Company’s calculations are based on a
      single option valuation approach and forfeitures are recognized as they occur.
      The Company’s ESPP was deemed non-compensatory under the provisions of APB No.
      25. Stock-based compensation costs were reflected in net income where the
      options granted under those plans had an exercise price that was less than
      the
      fair value of the underlying common stock on the date of grant. Previously
      reported amounts have not been restated.





The
      pro
      forma information for the three months and six months ended July 1, 2006 and
      July 2, 2005 was as follows:





**Three
                months ended**
            
            **Six
                months ended****July
                1,**
              **2006**
            
            **July
                2,**
              **2005**
            
            **July
                1,**
              **2006**
            
            **July
                2,**
              **2005**Net
                income - as reported
            
            $
            8,356
            
            $
            6,016
            
            $
            17,439
            
            $
            13,783Add:
                Stock based employee compensation
              recognized,
                net of tax
            
            
            -
            
            
            152
            
            
            -
            
            
            303Deduct:
                Pro-forma stock-based employee compensation expense determined under
                fair
                value based method for shares granted prior to being a public Company,
                net
                of tax
            
            
            (62
            )
            
            -
            
            
            (125
            )
            
            -Deduct:
                Pro-forma stock-based employee compensation expense determined under
                fair
                value based method for all shares granted as previously reported,
                net of
                tax
            
            
            -
            
            
            (4,730
            )
            
            -
            
            
            (5,428
            )Net
                income - pro forma
            
            $
            8,294
            
            $
            1,438
            
            $
            17,314
            
            $
            8,658Earnings
                per share:Basic
                - as reported
            
            $
            0.13
            
            $
            0.09
            
            $
            0.27
            
            $
            0.21Basic
                - proforma
            
            $
            0.13
            
            $
            0.02
            
            $
            0.27
            
            $
            0.13Diluted
                - as reported
            
            $
            0.13
            
            $
            0.09
            
            $
            0.26
            
            $
            0.21Diluted
                - proforma
            
            $
            0.12
            
            $
            0.02
            
            $
            0.25
            
            $
            0.13





7
 Table
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***Impact
      of the Adoption of Statement 123R using the modified prospective transition
      method beginning January 1, 2006***





During
      the six-month period ended July 1, 2006, share-based compensation expense was
      recorded for awards granted since 2004 but not yet vested as of January 1,
      2006.
      For these awards, the Company continues to recognize compensation expense using
      the accelerated amortization method. In May 2006, there were 884,500 awards
      granted. Compensation cost for awards granted after the adoption date is
      recognized using a straight-line amortization method.





The
      impact on results of continuing operations of recording share-based compensation
      for the three-month and six month periods ended July 1, 2006 were as
      follows:





**Three
                months ended**
            
            **Six
                months ended****July
                1, 2006**
            
            **July
                1, 2006**Selling,
                general & administrative
            
            $
            831
            
            $
            1,634Impact
                of Statement 123R, net of tax
            
            $
            526
            
            $
            1,034Impact
                on consolidated net income per share:Basic
            
            $
            0.01
            
            $
            0.02Diluted
            
            $
            0.01
            
            $
            0.02





There
      was
      no share-based compensation capitalized in assets as of July 1, 2006. On January
      6, 2006, a modification of shares resulted in a charge to compensation expense
      of $239 under Statement 123R.





For
      the
      six months ended July 1, 2006, the excess tax benefit realized from exercised
      stock options and similar awards was $271. As of July 1, 2006, the total
      unrecognized deferred share-based compensation balance for unvested shares
      issued after becoming a public company, net of expected forfeitures, was
      approximately $6,605, net of tax, which is expected to be amortized over the
      next five years.





Prior
      to
      the adoption of Statement 123R, the Company presented all tax benefits resulting
      from the exercise of stock options as operating cash inflows in the consolidated
      statements of cash flows, in accordance with the provisions of the Emerging
      Issues Task Force (“EITF”) Issue No 00-15. “Classification in the Statement of
      Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of
      a
      Nonqualified Employee Stock Option.” Statement 123R requires the benefits of tax
      deductions in excess of the compensation cost recognized for those options
      to be
      classified as financing cash inflows rather than operating cash inflows, on
      a
      prospective basis. This amount is shown as “Excess tax benefit from exercise of
      stock options” on the consolidated statement of cash flows.





***Valuation
      Assumptions***




The
      fair
      value of options granted on and subsequent to May 1, 2004 was estimated on
      the
      date of the grant using the Black-Scholes option pricing model with the
      following weighted-average assumptions: the expected stock price volatility
      was
      50%; the risk free interest at grant date ranged from 3.57% to 5.01% and the
      expected term ranged from 4.5 years to 6.0 years. Due to being a newly public
      company, the volatility factor was derived from using a historical volatility
      model as well as comparisons to peers in the Company’s
      market sector. In May 2006, there were 884,500 awards granted. The fair value
      of
      these awards was determined using the following assumptions: the expected stock
      price volatility was 50%; the risk free interest rate at grant date was 5.01%
      and the expected term was 6.0 years.




8
 Table
              of Contents


***Share-Based
      Payment Award Activity***





The
      following table summarizes equity share-based payment award activity for the
      six
      months ended July 1, 2006:





**Six
                months ended July 1, 2006****Options**
              **Available**
              **for
                Grant**
            
            **Options**
              **Outstanding**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**Outstanding
                - beginning January 1, 2006
            
            
            751,979
            
            
            4,695,748
            
            $
            12.36Granted(2)
            
            
            (884,500
            )
            
            884,500
            
            
            19.35Exercised
            
            
            -
            
            
            (387,416
            )
            
            5.20Forfeited(1)
                (2)
            
            
            166,955
            
            
            (189,893
            )
            
            18.56Outstanding
                - ending at July 1, 2006
            
            
            34,434
            
            
            5,002,939
            
            $
            13.91





(1)
            Options
                forfeited under the 1997 Plan do not become available for grant under
                the
                2004 plan.(2)
            Options
                forfeited under the 2004 Plan are immediately available for
                grant.





The
      stock
      options outstanding and exercisable for equity share-based payment awards as
      of
      July 1, 2006 were in the following exercise price ranges:





**Options
                Outstanding**
            
            **Options
                Exercisable****Exercise**
              **Price**
            **Shares**
            **Weighted**
              **Average**
              **Exercise
                Price**
            **Average**
              **Remaining**
              **Contractual
                Life**
            
            **Shares**
            **Weighted**
              **Average**
              **Exercise
                Price**$0.00
                to $5.00
            470,677
            $  
                3.86
            1.7
                years
            
            312,865
            $
                3.75$5.01
                to $10.00
            747,777
            8.24
            4.8
                years
            
            265,172
            8.24$10.01
                to $15.00
            1,613,249
            11.63
            4.9
                years
            
            661,797
            11.63$15.01
                to $20.00
            2,165,236
            19.73
            9.0
                years
            
            916,506
            19.99$20.01
                to $25.00
            2,000
            21.77
            8.5
                years
            
            2,000
            21.77$25.01
                to $30.00
            4,000
            27.26
            8.1
                years
            
            4,000
            27.265,002,939
            $
                13.91
            6.4
                years
            
            2,162,340
            $ 13.66





The
      aggregate intrinsic value of awards exercised during the six months ended July
      1, 2006 was $2,799. The total number of in-the-money awards exercisable as
      of
      July 1, 2006 was approximately 1,247,834. Based on the Company’s closing stock
      price of $19.26 as of July 1, 2006, the aggregate pre-tax intrinsic value that
      would have been received by award holders had all award holders exercised their
      vested awards that were in-the-money was $12,820.





**3.**   **SALE
      OF CREDIT CARD LOANS**





The
      Company’s wholly-owned bank subsidiary, World’s Foremost Bank (“WFB”), sells a
      substantial portion of its credit card loans. WFB has established a master
      trust
      (the “Trust”) for the purpose of routinely selling and securitizing credit card
      loans. WFB retains the servicing and certain other interests, including
      interest-only strips, cash reserve accounts and Class B certificates. During
      the
      three months and six months ended July 1, 2006 and July 2, 2005, WFB recognized
      gains on sale of $4,601, $3,796, $8,678 and $7,711, respectively, which are
      reflected as a component of credit card securitization income.


9
 Table
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***Retained
      Interests:***





Retained
      interests in securitized loans, which are carried at fair value, consisted
      of
      the following at July 1, 2006 and December 31, 2005:





**July
                1,**
              **2006**
            
            **December
                31,**
              **2005**Cash
                reserve account
            
            $
            18,379
            
            $
            16,495Interest-only
                strip
            
            
            17,360
            
            
            15,567Class
                B certificates
            
            
            2,233
            
            
            2,403$
            37,972
            
            $
            34,465





Credit
      card loans held for sale and credit card loans receivable consisted of the
      following at July 1, 2006 and December 31, 2005:





**July
                1,**
              **2006**
            
            **December
                31,**
              **2005**Composition
                of credit card loans held for sale and credit card loans
                receivable:Loans
                serviced
            
            $
            1,342,182
            
            $
            1,340,820Loans
                securitized and sold to outside investors
            
            
            (1,233,000
            )
            
            (1,247,000
            )Securitized
                receivables with certificates owned by WFB
              which
                are classified as retained interests
            
            
            (2,233
            )
            
            (2,403
            )106,949
            
            
            91,417Less
                adjustment to market value and allowance for loan losses
            
            
            (2,092
            )
            
            (1,759
            )Total
            
            $
            104,857
            
            $
            89,658Delinquent
                loans in the managed credit card loan portfolio
              at
                July 1, 2006 and December 31, 2005:30-89
                days
            
            $
            7,405
            
            $
            6,85690
                days or more and still accruing
            
            $
            2,282
            
            $
            2,176





**Three
                months ended**
            
            **Six
                months ended****July
                1,**
              **2006**
            
            **July
                2,**
              **2005**
            
            **July
                1,**
              **2006**
            
            **July
                2,**
              **2005**Total
                net charge-offs on the managed credit card
              loan
                portfolio for the three months and six months
              ended
                July 1, 2006 and July 2, 2005
            
            $
            5,920
            
            $
            5,833
            
            $
            11,544
            
            $
            11,158Average
                credit card loans:Managed
                credit card loans
            
            $
            1,295,131
            
            $
            1,038,465
            
            $
            1,274,653
            
            $
            1,022,452Securitized
                credit card loans including seller's interest
            
            $
            1,266,384
            
            
            1,020,025
            
            $
            1,244,237
            
            $
            1,004,472Total
                net charge-offs as an annualized percentage of average managed credit
                card
                loans
            
            
            1.83
            %
            
            2.25
            %
            
            1.81
            %
            
            2.18
            %





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 Table
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**4.**   **DEBT**





On
      February 27, 2006, the Company issued $215,000 in unsecured notes, with
      principal payable in full in ten years and interest payments made semiannually
      at a rate of 5.99%. Covenants related to this agreement include the
      following:





·
            A
                consolidated adjusted net worth in an amount not less than the sum
                of (i)
                $350,000 plus (ii) 25% of positive consolidated net earnings on a
                cumulative basis for each fiscal year beginning with the fiscal year
                ended
                2005.·
            A
                fixed charge coverage ratio (the ratio of consolidated cash flow
                to
                consolidated fixed charges for each period of four consecutive fiscal
                quarters) of no less than 2.00 to 1.00 as of the last day of any
                fiscal
                quarter.·
            A
                consolidated funded debt to total funded capitalization of no more
                than
                60%.





The
      Company was in compliance with all covenants as of the end of the periods
      presented.





The
      Company is party to a credit agreement that provides for a $325,000 unsecured
      revolving credit facility that expires on June 30, 2010. The credit agreement
      permits the issuance of up to $150,000 in letters of credit and standby letters
      of credit, the nominal amount of which are applied against the overall credit
      limit available under the revolver. There were no principal amounts outstanding
      on the line of credit, and $68,446 outstanding on letters of credit and standby
      letters of credit, as of July 1, 2006. During the first six months of fiscal
      2006, the average principal amount outstanding on the line of credit was $6,471,
      and the weighted average interest rate of borrowings on the line of credit
      was
      5.43%.





The
      Company is party to inventory financing agreements that allow certain vendors
      providing boat merchandise to give the Company extended payment terms. The
      vendors are responsible for all interest payments for the financing period
      and
      the financing company holds a security interest in the specific boat inventory
      held by the Company. The Company’s revolving credit facility limits this
      security interest to $20,000. The Company records this boat merchandise in
      inventory with an offsetting liability in accounts payable. The loans and
      payments are reflected in the financing lines of credit in the Company’s cash
      flow statement. The extended payment terms to the vendor do not exceed one
      year.
      The outstanding liability was $1,218 as of July 1, 2006.





WFB
      is
      party to an unsecured Federal Funds Sales Agreement with a financial
      institution. All federal funds transactions are on a daily origination and
      return basis. Daily interest charges are determined based on mutual agreement
      by
      the parties. The maximum amount of funds which can be borrowed is $25,000.
      There
      were no amounts outstanding as of July 1, 2006.





WFB
      is
      party to an unsecured Federal Funds Line of Credit agreement with a financial
      institution. The maximum amount of funds which can be borrowed is $40,000.
      The
      interest rate for the line of credit is based on the current federal funds
      rate . There
      were no amounts outstanding as of July 1, 2006.





The
      Company amended and restated the lease agreement for its distribution facility
      in Wheeling, West Virginia on April 26, 2005. The building was expanded,
      doubling its size. The new amended lease term began on July 1, 2006 and extended
      the original term to June 2036. The monthly installments were increased to
      $83,
      and the lease contains a bargain purchase option at the end of the lease term.
      The Company is accounting for this lease as a capital lease and has recorded
      the
      additional leased asset at the present value of the future minimum lease
      payments using a 5.9% implicit rate. The additional leased asset was recorded
      at
      $5,649 and is being amortized on a straight-line basis over 30 years.





**5.**   **DERIVATIVES**





The
      Company is exposed to market risks including changes in currency exchange rates
      and interest rates. The Company may enter into various derivative transactions
      pursuant to established Company policies to manage volatility associated with
      these exposures.





***Foreign
      Currency Management*** - The
      Company may enter into forward exchange or option contracts for transactions
      denominated in a currency other than the applicable functional currency in
      order
      to reduce exposures related to changes in foreign currency exchange rates.
      This
      primarily relates to hedging against anticipated inventory
      purchases.


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 Table
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Hedges
      of
      anticipated inventory purchases are designated as cash flow hedges. The gains
      and losses associated with these hedges are deferred in accumulated other
      comprehensive income/(loss) until the anticipated transaction is consummated
      and
      are recognized in the statement of income in the same period during which
      the hedged transactions affect earnings. Gains and losses on foreign currency
      derivatives for which the Company has not elected hedge accounting are recorded
      immediately in earnings. For the three months and six months ended July 1,
      2006
      there was no ineffectiveness associated with the Company’s foreign currency
      derivatives designated as cash flow hedges.





Generally,
      the Company hedges a portion of its anticipated inventory purchases for periods
      up to twelve months. As of July 1, 2006, the Company had hedged certain portions
      of its anticipated inventory purchases through August 2006.





The
      fair
      value of foreign currency derivative assets or liabilities is recognized within
      other current assets or other current liabilities. As of July 1, 2006 and
      December 31, 2005, the fair value of foreign currency derivative assets was
      $10
      and $0, respectively, and the fair value of foreign currency derivative
      liabilities was $0 and $11, respectively.





As
      of
      July 1, 2006 and December 31, 2005, the net deferred gain/(loss) recognized
      in
      accumulated other comprehensive income/(loss) was $4 and $(158), net of tax,
      respectively. The Company anticipates a gain of $6, net of tax, will be
      transferred out of accumulated other comprehensive income and recognized within
      earnings over the next twelve months. Gains or losses of $(4), $55, $(7) and
      $(7), net of tax, were transferred from accumulated other comprehensive income
      into cost of revenues for the three months and six months ended July 1, 2006
      and
      July 2, 2005, respectively.





***Interest
      Rate Management*** -
      On
      February 4, 2003, in connection with the Series 2003-1 term securitization,
      the
      Trust entered into a $300,000 notional swap agreement in order to manage
      interest rate exposure. The exposure is related to changes in cash flows from
      funding credit card loans, which include a high percentage of accounts with
      floating rate obligations that do not incur monthly finance charges. The swap
      converts the interest rate on the investor bonds from a floating rate basis
      with
      a spread over a benchmark note to a fixed rate of 3.699%. Since the Trust is
      not
      consolidated, the fair value of the swap is not reflected on the financial
      statements. Additionally, the Company entered into a swap with similar terms
      with the counter-party whereby the notional amount is zero unless the notional
      amount of the Trust’s swap falls below $300,000. The Company has not elected to
      designate this derivative as a hedge and, therefore, the derivative is marked
      to
      market through the statement of income. As of July 1, 2006, market value was
      determined to be zero. WFB pays Cabela’s a fee for the credit enhancement
      provided by this swap, which was $152, $152, $302 and $302 for the three months
      and six months ended July 1, 2006 and July 2, 2005, respectively.





**6.**   **EARNINGS
      PER SHARE**





Basic
      earnings per share (“EPS”) is computed by dividing net income by the weighted
      average number of shares of common stock outstanding during the period. Diluted
      earnings per share is computed by dividing net income by the sum of the weighted
      average number of shares outstanding plus all additional common shares that
      would have been outstanding if potentially dilutive common share equivalents
      had
      been issued. Options exercised prior to vesting have not been considered in
      the
      basic EPS calculation, but are considered in the computation of diluted EPS.
      There were 2,169,236 amd 6,000 options outstanding that were considered
      anti-dilutive for the three months and six months ended July 1, 2006 and
      July 2, 2005, respectively. The following table reconciles the number of shares
      utilized in the earnings per share calculations:





**Three
                months ended**
            
            **Six
                months ended****July
                1,**
              **2006**
            
            **July
                2,**
              **2005**
            
            **July
                1,**
              **2006**
            
            **July
                2,**
              **2005**Weighted
                average number of shares:Common
                shares - basic
            
            
            65,201,266
            
            
            64,648,768
            
            
            65,135,553
            
            
            64,618,424Effect
                of dilutive securities:Stock
                options
            
            
            1,199,892
            
            
            1,618,803
            
            
            1,287,361
            
            
            1,664,150Common
                shares - diluted
            
            
            66,401,158
            
            
            66,267,571
            
            
            66,422,914
            
            
            66,282,574


12
 Table
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**7.**   **STOCKHOLDERS’
      EQUITY**





The
      authorized capital stock of the Company consists of 245,000,000 shares of Class
      A voting common stock, par value $0.01 per share; 245,000,000 shares of Class
      B
      non-voting common stock, par value $0.01 per share; and 10,000,000 shares of
      preferred stock, par value $0.01 per share. As of July 1, 2006, there were
      57,168,430 shares of Class A voting common stock outstanding, including 18,350
      shares of unvested early exercised options, and 8,073,205 shares of Class B
      non-voting common stock outstanding.





**8.**   **COMPREHENSIVE
      INCOME**





**Three
                months ended**
            
            **Six
                months ended****July
                1,**
              **2006**
            
            **July
                2,**
              **2005**
            
            **July
                1,**
              **2006**
            
            **July
                2,**
              **2005**Net
                income
            
            $
            8,356
            
            $
            6,016
            
            $
            17,439
            
            $
            13,783Change
                in net unrealized holding gain or (loss) on marketable securities,
                net of
                tax of $(91) and $30 for the three month periods and $(361) and $(60)
                for
                the six month periods ended July 1, 2006 and July 2, 2005,
                respectively.
            
            
            (157
            )
            
            55
            
            
            (633
            )
            
            (108
            )Less:
                adjustment for net realized gain or (loss) on marketable securities,
                net
                of tax of $5 and $(8) for the three month periods and $9 and $(17)
                for the
                six month periods ended July 1, 2006 and July 2, 2005,
                respectively.
            
            
            9
            
            
            (16
            )
            
            15
            
            
            (33
            )Change
                in net unrealized holding gain or (loss) on derivatives, net of tax
                of $5
                and $(74) for the three month periods and $12 and $(120) for the
                six month
                periods ended July 1, 2006 and July 2, 2005, respectively.
            
            
            8
            
            
            (134
            )
            
            20
            
            
            (217
            )Less:
                adjustment for reclassification of derivative included in net income,
                net
                of tax of $(2) and $30 for the three month periods and $(4) and $(4)
                for
                the six month periods ended July 1, 2006 and July 2, 2005,
                respectively.
            
            
            (4
            )
            
            55
            
            
            (7
            )
            
            (7
            )Comprehensive
                income
            
            $
            8,212
            
            $
            5,976
            
            $
            16,834
            
            $
            13,418





**9.**   **RELATED
      PARTY TRANSACTIONS**





The
      Company entered into an employee lease agreement with an affiliate of the
      Company’s Board Chairman dated January 1, 2005, pursuant to which such affiliate
      leases the services of certain Company employees. In the three months and six
      months ended July 1, 2006 and July 2, 2005, total reimbursements for these
      expenses were $80, $81, $152 and $152, respectively.




**10.** **CONTINGENCIES**





***Litigation*** -
      The
      Company is engaged in various legal actions arising in the ordinary course
      of
      business. After taking into consideration the evaluation of such actions by
      legal counsel, management is of the opinion that the ultimate outcome will
      not
      have a material adverse effect on the Company’s financial position, results of
      operations or liquidity.





***Self-Insurance*** -
      The
      Company is self-insured for health claims up to $300 per individual. A liability
      of $3,931 and $4,201 has been estimated and recorded as of July 1, 2006, and
      December 31, 2005, respectively, for those claims submitted and for those
      incurred prior to the end of the quarter but not yet reported.





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 Table
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The
      Company is also self-insured for workers’ compensation claims up to $500 per
      individual. A liability of $2,877 and $2,533 has been estimated and recorded
      at
      July 1, 2006 and December 31, 2005, respectively, for those claims submitted
      and
      for those incurred prior to the end of the quarter but not yet reported.





The
      Company’s liabilities for health and workers’ compensation claims incurred but
      not reported are based upon internally developed calculations. These estimates
      are regularly evaluated for adequacy based on the most current information
      available, including historical claim payments, expected trends and industry
      factors.





**11.**   **SEGMENT
      REPORTING**





The
      Company has three reportable segments, Direct, Retail and Financial Services.
      The Direct segment sells products through direct-mail catalogs and an e-commerce
      website (Cabelas.com); the Retail segment consists of destination retail stores
      in various sizes and formats; and the Financial Services segment issues
      co-branded credit cards. The reconciling amount or Other segment is primarily
      made up of land sales, employee discounts, corporate overhead and shared
      services. The Company’s executive management, being its chief operating decision
      makers, assesses the performance of each operating segment based on an operating
      income measure, which is net revenue less merchandise acquisition costs and
      certain directly identifiable and allocable operating costs as described below.
      For the Direct segment, these operating costs primarily consist of catalog
      costs, e-commerce advertising costs and order processing costs. For the Retail
      segment, these operating costs primarily consist of labor, advertising,
      depreciation and occupancy costs of destination retail stores. For the
      Financial Services segment, operating costs primarily consist of advertising
      and
      marketing, third party services for processing credit card transactions,
      salaries and wages and other general and administrative costs. Corporate and
      other expenses consist of unallocated shared-service costs, general and
      administrative expenses, various small companies such as real estate
      development, travel and lodging, which are not aggregated with the other
      segments, and eliminations. Unallocated shared-service costs include receiving,
      distribution and storage costs of our inventory, merchandising and quality
      assurance costs, as well as corporate headquarters occupancy costs. General
      and
      administrative expenses include costs associated with general corporate
      management and shared departmental services such as management information
      systems, finance, human resources and legal.





Segment
      assets are those directly used in or clearly allocable to an operating segment’s
      operations. For the Direct segment, these assets primarily include prepaid
      catalog costs, fixed assets and goodwill. Goodwill makes up $970 of assets
      in
      the Direct segment. For the Retail segment, these assets primarily include
      inventory in the stores, land, buildings, fixtures and leasehold improvements.
      For the Financial Services segment, these assets primarily include cash, credit
      card loans, buildings and fixtures. Corporate and other assets include corporate
      headquarters, merchandise inventory, and shared technology infrastructure as
      well as corporate cash and cash equivalents, prepaid expenses and $428 of
      investment in an equity method investee. Segment depreciation and amortization
      are correspondingly allocated to each segment. Corporate and other depreciation
      and amortization and capital expenditures are related to corporate headquarters,
      merchandise distribution and technology infrastructure. Unallocated assets
      include corporate cash and equivalents, inventory for our Retail or Direct
      segment entities, the net book value of corporate facilities and related
      information systems, deferred income taxes and other corporate long-lived
      assets. The accounting policies of the segments, where applicable, are the
      same
      as those described in the summary of significant accounting policies in the
      annual financial statements. Intercompany revenue between the segments has
      been
      eliminated in the consolidations.





On
      March
      22, 2006, the Company changed the fee structure between its Financial Services
      segment and its other segments to more appropriately reflect current market
      conditions. This change was effective January 1, 2006. This updated fee
      structure includes (1) an increase in the fee paid by the Financial Services
      segment for originating a new credit card account, (2) an increase in the amount
      that the Financial Services segment pays for rewards earned by its cardholders
      and (3) an additional fee paid by the Financial Services segment for marketing
      equal to the amount by which the profitability of the Financial Services segment
      exceeds a 2% pre-tax return on the Financial Services segment’s average managed
      credit card loans. The segment information below reflects this change as if
      it
      had taken place in all periods presented.


14
 Table
          of Contents





**Three
                months ended July 1, 2006**
            
            **Direct**
            
            **Retail**
            
            **Financial**
              **Services**
            
            **Corporate**
              **Overhead**
              **and
                Other**
            
            **Total**Revenue
                from external
            
            $
            194,658
            
            $
            150,969
            
            $
            33,172
            
            $
            8,464
            
            $
            387,263Revenue
                from internal
            
            
            351
            
            
            480
            
            
            (152
            )
            
            (679
            )
            
            -Total
                revenue
            
            
            195,009
            
            
            151,449
            
            
            33,020
            
            
            7,785
            
            
            387,263Operating
                income (loss)
            
            
            28,689
            
            
            16,504
            
            
            7,091
            
            
            (37,739
            )
            
            14,545As
                a % of revenue
            
            
            14.7
            %
            
            10.9
            %
            
            21.5
            %
            
            N/A
            
            
            3.8
            %Depreciation
                and amortization
            
            
            1,103
            
            
            4,205
            
            
            221
            
            
            4,986
            
            
            10,515Assets
            
            
            390,752
            
            
            528,310
            
            
            248,910
            
            
            359,970
            
            
            1,527,942





**Three
                months ended July 2, 2005**
            
            **Direct**
            
            **Retail**
            
            **Financial**
              **Services**
            
            **Corporate**
              **Overhead**
              **and
                Other**
            
            **Total**Revenue
                from external
            
            $
            184,170
            
            $
            109,239
            
            $
            27,509
            
            $
            22,954
            
            $
            343,872Revenue
                from internal
            
            
            283
            
            
            394
            
            
            (152
            )
            
            (525
            )
            
            -Total
                revenue
            
            
            184,453
            
            
            109,633
            
            
            27,357
            
            
            22,429
            
            
            343,872Operating
                income (loss)
            
            
            29,657
            
            
            9,387
            
            
            5,444
            
            
            (35,666
            )
            
            8,822As
                a % of revenue
            
            
            16.1
            %
            
            8.6
            %
            
            19.9
            %
            
            N/A
            
            
            2.6
            %Depreciation
                and amortization
            
            
            1,358
            
            
            2,741
            
            
            243
            
            
            3,720
            
            
            8,062Assets
            
            
            294,459
            
            
            456,289
            
            
            204,249
            
            
            356,127
            
            
            1,311,124





**Six
                months ended July 1, 2006**
            
            **Direct**
            
            **Retail**
            
            **Financial**
              **Services**
            
            **Corporate**
              **Overhead**
              **and
                Other**
            
            **Total**Revenue
                from external
            
            $
            423,103
            
            $
            295,894
            
            $
            61,856
            
            $
            11,215
            
            $
            792,068Revenue
                from internal
            
            
            777
            
            
            898
            
            
            (302
            )
            
            (1,373
            )
            
            -Total
                revenue
            
            
            423,880
            
            
            296,792
            
            
            61,554
            
            
            9,842
            
            
            792,068Operating
                income (loss)
            
            
            61,693
            
            
            29,240
            
            
            14,126
            
            
            (76,311
            )
            
            28,748As
                a % of revenue
            
            
            14.6
            %
            
            9.9
            %
            
            22.9
            %
            
            N/A
            
            
            3.6
            %Depreciation
                and amortization
            
            
            2,234
            
            
            8,417
            
            
            441
            
            
            9,542
            
            
            20,634Assets
            
            
            390,752
            
            
            528,310
            
            
            248,910
            
            
            359,970
            
            
            1,527,942





**Six
                months ended July 2, 2005**
            
            **Direct**
            
            **Retail**
            
            **Financial**
              **Services**
            
            **Corporate**
              **Overhead**
              **and
                Other**
            
            **Total**Revenue
                from external
            
            $
            414,529
            
            $
            206,007
            
            $
            48,197
            
            $
            25,728
            
            $
            694,461Revenue
                from internal
            
            
            663
            
            
            759
            
            
            (302
            )
            
            (1,120
            )
            
            -Total
                revenue
            
            
            415,192
            
            
            206,766
            
            
            47,895
            
            
            24,608
            
            
            694,461Operating
                income (loss)
            
            
            61,007
            
            
            16,143
            
            
            10,662
            
            
            (67,967
            )
            
            19,845As
                a % of revenue
            
            
            14.7
            %
            
            7.8
            %
            
            22.3
            %
            
            N/A
            
            
            2.9
            %Depreciation
                and amortization
            
            
            2,798
            
            
            5,326
            
            
            616
            
            
            7,445
            
            
            16,185Assets
            
            
            294,459
            
            
            456,289
            
            
            204,249
            
            
            356,127
            
            
            1,311,124


15
 Table
          of Contents


The
      components and amounts of net revenues for our Financial Services segment for
      the three months and six months ended July 1, 2006 and July 2, 2005 were as
      follows:





**Three
                months ended**
            
            **Six
                months ended****July
                1,**
              **2006**
            
            **July
                2,**
              **2005**
            
            **July
                1,**
              **2006**
            
            **July
                2,**
              **2005**Interest
                and fee income
            
            $
            4,503
            
            $
            4,445
            
            $
            10,988
            
            $
            8,550Interest
                expense
            
            
            (1,174
            )
            
            (790
            )
            
            (2,301
            )
            
            (1,613
            )Net
                interest income
            
            
            3,329
            
            
            3,655
            
            
            8,687
            
            
            6,937Non-interest
                income:Securitization
                income
            
            
            42,061
            
            
            33,136
            
            
            75,780
            
            
            58,919Other
                non-interest income
            
            
            9,370
            
            
            7,137
            
            
            18,081
            
            
            14,571Total
                non-interest income
            
            
            51,431
            
            
            40,273
            
            
            93,861
            
            
            73,490Less:
                Customer reward costs
            
            
            (21,740
            )
            
            (16,571
            )
            
            (40,994
            )
            
            (32,532
            )Financial
                services revenue
            
            $
            33,020
            
            $
            27,357
            
            $
            61,554
            
            $
            47,895





The
      Company’s products are principally marketed to individuals within the United
      States. Net sales realized from other geographic markets, primarily Canada,
      were
      collectively less than 2% of consolidated net sales in each reported period.
      No
      single customer accounted for ten percent or more of consolidated net sales.
      No
      single product or service accounts for a significant percentage of the Company’s
      consolidated revenue.





**12.**   **SUPPLEMENTAL
      CASH FLOW INFORMATION**





The
      following table sets forth non-cash financing and investing activities and
      other
      cash flow information.





**July
                1,**
              **2006**
            
            **July
                2,**
              **2005**Non-cash
                financing and investing activities:Unpaid
                purchases of property and equipment included in accounts
                payable(1)
            
            $
            40,612
            
            $
            46,576Capital
                lease obligation
            
            $
            5,649
            
            
            -**Six
                months ended****July
                1,**
              **2006**
            
            
            **July
                2,**
              **2005**Other
                cash flow information:Interest
                paid,
                net of amounts capitalized of $149 and $215 in the six
              months
                ended July 1, 2006 and July 2, 2005
            
            $
            5,929
            
            $
            4,111Income
                taxes
            
            $
            30,846
            
            $
            19,012





(1)
            Amounts
                reported as unpaid purchases are recorded as purchases of property
                and
                equipment in the statement of cash flows in the period they are
                paid.


16
 Table
          of Contents


**13.**   **RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS**





On
      December 16, 2004, the FASB issued “Statement No. 123 (revised 2004),
      Share-Based Payment” (“Statement 123R”). Statement 123R requires the Company to
      recognize compensation expense for stock options and discounts under employee
      stock purchase plans granted to employees based on the estimated fair value
      of
      the equity instrument at the time of the grant. On March 29, 2005, the SEC
      issued Staff Accounting Bulletin No. 107 (“SAB 107”). SAB 107 provides the
      staff’s views regarding the valuation of share-based payment arrangements for
      public companies. SAB 107 does not modify any of the conclusions or requirements
      of Statement 123R. On November 10, 2005, the FASB issued FSP FAS 123R-3 which
      “Provides a Transition Election for Calculating the APIC Pool Under Statement
      123R.” Statement 123R requires companies to calculate the pool of excess tax
      benefits available to absorb tax deficiencies recognized subsequent to the
      adoption of Statement 123R (the “APIC pool”). The FASB issued FSP FAS 123R-3 to
      provide an elective transition alternative to calculating the APIC pool. A
      company may take up to one year from the later of its initial adoption of
      Statement 123R or November 11, 2005, to make its election. The Company is
      evaluating the transition method for calculating the APIC Pool.




In
      February 2006, the FASB issued Statement No. 155, “Accounting for Certain Hybrid
      Financial Instruments - an amendment to FASB Statements No. 133 and 140”
(“Statement 155”). Statement 155 eliminates the exemption from applying
      Statement 133 to interests in securitized financial assets so that similar
      instruments are accounted for similarly regardless of the form of the
      instruments. It also allows the Company to elect fair value measurement at
      acquisition, at issuance, or when a previously recognized financial instrument
      is subject to a remeasurement (new basis) event, on an instrument-by-instrument
      basis, in cases in which a derivative would otherwise have to be bifurcated.
      This statement is effective for all financial instruments acquired or issued
      after the beginning of an entity’s first fiscal year that begins after September
      15, 2006. The Company does not believe the adoption of Statement 155 will have
      a
      material impact on its financial statements.




In
      March
      2006, the FASB issued Statement No. 156, “Accounting for Servicing of Financial
      Assets - an amendment of FASB Statement No. 140” (“Statement 156”). Statement
      156 requires that an entity separately recognize a servicing asset or servicing
      liability when it undertakes an obligation to service a financial asset under
      a
      servicing contract in certain situations. Such servicing assets or servicing
      liabilities are required to be initially measured at fair value, if practicable.
      Statement 156 also allows an entity to choose one of two methods when
      subsequently measuring its servicing assets and servicing liabilities: (1)
      the
      amortization method or (2) the fair value measurement method This statement
      is
      effective as of the beginning of an entity’s first fiscal year that begins after
      September 15, 2006. The adoption of Statement 156 will not have an impact on
      the
      Company’s financial statements.





On
      May
      18, 2006, the State of Texas enacted House Bill 3 (“the Bill”), which replaces
      the State’s current franchise tax with a “margin tax.” The margin tax is
      assessed at one percent of Texas-sourced taxable margin (except for retailers
      and wholesales, which will be assessed at 0.5 percent). Although the Bill states
      that the new tax is not an income tax, it has characteristics of an income
      tax
      and accordingly should be accounted for as an income tax under FASB Statement
      No. 109, “Accounting for Income Taxes.” The margin tax is effective for returns
      originally due on or after January 1, 2008. However, as required by Statement
      109, all effects of a tax law change should be accounted for in the period
      of
      the law’s enactment. The impact on the Company’s effective tax rate was not
      material for fiscal 2006.





In
      the
      June 2006 EITF meeting the Task Force reached a consensus on Issue No. 06-3,
      “How Taxes Collected From Customers and Remitted to Governmental Authorities
      Should Be Presented in the Income Statement (That Is, Gross versus Net
      Presentation)”. Issue No. 06-3 concluded that entities should present taxes
      imposed concurrently on a specific revenue-producing transaction between a
      seller and a customer in the income statement, on either a gross or a net basis
      based on their accounting policy. Additionally, if such taxes are significant,
      and are presented on a gross basis, the amounts of those taxes should be
      disclosed. The effective date for this disclosure is for financial statements
      for interim and annual periods beginning after December 15, 2006.





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 Table
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On
      July
      13, 2006, the FASB issued Interpretation No 48, “Accounting for Uncertainty in
      Income Taxes.” The interpretation establishes a “more likely than not”
recognition threshold. To recognize a benefit from a tax position, a company
      must conclude that the position is more likely than not of being sustained
      upon
      audit based solely on the technical merits of the position. Once the recognition
      threshold is met, the best estimate of the amount that would be sustained on
      audit should be recognized. This interpretation is effective for fiscal years
      beginning after December 15, 2006. The Company is reviewing this interpretation
      and has not yet determined the impact on its financial statements.





**14.**   **RESTATEMENT
      OF FINANCIAL STATEMENTS**




In
          preparing
          the Company’s unaudited condensed consolidated financial statements for the
          second quarter of fiscal 2006, the Company’s management determined that its
          historical financial statements should have presented investments held
          in
          auction-rate securities as short-term investments and not as cash equivalents,
          as previously reported. Auction-rate securities are highly-liquid investments
          that are reset through a “dutch auction” process that occurs every 7 to 49 days,
          depending on the terms of the individual security, however they should
          not be
          considered cash equivalents. Additionally, management determined that its
          statement of cash flows for the three months ended April 1, 2006 contained
          a
          mechanical error related to unpaid purchases of property and equipment
          included
          in accounts payable as well as an error related to debt issuance costs.
          As a
          result, the Company has restated the accompanying condensed consolidated
          statement of cash flows for the six months ended July 2, 2005.
 
 As
          a
          result of the errors, the Company will also file as soon as practicable
          (i) a
          Form 10-Q/A for the first quarter of fiscal 2006 to restate its statements
          of
          cash flows for the three months ended April 1, 2006 and April 2, 2005,
          and (ii)
          a Form 10-K/A for the fiscal year ended December 31, 2005 to restate its
          balance
          sheet as of January 1, 2005 as well as its statements of cash flows for
          the
          fiscal years ended December 31, 2005, January 1, 2005 and January 3, 2004.
          These
          restatements did not impact the Company’s revenue, net income, total assets,
          stockholders’ equity or earnings per share.
  Following
        is
        a summary of the effects of the correction of the error on the Company’s
        statement of cash flows for the six months ended July 2,
        2005.





**Six
                months ended July 2, 2005****Statement
                of Cash Flows**
            
            **As
                previously reported**
            
            **As
                Restated***Cash
                flows from Operating Activities**:*Retained
                interests (1)
            
            $
            -
            
            
            $
            (3,089
            )Net
                cash flows from operating activities
            
            
            (100,534
            )
            
            
            (103,623
            )*Cash
                flows from Investing Activities:*Purchases
                of short-term investments
            
            $
            -
            
            
            $
            (21,000
            )Sales
                or maturities of short-term investments
            
            
            -
            
            
            
            145,250Change in cash reserves for retained interests (1)
            
            
            (2,339
            )
            
            
            750Net
                cash flows from investing activities
            
            
            (136,557
            )
            
            
            (9,218
            )NET
                (DECREASE) INCREASE IN CASH OR CASH EQUIVALENTS
            
            $
            (177,116
            )
            
            $
            (52,866
            )CASH
                AND CASH EQUIVALENTS, Beginning of the Period
            
            
            248,184
            
            
            
            123,934





(1)
            As
                discussed in Note 1 to the condensed consolidated financial statements,
                the Company has changed its presentation of cash flows regarding
                retained
                interests related to the Company’s Financial Services
                business.





18
 Table
          of Contents





Following
      is a summary of the effects of the correction of these errors on the Company’s
      statements of cash flows for the three months ended April 1, 2006 and April
      2,
      2005.





**Three
                months ended April 1, 2006**
            
            **Three
                months ended April 2, 2005****Statements
                of Cash Flows**
            
            **As
                previously reported**
            
            
            
            **As
                Restated**
            
            **As
                previously reported**
            
            **As
                Restated***Cash
                Flows from Operating Activities:*Accounts
                payable
            
            $
            (59,438
            )
            
            
            $
            (50,940
            )
            
            N/a
            
            
            N/aNet
                cash flows from operating activities
            
            
            (171,126
            )
            
            
            
            (162,628
            )
            
            N/a
            
            
            N/a*Cash
                flows from Investing Activities:*Capital
                expenditures
            
            $
            (6,043
            )
            
            
            $
            (14,541
            )
            
            N/a
            
            
            N/aPurchases
                of short-term investments
            
            
            -
            
            
            
            
            (65,000
            )
            $
            -
            
            $
            (21,000
            )Sales
                or maturities of short-term
              investments
            
            
            -
            
            
            
            
            65,000
            
            
            -
            
            
            145,250Purchases
                of intangibles
            
            
            (447
            )
            
            
            
            -
            
            
            N/a
            
            
            N/aNet
                cash flows from investing activities
            
            
            (19,277
            )
            
            
            
            (27,328
            )
            
            (54,998
            )
            
            69,252*Cash
                flows from Financing Activities:*Change
                in other
            
            $
            -
            
            
            
            
            (447
            )
            
            N/a
            
            
            N/aNet
                cash flows from financing activities
            
            
            200,180
            
            
            
            
            199,733
            
            
            N/a
            
            
            N/aNET
                (DECREASE) INCREASE IN
              CASH
                OR CASH EQUIVALENTS
            
            
            N/a
            
            
            
            
            N/a
            
            $
            (203,289
            )
            $
            (79,039
            )CASH
                AND CASH EQUIVALENTS,
              Beginning
                of the Period
            
            
            N/a
            
            
            
            
            N/a
            
            
            248,184
            
            
            123,934





*
            N/a
                  - Not applicable





Following
      is a summary of the effects of the correction of the error on the Company’s
      balance sheet and statements of cash flows for the fiscal years ended December
      31, 2005, January 1, 2005 and January 3, 2004.





**2005**
            
            **2004**
            
            **2003****Statements
                of Cash Flows**
            
            **As
                previously reported**
            
            **As
                Restated**
            
            **As
                previously reported**
            
            **As
                Restated**
            
            **As
                previously reported**
            
            **As
                Restated***Cash
                flows from Investing Activities:*Purchases
                of short-term investments
            
            $
            -
            
            $
            (21,000
            )
            $
            -
            
            $
            (156,825
            )
            $
            -
            
            $
            (111,450
            )Sales
                or maturities of short-term
              investments
            
            
            -
            
            
            145,250
            
            
            -
            
            
            112,500
            
            
            -
            
            
            74,400Net
                cash flows from investing
              activities
            
            
            (204,867
            )
            
            (80,617
            )
            
            (126,811
            )
            
            (171,136
            )
            
            (89,735
            )
            
            (126,785
            )NET
                (DECREASE) INCREASE IN
              CASH
                OR CASH EQUIVALENTS
            
            $
            (161,261
            )
            $
            (37,011
            )
            $
            55,603
            
            $
            11,278
            
            $
            13,945
            
            $
            (23,105
            )CASH
                AND CASH EQUIVALENTS,
              Beginning
                of the Year
            
            
            248,184
            
            
            123,934
            
            
            192,581
            
            
            112,656
            
            
            178,636
            
            
            135,761CASH
                AND CASH EQUIVALENTS,
              End
                of the Year
            
            
            N/a
            
            
            N/a
            
            
            248,184
            
            
            123,934
            
            
            192,581
            
            
            112,656





*
            N/a
                - Not applicable




19
 Table
          of Contents


**January
                1, 2005****Balance
                Sheet**
            
            **As
                previously reported**
            
            **As
                Restated**Cash
                and cash equivalents
            
            $
            248,184
            
            $
            123,934Short-term
                investments
            
            
            -
            
            
            124,250




(1)
              The
                  Company did not own any auction-rate securities as of December
                  31,
                  2005.
  **Item
      2.**   **Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations.**





This
      report on Form 10-Q contains “forward-looking statements” that are based on our
      beliefs, assumptions and expectations of future events, taking into account
      the
      information currently available to us. All statements other than statements
      of
      current or historical fact contained in this report are forward-looking
      statements within the meaning of the Private Securities Litigation Reform Act.
      The words “believe,” “may,” “should,” “anticipate,” “estimate,” “expect,”
“intend,” “objective,” “seek,” “plan,” and similar statements are intended to
      identify forward-looking statements. Forward-looking statements involve risks
      and uncertainties that may cause our actual results, performance or financial
      condition to differ materially from the expectations of future results,
      performance or financial condition we express or imply in any forward-looking
      statements. These risks and uncertainties include, but are not limited to:
      the
      ability to negotiate favorable purchase, lease and/or economic development
      arrangements; expansion into new markets; market saturation due to new
      destination retail store openings; the rate of growth of general and
      administrative expenses associated with building a strengthened corporate
      infrastructure to support our growth initiatives; increasing competition in
      the
      outdoor segment of the sporting goods industry; the cost of our products; supply
      and delivery shortages or interruptions; adverse weather conditions, unseasonal
      weather conditions which impact the demand for our products; fluctuations in
      operating results; adverse economic conditions causing a decline in
      discretionary consumer spending; the cost of fuel increasing or remaining at
      current levels; delays in road construction and/or traffic planning around
      our
      new destination retail stores; road construction around our existing destination
      retail stores; labor shortages or increased labor costs; changes in consumer
      preferences and demographic trends; increased government regulation; inadequate
      protection of our intellectual property; decreased interchange fees received
      by
      our financial services business as a result of the current interchange
      litigation against VISA; other factors that we may not have currently identified
      or quantified; and other risks, relevant factors and uncertainties identified
      in
      our filings with the SEC (including the information set forth in the “Risk
      Factors” section of our Form 10-K for the fiscal year ended December 31, 2005
      (our “2005 Form 10-K”)), which filings are available at the SEC’s website at
      www.sec.gov. Given the risks and uncertainties surrounding forward-looking
      statements, you should not place undue reliance on these statements. Our
      forward-looking statements speak only as of the date of this report. Other
      than
      as required by law, we undertake no obligation to update or revise
      forward-looking statements, whether as a result of new information, future
      events or otherwise.





The
      following discussion and analysis of financial condition, results of operations,
      liquidity and capital resources should be read in conjunction with our audited
      consolidated financial statements and notes thereto included in our 2005 Form
      10-K, as filed with the SEC, and our unaudited interim consolidated financial
      statements and the notes thereto appearing elsewhere in this Form
      10-Q.





Management’s
      Discussion and Analysis has been revised for the effects of the restatement
      discussed in Note 14 to the financial statements.





**Overview**





We
      are
      the world’s largest direct marketer, and a leading specialty retailer, of
      hunting, fishing, camping and related outdoor merchandise. We serve people
      who
      enjoy the outdoor lifestyle through our well-established direct business and
      our
      growing number of destination retail stores. Additionally, we benefit from
      our
      credit card operation, which offers us the opportunity to enhance our
      merchandising business revenue by reinforcing our brand and increasing customer
      loyalty. To best reflect our operations, we organize the financial reporting
      of
      our business into the following segments:





·
            Direct,
                which consists of our catalogs and website;·
            Retail,
                which consists of our destination retail stores;·
            Financial
                Services, which consists of our credit card business, which is managed
                and
                administered by our wholly-owned bank subsidiary, World's Foremost
                Bank;
                and·
            Other,
                which consists of aggregated non-merchandising outfitter services,
                our
                real estate land sales and our corporate and other expenses.




In the discussion below, where we refer to our "merchandising
      business" we are
      referring to our Direct and Retail segments, collectively. Where we refer to
      our
      "bank," we are referring to our Financial Services segment.


20
 Table
          of Contents





**Revenue**





Revenue
      consists of sales of our products and services. Direct revenue includes sales
      from orders placed over the phone, by mail and through our website and includes
      customer shipping charges. Retail revenue includes all sales made at our
      destination retail stores and is driven by sales at new stores and changes
      in
      comparable store sales. A store is included in our comparable store sales base
      on the first day of the month following the fifteen month anniversary of its
      opening, completion of major remodeling, or expansion by greater than 25% of
      total square footage. Financial Services revenue includes securitization income,
      interest income and interchange and other fees net of reward program costs,
      interest expense and credit losses from our credit card operations. Other
      revenue consists primarily of land sales around our destination retail stores
      and our non-merchandising outfitter services.





**Cost
      of Revenue**





Cost
      of
      revenue for our merchandising business includes cost of merchandise, shipping
      costs, inventory shrink and other miscellaneous costs. However, it does not
      include occupancy costs, depreciation, direct labor or warehousing costs, which
      are included in selling, general and administrative expenses. Our Financial
      Services segment does not have costs classified as cost of revenue. Other cost
      of revenue includes the basis in land that we have sold.





**Gross
      Profit**





We
      define
      gross profit as the difference between revenue and cost of revenue. As we
      discuss below, we believe that operating income presents a more meaningful
      measure of our consolidated operating performance than gross profit because
      of
      the following factors:





·
            our
                Financial Services segment does not have costs classified as cost
                of
                revenue which results in a disproportionate gross profit contribution
                for
                this segment;·
            we
                do not include occupancy costs, depreciation, direct labor or warehousing
                costs in cost of revenue, which affects comparability to other retailers
                who may account differently for some or all of these costs;
                and·
            we
                have historically attempted to price our customer shipping charges
                to
                generally match our shipping expenses, which reduces gross profit
                as a
                percentage of Direct revenue.





**Selling,
      General and Administrative Expenses**





Selling,
      general and administrative expenses include directly identifiable operating
      costs and other expenses, as well as depreciation and amortization. For our
      Direct segment, these operating costs primarily consist of catalog development,
      production and circulation costs, Internet advertising costs and order
      processing costs. For our Retail segment, these costs primarily consist of
      payroll, store occupancy, utilities and advertising costs. For our Financial
      Services segment, these costs primarily consist of advertising costs, marketing
      fees, third party data processing costs associated with servicing accounts,
      payroll and other administrative fees. Our Other expenses include shared-service
      costs, general and administrative expenses and the costs of operating our
      various other small businesses described above which are not included in any
      of
      our segments. Shared-service costs include costs for services shared by two
      or
      more of our business segments (principally our Direct and Retail segments)
      and
      include receiving, distribution and storage costs, merchandising, quality
      assurance costs and corporate occupancy costs. General and administrative
      expenses include costs associated with general corporate management and shared
      departmental services such as management information systems, finance, human
      resources and legal.





21
 Table
          of Contents


**Operating
      Income**





Operating
      income is defined as revenue less cost of revenue and selling, general and
      administrative expenses. Given the variety of segments we report and the
      different cost classifications inherent in each of their respective businesses,
      it is difficult to compare our consolidated results on the basis of gross
      profit. Consequently, we believe that operating income is the best metric to
      compare the performance and profitability of our segments to each other and
      to
      judge our consolidated performance because it includes all applicable revenue
      and cost items.





**Retail
      Expansion**





Significant
      amounts of cash will be needed in order to open new destination retail stores
      and implement our retail growth strategy. Depending upon the location and a
      variety of other factors, including store size and the amount of public
      improvements necessary, and based upon our prior experience, opening a single
      large-format destination retail store will require expenditures in the range
      of
      $30 to $50 million. This includes the cost of real estate, site work, public
      improvements such as utilities and roads, buildings, equipment, fixtures
      (including taxidermy) and inventory.





Historically,
      we have been able to negotiate economic development arrangements relating to
      the
      construction of a number of our new destination retail stores, including free
      land, monetary grants and the recapture of incremental sales, property or other
      taxes through economic development bonds, with many local and state governments.
      We are able to negotiate these agreements as we generally have located our
      destination retail stores in towns and municipalities that do not have a large
      base of commercial businesses. We attempt to design our destination retail
      stores to provide exciting tourist and entertainment shopping experiences for
      the entire family. We believe these factors increase the revenue for the state
      and local municipality where the destination retail store is located, making
      us
      a compelling partner for community development and expansion. Where appropriate,
      we intend to continue to utilize economic development arrangements with state
      and local governments to offset some of the construction costs and improve
      the
      return on investment of our new stores.





The
      stores we opened in 2005, and a number of our stores announced for 2006 and
      2007, are located closer to larger populations. We believe this strategy will
      make our stores more convenient for our customers and will increase our market
      share.





At
      the
      end of the second fiscal quarter we operated fourteen destination retail stores.
      During fiscal 2005, we increased our total retail square footage by 59% to
      2,097,840 total square feet with the opening of four new destination retail
      stores. For fiscal 2006, we currently plan to open four new destination retail
      stores which will add approximately 603,139 square feet, or 29%, to our retail
      square footage in fiscal 2006.





**Critical
      Accounting Policies**





Our
      condensed consolidated financial statements have been prepared in accordance
      with accounting principles generally accepted in the United States of America.
      The preparation of these financial statements requires us to make estimates
      and
      judgments that affect the reported amounts of assets, liabilities, revenues
      and
      expenses and related disclosures of contingent assets and liabilities. The
      estimates and assumptions are evaluated on a periodic basis and are based on
      historical experience and various other factors that are believed to be
      reasonable under the circumstances. Actual results may differ significantly
      from
      these estimates.





Our
      critical accounting policies and use of estimates are discussed in our 2005
      Form
      10-K, as filed with the SEC, and should be read in conjunction with the annual
      financial statements and notes thereto.





22
 Table
          of Contents


**Results
      of Operations**




Our
      second fiscal quarter ends on the Saturday closest to June 30. The three months
      ended July 1, 2006 and July 2, 2005 each consisted of 13 weeks, and the six
      months then ended each had 26 weeks. Our operating results for the three months
      and six months ended July 1, 2006 and July 2, 2005, expressed as a percentage
      of
      revenue, were as follows:





**Three
                months ended**
            
            **Six
                months ended****July
                1,**
              **2006**
            
            **July
                2,**
              **2005**
            
            **July
                1,**
              **2006**
            
            **July
                2,**
              **2005**Revenue
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Cost
                of revenue
            
            
            59.2
            %
            
            60.7
            %
            
            59.6
            %
            
            60.7
            %Gross
                profit
            
            
            40.8
            %
            
            39.3
            %
            
            40.4
            %
            
            39.3
            %Selling,
                general and administrative expenses
            
            
            37.0
            %
            
            36.7
            %
            
            36.8
            %
            
            36.4
            %Operating
                income
            
            
            3.8
            %
            
            2.6
            %
            
            3.6
            %
            
            2.9
            %Interest
                income
            
            
            0.2
            %
            
            0.0
            %
            
            0.2
            %
            
            0.1
            %Interest
                expense
            
            
            (1.2
            )%
            
            (0.7
            )%
            
            (1.0
            )%
            
            (0.7
            )%Other
                income (net)
            
            
            0.7
            %
            
            0.9
            %
            
            0.7
            %
            
            0.8
            %Total
                other income/(expense)
            
            
            (0.3
            )%
            
            0.2
            %
            
            (0.1
            )%
            
            0.2
            %Income
                before provision for income taxes
            
            
            3.5
            %
            
            2.8
            %
            
            3.5
            %
            
            3.1
            %Income
                tax expense
            
            
            1.3
            %
            
            1.0
            %
            
            1.3
            %
            
            1.1
            %Net
                income
            
            
            2.2
            %
            
            1.8
            %
            
            2.2
            %
            
            2.0
            %





**Segment
      Information**





On
      March
      22, 2006, we changed the fee structure between our Financial Services segment
      and our other segments to more appropriately reflect current market conditions.
      This change was effective January 1, 2006. This updated fee structure includes
      (1) an increase in the fee paid by the Financial Services segment for
      originating a new credit card account, (2) an increase in the amount that the
      Financial Services segment pays for rewards earned by its cardholders and (3)
      an
      additional fee paid by the Financial Services segment for marketing equal to
      the
      amount by which the profitability of the Financial Services segment exceeds
      a 2%
      pre-tax return on the Financial Services segment’s average managed credit card
      loans. The segment information presented in this Form 10-Q reflects this change
      as if it had taken place in all periods presented. The following table sets
      forth the revenue and operating income of each of our segments for the three
      months and six months ended July 1, 2006 and July 2, 2005.




**Three
                  months ended**
              
              **Six
                  months ended****(Dollars
                  in thousands)**
              
              **July
                  1,**
                **2006**
              
              **July
                  2,**
                **2005**
              
              **July
                  1,**
                **2006**
              
              **July
                  2,**
                **2005**Direct
                  revenue
              
              $
              195,009
              
              $
              184,453
              
              $
              423,880
              
              $
              415,192Retail
                  revenue
              
              
              151,449
              
              
              109,633
              
              
              296,792
              
              
              206,766Financial
                  services revenue
              
              
              33,020
              
              
              27,357
              
              
              61,554
              
              
              47,895Other
                  revenue
              
              
              7,785
              
              
              22,429
              
              
              9,842
              
              
              24,608Total
                  revenue
              
              $
              387,263
              
              $
              343,872
              
              $
              792,068
              
              $
              694,461Direct
                  operating income
              
              $
              28,689
              
              $
              29,657
              
              $
              61,693
              
              $
              61,007Retail
                  operating income
              
              
              16,504
              
              
              9,387
              
              
              29,240
              
              
              16,143Financial
                  services operating income
              
              
              7,091
              
              
              5,444
              
              
              14,126
              
              
              10,662Other
                  operating income (loss)
              
              
              (37,739
              )
              
              (35,666
              )
              
              (76,311
              )
              
              (67,967
              )Total
                  operating income
              
              $
              14,545
              
              $
              8,822
              
              $
              28,748
              
              $
              19,845*As
                  a Percentage of Total Revenue:*Direct
                  revenue
              
              
              50.4
              %
              
              53.6
              %
              
              53.5
              %
              
              59.8
              %Retail
                  revenue
              
              
              39.1
              %
              
              31.9
              %
              
              37.5
              %
              
              29.8
              %Financial
                  services revenue
              
              
              8.5
              %
              
              8.0
              %
              
              7.8
              %
              
              6.9
              %Other
                  revenue
              
              
              2.0
              %
              
              6.5
              %
              
              1.2
              %
              
              3.5
              %Total
                  revenue
              
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %*As
                  a Percentage of Segment Revenue:*Direct
                  operating income
              
              
              14.7
              %
              
              16.1
              %
              
              14.6
              %
              
              14.7
              %Retail
                  operating income
              
              
              10.9
              %
              
              8.6
              %
              
              9.9
              %
              
              7.8
              %Financial
                  services operating income
              
              
              21.5
              %
              
              19.9
              %
              
              22.9
              %
              
              22.3
              %Total
                  operating income(1)
              
              
              3.8
              %
              
              2.6
              %
              
              3.6
              %
              
              2.9
              %





(1)
            The
                percentage of total operating income is a percentage of total consolidated
                revenue.





23
 Table
          of Contents





For
      credit card loans securitized and sold, the loans are removed from our balance
      sheet and the net earnings on these securitized assets after paying outside
      investors are reflected as a component of our securitization income on a GAAP
      basis. The following table summarizes the results of our Financial Services
      segment for the three months and six months ended July 1, 2006 and July 2,
      2005
      on a GAAP basis with interest and fee income, interest expense and provision
      for
      loan losses for the credit card loans receivable we own reported in net interest
      income. Non-interest income on a GAAP basis includes servicing income, gains
      on
      sales of loans and income recognized on our retained interests for the entire
      securitized portfolio, as well as, interchange income on the entire managed
      portfolio.





**Financial
                Services Revenue as reported**
            
            **Three
                months ended**
            
            **Six
                months ended****in
                the Financial Statements:**
            
            **July
                1,**
              **2006**
            
            **July
                2,**
              **2005**
            
            **July
                1,**
              **2006**
            
            **July
                2,**
              **2005**Interest
                and fee income
            
            $
            4,503
            
            $
            4,445
            
            $
            10,988
            
            $
            8,550Interest
                expense
            
            
            (1,174
            )
            
            (790
            )
            
            (2,301
            )
            
            (1,613
            )Net
                interest income
            
            
            3,329
            
            
            3,655
            
            
            8,687
            
            
            6,937Non-interest
                income:Securitization
                income
            
            
            42,061
            
            
            33,136
            
            
            75,780
            
            
            58,919Other
                non-interest income
            
            
            9,370
            
            
            7,137
            
            
            18,081
            
            
            14,571Total
                non-interest income
            
            
            51,431
            
            
            40,273
            
            
            93,861
            
            
            73,490Less:
                Customer reward costs
            
            
            (21,740
            )
            
            (16,571
            )
            
            (40,994
            )
            
            (32,532
            )Financial
                services revenue
            
            $
            33,020
            
            $
            27,357
            
            $
            61,554
            
            $
            47,895





(1)
            For
                the three months and six months ended July 1, 2006 and July 2, 2005,
                we
                recognized gains on sale of credit card loans of $4.6 million, $3.8
                million, $8.7 million and $7.7 million, respectively, which are reflected
                as a component of securitization
                income.





Our
      “managed” credit card loans represent credit card loans receivable we own plus
      securitized credit card loans. Since the financial performance of the managed
      portfolio has a significant impact on the earnings we will receive from
      servicing the portfolio, we believe the following table on a “managed” basis is
      important information to analyze our revenue in the Financial Services segment.
      This non-GAAP presentation reflects the financial performance of the credit
      card
      loans receivable we own plus those that have been sold for the three months
      and
      six months ended July 1, 2006 and July 2, 2005 and includes the effect of
      recording the retained interest at fair value. Interest income, interchange
      income (net of customer rewards) and fee income on both the owned and
      securitized portfolio are recorded in their respective line items. Interest
      paid
      to outside investors on the securitized credit card loans is included with
      other
      interest costs and included in interest expense. Credit losses on the entire
      managed portfolio are included in provision for loan losses. Although our
      financial statements are not presented in this manner, management reviews the
      performance of its managed portfolio in order to evaluate the effectiveness
      of
      its origination and collection activities, which ultimately affects the income
      we will receive for servicing the portfolio. The securitization of credit card
      loans primarily converts interest income, interchange income, credit card fees,
      credit losses and other income and expense related to the securitized loans
      into
      securitization income.




24
 Table
          of Contents




**Managed
                  Financial Services Revenue:**
              
              **Three
                  months ended**
              
              **Six
                  months ended****(Dollars
                  in thousands except other data)**
              
              **July
                  1,**
                **2006**
              
              **July
                  2,**
                **2005**
              
              **July
                  1,**
                **2006**
              
              **July
                  2,**
                **2005**Interest
                  income
              
              $
              33,549
              
              $
              23,676
              
              $
              66,463
              
              $
              46,545Interchange
                  income, net of customer reward costs
              
              
              12,889
              
              
              11,812
              
              
              23,993
              
              
              19,123Other
                  fee income
              
              
              5,310
              
              
              4,659
              
              
              10,473
              
              
              9,242Interest
                  expense
              
              
              (15,300
              )
              
              (9,338
              )
              
              (29,327
              )
              
              (18,021
              )Provision
                  for loan losses
              
              
              (6,050
              )
              
              (6,138
              )
              
              (11,912
              )
              
              (11,473
              )Other
              
              
              2,622
              
              
              2,686
              
              
              1,864
              
              
              2,479Managed
                  Financial Services revenue
              
              $
              33,020
              
              $
              27,357
              
              $
              61,554
              
              $
              47,895***As
                  a Percentage of Managed Credit Card Loans*****Managed
                  Financial Services Revenue:**Interest
                  income
              
              
              10.4
              %
              
              9.1
              %
              
              10.4
              %
              
              9.1
              %Interchange
                  income, net of customer reward costs
              
              
              4.0
              %
              
              4.6
              %
              
              3.8
              %
              
              3.7
              %Other
                  fee income
              
              
              1.6
              %
              
              1.8
              %
              
              1.6
              %
              
              1.8
              %Interest
                  expense
              
              
              (4.7
              )%
              
              (3.6
              )%
              
              (4.6
              )%
              
              (3.5
              )%Provision
                  for loan losses
              
              
              (1.9
              )%
              
              (2.4
              )%
              
              (1.9
              )%
              
              (2.2
              )%Other
              
              
              0.8
              %
              
              1.0
              %
              
              0.4
              %
              
              0.5
              %Managed
                  Financial Services revenue
              
              
              10.2
              %
              
              10.5
              %
              
              9.7
              %
              
              9.4
              %Average
                  reported credit card loans
              
              $
              127,638
              
              $
              110,695
              
              $
              125,262
              
              $
              105,009Average
                  managed credit card loans
              
              $
              1,295,131
              
              $
              1,038,465
              
              $
              1,274,653
              
              $
              1,022,452


**Three
      Months Ended July 1, 2006 Compared to Three Months Ended July 2, 2005**


**Revenue**





Revenue
      increased by $43.4 million, or 12.6%, to $387.3 million in the three months
      ended July 1, 2006 from $343.9 million in the three months ended July 2, 2005
      as
      we experienced revenue growth in our Direct, Retail and Financial Services
      segments. Merchandise revenue increased by $52.4 million, or 17.8%, to $346.5
      million in the three months ended July 1, 2006 from $294.1 million in the three
      months ended July 2, 2005. Our Other segment revenue declined by $14.6 million
      primarily due to a reduction in land sales, which caused total revenue for
      the
      second quarter of fiscal 2006 to grow slower than merchandise revenue.





*Direct
      Revenue* .
      Direct
      revenue increased by $10.5 million, or 5.7%, to $195.0 million in the three
      months ended July 1, 2006 from $184.5 million in the three months ended July
      2,
      2005. We had a timing difference in promotional programs in the second quarter
      of fiscal 2006 compared to the second quarter of fiscal 2005. In the second
      quarter of fiscal 2005, the promotion did not start until the end of the
      quarter. In the second quarter of fiscal 2006, we started a promotional program
      earlier in the quarter. The product categories that contributed the largest
      dollar volume increases to our Direct revenue in the three months ended July
      1,
      2006 as compared to the three months ended July 2, 2005 included casual
      clothing, gifts and fishing gear.





25
 Table
          of Contents


*Retail
      Revenue* .
      Retail
      revenue increased by $41.8 million, or 38.1%, to $151.4 million in the three
      months ended July 1, 2006 from $109.6 million in the three months ended July
      2,
      2005 due to an increase in new store sales of $42.4 million. New store sales
      were partially offset by a slight decrease in comparable store sales of $0.6
      million, or 0.6%, compared to the three months ended July 2, 2005. Easter
      occurred in the first quarter of 2005, while it occurred in the second quarter
      of 2006. Since we close our stores on Easter Sunday, we estimate that this
      shift
      in the timing of the Easter weekend had a negative impact of approximately
      $0.9
      million on our comparable store sales in the current quarter. In addition,
      sales
      at our Owatonna, Minnesota store continue to be impacted by our new store in
      Rogers, Minnesota. The product categories that contributed the largest dollar
      volume increases to our Retail revenue growth in the three months ended July
      1,
      2006 as compared to the three months ended July 2, 2005 included marine
      products, hunting equipment and fishing gear.





*Financial
      Services Revenue* .
      Financial Services revenue increased by $5.6 million, or 20.4%, to $33.0 million
      in the three months ended July 1, 2006 from $27.4 million in the three months
      ended July 2, 2005. We measure the results of our Financial Services business
      on
      a managed basis as presented in the table on page 25. Interest income as
      measured on a managed basis increased $9.9 million. The increase in interest
      income was due to an increase in interest rates and managed credit card loans.
      Interchange income, net of reward costs, increased by $1.1 million, or 9.1%.
      Interchange income is driven by net purchases, which increased by 23.2%;
      however, interchange income was offset by an increase in customer reward costs
      of 31.2%. Customer reward costs generally increase at the same rate as net
      purchases. During the quarter, customer reward costs increased more than net
      purchases due to an increase in new account growth and promotional event
      campaigns. The increases in interest income and interchange income were offset
      by an increase in interest expense of $6.0 million due to increases in
      securitized credit card loans, borrowings and interest rates. Compared to the
      three months ended July 2, 2005, the number of average active accounts grew
      by
      17.8% to 823,219 and the average balance per active account grew by 5.9% to
      approximately $1,573.





**Gross
      Profit**





Gross
      profit increased by $22.5 million, or 16.6%, to $157.7 million in the three
      months ended July 1, 2006 from $135.2 million in the three months ended July
      2,
      2005. Gross profit increased 1.5% as a percentage of revenue to 40.8% in the
      three months ended July 1, 2006 from 39.3% in the three months ended July 2,
      2005. Gross profit as a percentage of revenue increased due to an increase
      in
      our Financial Services revenue, which did not have any corresponding increase
      in
      cost of revenue. Gross profit on land sales in our Other segment contributed
      to
      a decline in gross profit of $0.7 million in the second quarter of fiscal 2006
      as compared to the second quarter of fiscal 2005 due to a reduction in total
      land sales.





*Merchandising
      Business.* The
      gross profit of our merchandising business increased by $14.8 million, or 14.1%,
      to $120.0 million in the three months ended July 1, 2006 from $105.2 million
      in
      the three months ended July 2, 2005. Gross profit decreased by 1.2% as a
      percentage of merchandise revenue to 34.6% in the three months ended July 1,
      2006 from 35.8% in the three months ended July 2, 2005. The decline in our
      merchandising gross profit as a percentage of merchandise revenue is primarily
      attributable to an increase in sales discounts of $3.4 million, or 0.8% of
      merchandise revenue. In our Direct business, we began a promotional program
      at
      the beginning of the second quarter of fiscal 2006 as compared to the end of
      the
      second quarter of fiscal 2005. We also had a new promotional discount card
      program that we launched in the second quarter of fiscal 2006 that we did not
      have in the second quarter of fiscal 2005, which related primarily to our Retail
      segment. In addition, our freight costs increased by 0.5% of merchandise revenue
      in the second quarter of fiscal 2006. Our shipping margin - the shipping income
      we collect less the cost we pay to ship merchandise to our customers - declined
      by $0.9 million, or 0.4% of merchandise revenue. A portion of this decline
      was
      due to shipping rate increases as a result of the rise in fuel costs. Average
      fuel costs during the second quarter of fiscal 2006 were 30% higher than in
      the
      second quarter of fiscal 2005, causing our shipping carriers to increase their
      prices. The remainder of the decline in shipping margin was caused by the
      implementation of our new warehouse management software, which caused us to
      ship
      multiple packages per order due to the inability to transfer products between
      distribution centers while the software was being phased-in. We expect this
      issue to be resolved during the third quarter of fiscal 2006.





26
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          of Contents


**Selling,
      General and Administrative Expenses**





Selling,
      general and administrative expenses increased by $16.9 million, or
      13.3% *,* to
      $143.2 million in the three months ended July 1, 2006 from $126.3 million in
      the
      three months ended July 2, 2005. Selling, general and administrative expenses
      were 37.0% of revenue in the three months ended July 1, 2006 compared to 36.7%
      in the three months ended July 2, 2005. We recognized $0.8 million of stock
      based compensation expense, related to the adoption of Statement 123R, in the
      three months ended July 1, 2006, which accounted for 0.2% of the 0.3% increase
      in selling, general and administrative expenses as a percentage of total
      revenue. The most significant factors contributing to the increase in selling,
      general and administrative expenses by segment included:





·
            Selling,
                general and administrative expenses attributed to shared services
                increased by $4.3 million over the prior period primarily as a result
                of
                increases in wages and related benefits of $2.4 million. In addition,
                depreciation increased by $1.3 million and incidental equipment and
                software costs increased by $0.7 million. Increases in wages and
                benefits
                were primarily due to increases in personnel in our distribution
                centers
                as our merchandise revenue continues to grow as well as $0.6 million
                of
                stock based compensation expense related to the adoption of Statement
                123R. Depreciation increased due to two system upgrades implemented
                by the
                end of 2005 when these projects were placed in service. Equipment
                and
                software costs increased due to preliminary project costs related
                to
                system upgrades. Total Other selling, general and administrative
                costs as
                a percentage of consolidated revenue decreased to 11.0% from 11.1%.·
            *Direct*selling,
                general and administrative expenses increased by $3.5 million. This
                was
                primarily due to catalog costs, which increased by $2.2 million,
                or 8.7%.
                Catalog costs increased to $27.3 million in the three months ended
                July 1,
                2006 from $25.1 million in the three months ended July 2, 2005. As
                a
                percentage of Direct revenue, catalog costs increased to 14.0% in
                the
                three months ended July 1, 2006 from 13.6% in the three months ended
                July
                2, 2005. This increase in catalog costs as a percentage of our Direct
                revenue was due to additional promotional mailing campaigns targeted
                at
                specific customer groups, an increase in postage costs and increased
                mailings in markets where new stores will be opening in the future.
                Additionally, salaries and wages increased by $0.5 million, credit
                card
                discount fees increased by $0.3 million and equipment and software
                expenses increased by $0.2 million. Advertising costs increased by
                $0.8
                million, but were offset by an increase in the marketing fee paid
                to the
                Direct segment from the Financial Services segment of $0.9 million,
                or
                0.5% of Direct revenue.·
            *Retail*selling,
                general and administrative expenses comprised $5.1 million of the
                total
                increase in selling, general and administrative expense. We incurred
                new
                store operating costs of $8.5 million related to our new stores,
                which
                were not open in the comparable quarter of 2005. Total selling, general
                and administrative expenses in our comparable store base decreased
                by $2.0
                million, or 2.0% as a percentage of comparable store sales, due to
                a
                decrease in advertising and controlling overall selling, general
                and
                administrative costs. Pre-opening costs decreased by $1.3 million
                compared
                to the second quarter of fiscal 2005 due to the timing of our new
                store
                openings. Pre-opening costs as a percentage of Retail revenue decreased
                to
                1.5% from 3.23%. Retail corporate overhead costs decreased slightly
                by
                0.1% of Retail revenue compared to the second quarter of fiscal 2005.
                Increases in salaries and related benefits along with property taxes
                were
                offset by an increase in the marketing fee paid to the Retail segment
                from
                the Financial Services segment of $1.1 million, or 0.3% of Retail
                revenue.·
            *Financial
                Services*selling,
                general and administrative expenses comprised $4.0 million of the
                total
                increase in selling, general and administrative expense. This was
                primarily due to increased marketing fees of $2.0 million paid to
                our
                other segments. Advertising and promotional costs increased by $1.0
                million due to increases in VISA assessments and new account acquisition
                costs. Third party services related to our credit card processing
                increased by $0.5 million as the number of credit card accounts and
                credit
                card transactions increased. Postage increased by $0.2 million due
                to rate
                increases and an increase in the number of credit card accounts.





**Operating
      Income**





Operating
      income increased by $5.7 million, or 64.8%, to $14.5 million in the three months
      ended July 1, 2006 from $8.8 million in the three months ended July 2, 2005.
      Operating income as a percentage of revenue increased to 3.8% in the three
      months ended July 1, 2006 from 2.6% in the three months ended July 2, 2005.
      We
      continue to improve our operating income margin through revenue expansion and
      controlling our operating costs.





27
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          of Contents


**Interest
      Expense**





Interest
      expense increased by $2.4 million to $4.8 million in the three months ended
      July
      1, 2006 from $2.4 million in the three months ended July 2, 2005. The increase
      in interest expense was primarily due to an increase in borrowing related to
      the
      issuance of $215 million in unsecured notes.





**Income
      Taxes**





Our
      effective tax rate was 37.2% in the three months ended July 1, 2006 as compared
      to 35.6% in the three months ended July 2, 2005. During the quarter, we adjusted
      our estimated annual effective tax rate from 36.2% to 36.7% based on recent
      information, including the impact of our updated fee structure with our
      Financial Services segment, updated projections and the completion and filing
      of
      our most recent state tax returns. We expect our effective tax rate to continue
      to increase as we open stores in new states and incur additional state income
      taxes.





**Six
      Months Ended July 1, 2006 Compared to Six Months Ended July 2, 2005**


**Revenue**





Revenue
      increased by $97.6 million, or 14.1%, to $792.1 million in the six months ended
      July 1, 2006 from $694.5 million in the six months ended July 2, 2005 as we
      experienced revenue growth in our Direct, Retail and Financial Services
      segments. Our Other segment revenue declined by $14.8 million primarily due
      to a
      reduction in land sales.





*Direct
      Revenue* .
      Direct
      revenue increased by $8.7 million, or 2.1%, to $423.9 million in the six months
      ended July 1, 2006 from $415.2 million in the six months ended July 2, 2005.
      We
      had timing and discounting differences in our promotional programs in the first
      six months of fiscal 2006 compared to the first six months of fiscal 2005.
      In
      the first quarter of fiscal 2006, we reduced a discount given relative to the
      prior year, while in the second quarter of fiscal 2006, we accelerated the
      timing of a promotion relative to the timing of that same promotion in the
      prior
      year. These two events offset each other slightly. The product categories that
      contributed the largest dollar volume increases to our Direct revenue in the
      six
      months ended July 1, 2006 as compared to the six months ended July 2, 2005
      included gifts, camping gear, and hunting equipment.





*Retail
      Revenue* .
      Retail
      revenue increased by $90.0 million, or 43.5%, to $296.8 million in the six
      months ended July 1, 2006 from $206.8 million in the six months ended July
      2,
      2005 due to new store sales of $91.8 million. New store sales were partially
      offset by a slight decrease in comparable store sales of $0.9 million, or 0.5%,
      compared to the six months ended July 2, 2005. Sales at our Owatonna, Minnesota
      store continue to be impacted by our new store in Rogers, Minnesota, which
      was
      the primary reason our comparable store sales were down during the first six
      months of the year. The product categories that contributed the largest dollar
      volume increases to our Retail revenue growth in the six months ended July
      1,
      2006 as compared to the six months ended July 2, 2005 included hunting
      equipment, marine products and camping gear.





*Financial
      Services Revenue* .
      Financial Services revenue increased by $13.7 million, or 28.6%, to $61.6
      million in the six months ended July 1, 2006 from $47.9 million in the six
      months ended July 2, 2005. We measure the results of our Financial Services
      business on a managed basis as presented in the table on page 25. Interest
      income as measured on a managed basis increased $19.9 million. The increase
      in
      interest income is due to an increase in interest rates and managed credit
      card
      loans. Interchange income, net of reward costs, increased by $4.9 million,
      or
      25.5%. Interchange income is driven by net purchases, which increased by 23.0%;
      however, interchange income was offset by an increase in customer reward costs
      of 26.0%. The increases in interest income and interchange income were offset
      by
      an increase in interest expense of $11.3 million due to increases in securitized
      credit card loans, borrowings and interest rates. Compared to the six months
      ended July 2, 2005, the number of average active accounts grew by 17.8% to
      816,715 and the average balance per active account grew by 5.8% to approximately
      $1,561.





**Gross
      Profit**





Gross
      profit increased by $47.9 million, or 17.6%, to $320.3 million in the six months
      ended July 1, 2006 from $272.4 million in the six months ended July 2, 2005.
      Gross profit increased 1.2% as a percentage of revenue to 40.4% in the six
      months ended July 1, 2006 from 39.2% in the six months ended July 2, 2005.
      Gross
      profit as a percentage of revenue increased due to an increase in our Financial
      Services revenue, which did not have any corresponding increase in cost of
      revenue.





28
 Table
          of Contents


*Merchandising
      Business.* The
      gross profit of our merchandising business increased by $32.6 million, or 14.8%,
      to $252.3 million in the six months ended July 1, 2006 from $219.7 million
      in
      the six months ended July 2, 2005. Gross profit decreased by 0.3% as a
      percentage of merchandise revenue to 35.0% in the six months ended July 1,
      2006
      from 35.3% in the six months ended July 2, 2005. The decline in our
      merchandising gross profit as a percentage of merchandise revenue was primarily
      attributable to an increase in freight costs of 0.5% of merchandise revenue.





**Selling,
      General and Administrative Expenses**





Selling,
      general and administrative expenses increased by $39.0 million, or
      15.4% *,* to
      $291.5 million in the six months ended July 1, 2006 from $252.5 million in
      the
      six months ended July 2, 2005. Selling, general and administrative expenses
      were
      36.8% of revenue in the six months ended July 1, 2006 compared to 36.4% in
      the
      six months ended July 2, 2005. We recognized $1.6 million of stock based
      compensation expense, related to the adoption of Statement 123R, in the six
      months ended July 1, 2006, which accounted for 0.2% of the 0.4% increase in
      selling, general and administrative expenses. The most significant factors
      contributing to the increase in selling, general and administrative expenses
      included:





·
            Selling,
                general and administrative expenses attributed to shared services
                increased by $10.0 million over the prior period primarily as a result
                of
                increases in wages and related benefits of $5.7 million. In addition,
                depreciation increased by $2.1 million, incidental equipment and
                software
                costs increased by $1.5 million and contract labor increased by $0.5
                million. Increases in wages and benefits were primarily due to increases
                in personnel at our distribution centers as our merchandise revenue
                continues to grow as well as stock based compensation expense of
                $1.0
                million related to the adoption of Statement 123R. Depreciation increased
                due to two system upgrades implemented by the end of 2005 when these
                projects were placed in service. Equipment and software costs, along
                with
                contract labor, increased due to preliminary project costs related
                to
                system upgrades. Total Other selling, general and administrative
                costs as
                a percentage of consolidated revenue decreased from 10.5% to 10.4%.·
            *Direct*selling,
                general and administrative expenses increased by $1.7 million. This
                was
                primarily due to an increase in our catalog costs of $4.2 million,
                or
                7.4%. Catalog costs increased to $60.5 million in the six months
                ended
                July 1, 2006 from $56.3 million in the six months ended July 2, 2005.
                As a
                percentage of Direct revenue, catalog costs increased to 14.3% in
                the six
                months ended July 1, 2006 from 13.6% in the six months ended July
                2, 2005.
                This increase in catalog costs as a percentage of our Direct revenue
                was
                due to a reduction of promotional sales lift, which was stronger
                in the
                first quarter of fiscal 2005 compared to the first quarter of fiscal
                2006,
                an increase in the number of promotional mailing campaigns, increased
                mailings in markets where new stores will be opening in the future
                and an
                increase in postage costs. Advertising expense increased by $0.8
                million
                related to the mailing campaigns. These increases were partially
                offset by
                an increase in the marketing fee paid to the Direct segment from
                the
                Financial Services segment of $4.2 million, or 0.9% of Direct revenue.·
            *Retail*selling,
                general and administrative expenses comprised $17.1 million of the
                total
                increase in selling, general and administrative expense. We incurred
                new
                store operating costs of $20.9 million related to our new stores,
                which
                were not open in the comparable quarter of 2005. The increase in
                new store
                costs were offset by decreases in Retail corporate overhead costs
                of $2.1
                million, a decrease in pre-opening costs of $1.3 million and a decrease
                in
                total selling, general and administrative expenses in our comparable
                store
                base of $0.4 million, or 0.2% as a percentage of comparable store
                sales.
                Advertising costs increased by 0.6% of comparable store sales; however,
                this was completely offset by overall reductions in selling, and
                general
                and administrative costs. Corporate overhead costs decreased due
                to an
                increase in the marketing fee paid to the Retail segment from the
                Financial Services segment of $3.0 million. Pre-opening costs decreased
                due to the timing of our store openings in 2006. All of our new stores
                in
                fiscal 2006 will be open in the second half of the year as compared
                to two
                stores being open in the first half of the year in fiscal
                2005.·
            *Financial
                Services*selling,
                general and administrative expenses comprised $10.2 million of the
                total
                increase in selling, general and administrative expense. This was
                primarily due to increased marketing fees of $7.2 million paid to
                our
                other segments. Advertising and promotional costs increased by $2.0
                million due to increases in VISA assessments and new account acquisition
                costs. Third party services related to our credit card processing
                increased by $0.8 million as the number of credit card accounts and
                credit
                card transactions increased. Postage increased by $0.5 million due
                to rate
                increases and an increase in the number of credit card accounts.
                These
                increases were slightly offset by a decrease in bad debt expense
                of $0.7
                million. Bad debt expense decreased due to a reduction in counterfeit
                fraud.


29
 Table
          of Contents





**Operating
      Income**





Operating
      income increased by $8.9 million, or 44.9%, to $28.7 million in the six months
      ended July 1, 2006 from $19.8 million in the six months ended July 2, 2005.
      Operating income as a percentage of revenue increased to 3.6% in the six months
      ended July 1, 2006 from 2.9% in the six months ended July 2, 2005. We continue
      to improve our operating income margin through revenue expansion and controlling
      our operating costs.





**Interest
      Expense**





Interest
      expense increased by $3.6 million to $8.1 million in the six months ended July
      1, 2006 from $4.5 million in the six months ended July 2, 2005. The increase
      in
      interest expense was primarily due to an increase in borrowing related to the
      issuance $215 million in unsecured notes at a fixed rate of 5.99%.





**Income
      Taxes**





Our
      effective tax rate was 36.7% in the six months ended July 1, 2006 as compared
      to
      35.6% in the six months ended July 2, 2005. We expect our effective tax rate
      to
      continue to increase as we open stores in new states and incur additional state
      income taxes.





**Bank
      Asset Quality**





We
      securitize a majority of our credit card loans. On a quarterly basis, we
      transfer eligible credit card loans into a securitization trust. We are required
      to own at least a minimum twenty day average of 5% of the interests in the
      securitization trust. Therefore, these retained loans have the same
      characteristics as those loans sold to outside investors. Certain accounts
      are
      ineligible for securitization because they are delinquent at the time of sales
      to the trust, originated from sources other than Cabela's Club credit cards
      and
      various other requirements. The total amount of ineligible loans and receivables
      were $16.0 million and $14.1 million at July 1, 2006 and December 31, 2005,
      respectively. Of the $16.0 million outstanding at July 1, 2006, $14.5 million
      originated from sources other than Cabela’s Club credit cards.





The
      quality of our managed credit card loan portfolio at any time reflects, among
      other factors, the creditworthiness of the individual cardholders, general
      economic conditions, the success of our account management and collection
      activities, and the life cycle stage of the portfolio. Our financial results
      are
      sensitive to changes in delinquencies and net charge-offs of this portfolio.
      During periods of economic weakness, delinquencies and net charge-offs are
      more
      likely to increase. We have sought to manage this sensitivity by selecting
      a
      customer base that has historically shown itself to be very creditworthy based
      on charge-off levels, credit bureau scores, such as Fair Isaac & Company
      (FICO) scores, and behavior scores.





**Delinquencies**





We
      consider the entire balance of an account, including any accrued interest and
      fees, delinquent if the minimum payment is not received by the payment due
      date.
      Our aging methodology is based on the number of completed billing cycles during
      which a customer has failed to make a required payment. Delinquencies not only
      have the potential to reduce earnings by increasing the unrealized loss
      recognized to reduce the loans to market value and reducing securitization
      income, but they also result in additional operating costs dedicated to
      resolving the delinquencies.





The
      following chart shows the percentage of our managed accounts that have been
      delinquent as of the ends of the periods presented.





**July
                1,**
              **2006**
            
            **December
                31,**
              **2005**
            
            **July
                2,**
              **2005**Number
                of days delinquentGreater
                than 30 days
            
            0.72%
            
            0.67%
            
            0.59%Greater
                than 60 days
            
            0.40%
            
            0.38%
            
            0.34%Greater
                than 90 days
            
            0.17%
            
            0.16%
            
            0.14%


30
 Table
          of Contents





**Charge-offs**


Gross
        charge-offs reflect the uncollectible principal, interest and fees on a
        customer's account. Recoveries reflect the amounts collected on previously
        charged-off accounts. Most bankcard issuers charge off accounts at 180 days.
        We
        charge off accounts on the 24th day of the month after an account becomes
        115
        days contractually delinquent, except in the case of cardholder bankruptcies
        and
        cardholder deaths. Cardholder bankruptcies are charged off 30 days after
        notification, and delinquencies caused by cardholder deaths are charged off
        on
        the 24th day of the month after an account is 60 days contractually delinquent.
        As a result, our charge-off rates are not directly comparable to other
        participants in the bankcard industry. Our charge-off activity for the managed
        portfolio for the three months and six months ended July 1, 2006 and July
        2,
        2005 is summarized below:




**Three
                months ended**
            
            **Six
                months ended****July
                1,**
              **2006**
            
            **July
                2,**
              **2005**
            
            **July
                1,**
              **2006**
            
            **July
                2,**
              **2005****(Dollars
                in thousands)**Gross
                charge-offs
            
            $
            7,424
            
            $
            6,820
            
            $
            14,156
            
            $
            13,322Less:
                Recoveries
            
            
            (1,504
            )
            
            (987
            )
            
            (2,612
            )
            
            (2,164
            )Net
                charge-offs
            
            
            5,920
            
            
            5,833
            
            
            11,544
            
            
            11,158Net
                charge-offs as a percentage of average managed credit card
                loans
            
            
            1.83
            %
            
            2.25
            %
            
            1.81
            %
            
            2.18
            %





**Liquidity
      and Capital Resources**


**Overview**





Our
      merchandising business and our Financial Services segment have significantly
      different liquidity and capital needs. The primary cash requirements of our
      merchandising business relate to capital for new destination retail stores,
      purchases of economic development bonds related to the development of new
      destination retail stores, purchase of inventory, investments in our management
      information systems and other infrastructure, and other general working capital
      needs. We historically have met these requirements by generating cash from
      our
      merchandising business operations, borrowing under revolving credit facilities,
      issuing debt and equity securities, obtaining economic development grants from
      state and local governments in connection with developing our destination retail
      stores, collecting principal and interest payments on our economic development
      bonds and from the retirement of economic development bonds. The cash flow
      we
      generate from our merchandising business is seasonal, with our peak cash
      requirements for inventory occurring between May and November. While we have
      consistently generated overall positive annual cash flow from our operating
      activities, other sources of liquidity are generally required by our
      merchandising business during these peak cash use periods. These sources
      historically have included short-term borrowings under our revolving credit
      facility and access to debt markets, such as the private placement of long-term
      debt securities we completed in February 2006. While we generally have been
      able
      to manage our cash needs during peak periods, if any disruption occurred to
      our
      funding sources, or if we underestimated our cash needs, we would be unable
      to
      purchase inventory and otherwise conduct our merchandising business to its
      maximum effectiveness, which would result in reduced revenue and profits.





The
      primary cash requirements of our Financial Services segment relate to the
      generation of credit card loans and the purchase of points used in the Cabela’s
      Club VISA customer loyalty rewards program from our merchandising business.
      The
      bank obtains funds for these purposes through various financing activities,
      which include engaging in securitization transactions, borrowing under federal
      funds bank credit facilities, selling certificates of deposit and generating
      cash from operations. Our bank’s charter is limited to issuing credit cards and
      selling brokered certificates of deposit of $100,000 or more, and it does not
      accept demand deposits or make non-credit card loans. Consequently, our bank
      cannot lend money to Cabela’s, Incorporated or our other affiliates. The bank is
      subject to capital requirements imposed by Nebraska banking law and the VISA
      membership rules, and its ability to pay dividends is limited by Nebraska and
      federal banking law.





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 Table
          of Contents


We
      continue to monetize our economic development bonds for future retail expansion.
      In the second quarter, $53.0 million in bonds we owned related to our Wheeling,
      West Virginia retail store and distribution center were retired in connection
      with a transaction whereby we took a subordinate position on the remaining
      bonds
      we still hold related to this location. These remaining bonds are classified
      on
      our balance sheet as marketable securities and have been valued at approximately
      $36.3 million.





We
      are
      focused on improving our inventory position in relation to sales growth.
      Inventory at our comparable stores declined 11.3% in the twelve months ended
      July 1, 2006. We are optimistic that we will continue to see our inventory
      growth slow in relation to our merchandise sales growth as we continue to
      enhance our multi-channel systems.





We
      believe that we will have sufficient capital available from current cash on
      hand, short-term investments, operations, additional monetization of our
      economic development bonds, our revolving credit facility and other borrowing
      sources, including the private placement of debt we completed in February 2006,
      to fund our existing operations and growth plan for the next twelve to eighteen
      months.





**Operating,
      Investing and Financing activities**





Cash
      used
      by operating activities was $140.9 million in the six months ended July 1,
      2006
      as compared with $103.6 million in the six months ended July 2, 2005. The $37.3
      million increase in cash used by operating activities was due to an increase
      in
      cash used for accounts payable of $43.8 million, an increase in cash used for
      the origination of credit card loans of $17.7 million, an increase in cash
      used
      for accrued compensation and benefits of $5.5 million and an increase in cash
      used for gift certificates and credit card reward points of $4.7 million. These
      increases were partially offset by a reduction in cash used for inventory of
      $32.8 million. The increase in cash used for accounts payable was primarily
      caused by a change in the payable to our third party processor at our bank
      of
      $26.7 million between the comparable periods. This change was due to timing
      of
      holidays close to the end of the year causing the number of days of transactions
      on credit cards to fluctuate. Changes in the amounts paid for inventory affected
      accounts payable by $13.8 million. As we continue to grow our credit card
      portfolio the cash used for origination of credit card loans continues to
      increase. Cash used for accrued compensation and benefits increased as the
      total
      accrued bonuses paid in March increased over the prior year. Cash used for
      the
      redemption of gift certificates and credit card rewards increased as gift
      certificate purchases from the holidays were redeemed. Cash used for inventory
      decreased by $32.8 million compared to the first six months of fiscal 2005
      due
      in part to the effects of our new ordering system having an impact on reducing
      inventory levels at our stores and in part due to the timing of merchandise
      receipts for our new stores that are opening later in the year in fiscal 2006.





Cash
      used
      in investing activities was $37.4 million in the six months ended July 1, 2006
      as compared with $9.2 million in the six months ended July 2, 2005. The $28.2
      million increase in cash used for investing activities was due to an increase
      in
      purchases of short-term investments of $110.2 million and a decrease in sales
      of
      short-term investments of $17.0 million. These two uses of cash were partially
      offset by a $46.0 million decrease in capital expenditures and a $2.8 million
      decrease in the purchase of marketable securities. In addition, economic
      development bonds related to our Wheeling, West Virginia destination retail
      store and distribution center were retired for $53.0 million. The decrease
      in
      capital expenditures and the purchase of marketable securities is related to
      the
      timing of our new destination retail store openings. In fiscal 2005, two of
      our
      new stores were opened in the first half of the year. In fiscal 2006, all of
      our
      new stores will be opened in the second half of the year.





Cash
      provided by financing activities was $209.1 million in the six months ended
      July
      1, 2006 as compared to cash provided of $60.0 million in the six months ended
      July 2, 2005. The $149.1 million increase in cash provided by financing
      activities is primarily due to the issuance of $215.0 million of notes in a
      private placement in February 2006. In addition, cash was provided by the
      reduction in maturities of time deposits held by our bank of $18.3 million.
      These increases in cash provided by financing activities were partially offset
      by cash used to pay our line of credit of $95.1 million and a decrease in cash
      advances on our line of credit of $7.1 million.





As
      of
      July 1, 2006, we had material cash commitments in the amount of $107.6 million
      for fiscal 2006 and $198.5 million for fiscal 2007 and 2008 for estimated
      capital expenditures and the purchase of future economic development bonds
      in
      connection with the construction and development of new destination retail
      stores. In addition, we are obligated to fund the remaining $4.6 million of
      economic development bonds and construction costs related to the expansion
      of
      our distribution center in Wheeling, West Virginia throughout fiscal 2006.
      We
      are also committed to fund $14.2 million of economic development bonds related
      to our fiscal 2005 stores.  When the bonds are funded, we will be
      reimbursed for the qualifying construction costs we have incurred.





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**Grants
      and Economic Development Bonds**





*Grants.* Under
      various grant programs, state or local governments provide funding for certain
      costs associated with developing and opening a new destination retail store. We
      generally have received grant funding in exchange for commitments, such as
      assurance of agreed employment and wage levels at our destination retail stores
      or that the destination retail store will remain open, made by us to the state
      or local government providing the funding. The commitments typically phase
      out
      over approximately five to ten years. If we fail to maintain the commitments
      during the applicable period, the funds we received may have to be repaid or
      other adverse consequences may arise, which could affect our cash flows and
      profitability. As of July 1, 2006 and December 31, 2005, the total amount of
      grant funding subject to a specific contractual remedy was $14.9 million and
      $16.6 million, respectively. Portions of seven of our destination retail stores,
      such as wildlife displays and museums, are subject to forfeiture provisions.
      Prior to the second quarter of 2006, we had 30.3 acres of land subject to
      forfeiture. During the second quarter of fiscal 2006, 15.0 acres of land subject
      to forfeiture was exchanged in connection with the retirement of the Wheeling,
      West Virginia bonds and we forfeited 15.3 acres of undeveloped property around
      one of our other stores.




*Economic
      Development Bonds.* Through
      economic development bonds, the state or local government sells bonds to provide
      funding for land acquisition, readying the site, building infrastructure and
      related eligible expenses associated with the construction and equipping of
      our
      destination retail stores. Generally, we have been the sole purchaser of these
      bonds. The bond proceeds that are received by the governmental entity are then
      used to fund the construction and equipping of new destination retail stores
      and
      related infrastructure development. While purchasing these bonds involves an
      initial cash outlay by us in connection with a new store, some or all of these
      costs can be recaptured through the repayments of the bonds. The payments of
      principal and interest on the bonds are typically tied to sales, property or
      lodging taxes generated from the store and, in some cases, from businesses
      in
      the surrounding area, over periods which range between 20 and 30 years. In
      addition, some of the bonds that we have purchased may be repurchased for par
      value by the governmental entity prior to the maturity date of the bonds.
      However, the governmental entity from which we purchase the bonds is not
      otherwise liable for repayment of principal and interest on the bonds to the
      extent that the associated taxes are insufficient to pay the bonds. In one
      location, the bonds will become subordinated to other bonds associated with
      the
      development if we fail to continue to operate the store over a prescribed
      period. After purchasing the bonds, we typically carry them on our balance
      sheet
      as “available for sale” marketable securities and value them based upon
      management’s projections of the amount of tax revenue that will be generated to
      support principal and interest payments on the bonds. We have limited experience
      in valuing these bonds and, because of the unique features of each project,
      there is no independent market data for valuation of these types of bonds.
      If
      sufficient tax revenue is not generated by the subject properties, we will
      not
      receive scheduled payments and will be unable to realize the full value of
      the
      bonds carried on our balance sheet. As of July 1, 2006 and December 31, 2005,
      we
      carried $108.3 million and $144.5 million, respectively, of economic development
      bonds on our balance sheet.





The
      negotiation of these economic development arrangements has been important to
      our
      destination retail store expansion in the past, and we believe it will continue
      to be an important factor to our ability to execute our destination retail
      store
      expansion strategy because we believe they will allow us to avoid or recapture
      a
      portion of the costs involved with opening a new store. If similar packages
      are
      unavailable in the future or the terms are not as favorable to us, our return
      on
      investment in new stores could be adversely affected.





**Securitization
      of Credit Card Loans**





We
      have
      been, and will continue to be, particularly reliant on funding from
      securitization transactions for our Financial Services segment. A failure to
      renew existing facilities or to add additional capacity on favorable terms
      as it
      becomes necessary could increase our financing costs and potentially limit
      our
      ability to grow our Financial Services business. Unfavorable conditions in
      the
      asset-backed securities markets generally, including the unavailability of
      commercial bank liquidity support or credit enhancements, such as financial
      guaranty insurance, could have a similar effect.


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Furthermore,
      poor performance of our securitized credit card loans, including increased
      delinquencies and credit losses, lower payment rates or a decrease in excess
      spreads below certain thresholds, could result in a downgrade or withdrawal
      of
      the ratings on the outstanding securities issued in our securitization
      transactions, cause early amortization of these securities or result in higher
      required credit enhancement levels. This could jeopardize our ability to
      complete other term securitization transactions on acceptable terms, decrease
      our liquidity and force us to rely on other potentially more expensive funding
      sources, to the extent available, which would decrease our profitability. The
      total amount and maturities for our credit card securitizations as of July
      1,
      2006 were as follows:





**Series**
            **Type**
            **Initial******
              **Amount**
            **Certificate**
              **Rate**
            **Expected
                Final****(Dollars
                in thousands)**Series
                2001-2
            Term
            $250,000
            Floating
            November
                2006Series
                2003-1
            Term
            $300,000
            Fixed
            January
                2008Series
                2003-2
            Variable
            $300,000
            Floating
            July
                2006 (1)Series
                2004-I
            Term
            $75,000
            Fixed
            March
                2009Series
                2004-II
            Term
            $175,000
            Floating
            March
                2009Series
                2005-I
            Term
            $140,000
            Fixed
            October
                2010Series
                2005-I
            Term
            $110,000
            Floating
            October
                2010





(1)
            This
                variable securitization was replaced on July 10, 2006 with a new
                $300,000
                variable funding commercial paper conduit securitization with a floating
                rate and one year term.





**Certificates
      of Deposit**





We
      utilize certificates of deposit to partially finance the operating activities
      of
      our bank. Our bank issues certificates of deposit in a minimum amount of
      $100,000 in various maturities. As of July 1, 2006, we had $107.1 million of
      certificates of deposit outstanding with maturities ranging from July 2006
      to
      April 2016 and with a weighted average effective annual fixed rate of 4.74%.
      Certificate of deposit borrowings are subject to regulatory capital
      requirements.





**Credit
      Facility and other Indebtedness**





We
      are
      party to a credit agreement that provides for a $325 million unsecured revolving
      credit facility and expires on June 30, 2010. During the term of the facility,
      we are required to pay a facility fee, which ranges from 0.100% to 0.250%.
      We
      may elect to take advances at interest rates calculated at U.S. Bank National
      Association’s prime rate (or, if greater, the average rate on the federal funds
      rate in effect for the day plus one-half of one percent) or the Eurodollar
      rate
      of interest plus a margin, which adjusts, based upon certain financial ratios
      achieved and ranges from 0.650% to 1.350%. The credit agreement permits the
      issuance of up to $150 million in letters of credit and standby letters of
      credit, the nominal amount of which are applied against the overall credit
      limit
      available under the revolver. The credit facility may be increased to $450
      million upon our request and with the consent of the banks party to the credit
      agreement. There were no principal borrowings outstanding under the credit
      facility, and $68.4 million outstanding on letters of credit and standby letters
      of credit, at July 1, 2006. During the first six months of fiscal 2006, the
      average principal amount outstanding on the line of credit was $6.5 million,
      and
      the weighted average interest rate on the line of credit was 5.43%. Our total
      remaining borrowing capacity under the credit facility as of July 1, 2006,
      after
      subtracting outstanding letters of credit and standby letters of credit of
      $68.4
      million, was $256.6 million. The credit agreement requires that we comply with
      several financial and other covenants, including requirements that we maintain
      the following financial ratios as set forth in the credit
      agreement:





·
            A
                fixed charge coverage ratio of no less than 1.50 to 1.00 as of the
                last
                day of any fiscal quarter. The fixed charge coverage ratio is defined
                as
                (a) EBITR minus the sum of any cash dividends, tax expenses paid
                in cash,
                in each case for the twelve month period ending on the last day of
                the
                fiscal quarter, and to the extent not included, or previously included,
                in
                the calculation of EBITR, any cash payments with respect to contingent
                obligations, to (b) the sum of interest expense, all required principal
                payments with respect to coverage indebtedness and operating lease
                obligations, in each case for the twelve month period ending on the last
                day of the fiscal quarter. Our credit agreement defines EBITR as
                net
                income before deductions for income taxes, interest expense and operating
                lease obligations.


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·
            A
                cash flow leverage ratio of no more than 3.00 to 1.00 as of the last
                day
                of any fiscal quarter for the twelve month period ending on that
                day. The
                cash flow leverage ratio is defined as adjusted coverage indebtedness
                (average indebtedness of the Company on a consolidated basis for
                the
                preceding four fiscal quarters determined in accordance with GAAP
                excluding: (a) liabilities of WFB, (b) long term deferred compensation,
                (c) long term deferred taxes, (d) any current liabilities (other
                than
                coverage indebtedness), and (e) deferred grant income) to EBITDA.
                Our
                credit agreement defines EBITDA as net income before deductions for
                income
                taxes, interest expense, depreciation and amortization, all as determined
                on a consolidated basis in accordance with GAAP.·
            A
                minimum tangible net worth of no less than $350 million plus 50%
                of
                positive consolidated net income on a cumulative basis for each fiscal
                year beginning with the fiscal year ended 2005 as of the last day
                of any
                fiscal quarter. Tangible net worth is equity less intangible
                assets.





In
      addition, the credit agreement contains cross default provisions to other
      outstanding debt. In the event we fail to comply with these covenants, a default
      is triggered. In the event of default, all outstanding letters of credit and
      all
      principal and outstanding interest would immediately become due and
      payable.





In
      addition, our credit agreement includes a limitation that we may not pay
      dividends to our stockholders in excess of 50% of our prior year's consolidated
      EBITDA and a provision that permits acceleration by the lenders in the event
      there is a "change in control." Based upon this EBITDA calculation for fiscal
      2005, dividends would not be permissible in fiscal 2006 in excess of $80.3
      million. Our credit agreement defines a "change in control" to mean any of
      the
      following circumstances: (a) we cease to own, directly or indirectly, 100%
      of
      the shares of each class of the voting stock or other equity interest of each
      other borrower that has or has had total assets in excess of $10.0 million;
      (b)
      the acquisition or ownership, directly or indirectly, beneficially or of record,
      by any person or group (within the meaning of the Securities Exchange Act of
      1934 and the rules of the Securities and Exchange Commission there under as
      in
      effect on July 15, 2005), of equity interests representing more than 25% of
      the
      aggregate ordinary voting power represented by our issued and outstanding equity
      interests (other than equity interests held by Richard N. Cabela or James W.
      Cabela or a group controlled by Richard N. Cabela or James W. Cabela); or (c)
      occupation of a majority of the seats (other than vacant seats) on our board
      of
      directors by persons who were neither (i) nominated by our board of directors
      nor (ii) appointed by directors so nominated. Our credit agreement provides
      that
      all loans or deposits from us or any of our subsidiaries to our bank cannot
      exceed $75.0 million in the aggregate at any time when loans are outstanding
      under the revolving credit facility.





In
      addition to our credit facility, we have accessed the private placement debt
      markets. On February 27, 2006, we issued $215.0 million in unsecured notes,
      with
      principal payable in full in ten years and interest payments made semiannually
      at a rate of 5.99%. Covenants related to this agreement include the
      following:





·
            A
                consolidated adjusted net worth in an amount not less than the sum
                of (i)
                $350 million plus (ii) 25% of positive consolidated net earnings
                on a
                cumulative basis for each fiscal year beginning with the fiscal year
                ended
                2005.·
            A
                fixed charge coverage ratio (the ratio of consolidated cash flow
                to
                consolidated fixed charges for each period of four consecutive fiscal
                quarters) of no less than 2.00 to 1.00 as of the last day of any
                fiscal
                quarter.·
            A
                consolidated funded debt to total funded capitalization of no more
                than
                60%.





In
      September 2002, we issued $125.0 million in senior unsecured notes bearing
      interest at a fixed rate of 4.95%, repayable in five annual installments of
      $25.0 million beginning on September 5, 2005. The aggregate principal balance
      on
      these notes as of July 1, 2006 was $100.0 million. These notes require that
      we
      comply with several financial and other covenants, including requirements that
      we maintain the following financial ratios as set forth in the note purchase
      agreements:





·
            A
                consolidated adjusted net worth in an amount not less than the sum
                of (i)
                $150 million plus (ii) 25% of positive consolidated net earnings
                on a
                cumulative basis for each fiscal year beginning with the fiscal year
                ended
                2002.·
            A
                fixed charge coverage ratio (the ratio of consolidated cash flow
                to
                consolidated fixed charges for each period of four consecutive fiscal
                quarters) of no less than 2.00 to 1.00 as of the last day of any
                fiscal
                quarter.


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In
      addition, we agreed to a limitation that our subsidiaries, excluding the bank,
      and we may not create, issue, assume, guarantee or otherwise assume funded
      debt
      in excess of 60% of consolidated total capitalization.





As
      of
      July 1, 2006, we were in compliance with all of the covenants under our credit
      agreement and unsecured notes. We may or may not engage in future long-term
      borrowing transactions to fund our operations or our growth plans. Whether
      or
      not we undertake such borrowings will depend on a variety of factors, including
      prevailing interest rates, our retail growth plans, our financial strength,
      alternative sources and costs of funding and our management's assessment of
      potential returns on investment that may be realized from the proceeds of such
      borrowings.





**Off-Balance
      Sheet Arrangements**





*Operating
      leases -* We
      lease
      various items of office equipment and buildings, all of which are recorded
      in
      our selling, general and administrative expenses.





*Credit
      Card Limits -* The
      bank
      bears off-balance sheet risk in the normal course of its business. One form
      of
      this risk is through the bank's commitment to extend credit to cardholders
      up to
      the maximum amount of their credit limits. The aggregate of such potential
      funding requirements totaled $8.6 billion and $7.5 billion as of July 1, 2006
      and December 31, 2005, respectively, which amounts were in addition to existing
      balances cardholders had at such dates. These funding obligations are not
      included on our consolidated balance sheet. While the bank has not experienced,
      and does not anticipate that it will experience, a significant draw down of
      unfunded credit lines by customers, a significant draw down would create a
      cash
      need at the bank which likely could not be met by our available cash and funding
      sources. The bank has the right to reduce or cancel these available lines of
      credit at any time.





*Securitizations
      -* All
      of
      the bank's securitization transactions have been accounted for as sale
      transactions and the credit card loans relating to those pools of assets are
      not
      reflected on our consolidated balance sheet.





**Seasonality**





Our
      business is seasonal in nature and interim results may not be indicative of
      results for the full year. Due to holiday buying patterns, and hunting and
      fishing season openings across the country, merchandise sales are typically
      higher in the third and fourth quarters than in the first and second quarters.
      We anticipate our sales will continue to be seasonal in nature.





**Item
      3.**   **Quantitative
      and Qualitative Disclosures About Market Risk.**





We
      are
      exposed to interest rate risk through our bank's operations and, to a lesser
      extent, through our merchandising operations. We also are exposed to foreign
      currency risk through our merchandising operations.





**Financial
      Services Interest Rate Risk**





Interest
      rate risk refers to changes in earnings or the net present value of assets
      and
      off-balance sheet positions less liabilities (termed "economic value of equity")
      due to interest rate changes. To the extent that interest income collected
      on
      managed loans and interest expense do not respond equally to changes in interest
      rates, or that rates do not change uniformly, securitization earnings and
      economic value of equity could be affected. Our net interest income on managed
      credit card loans is affected primarily by changes in short term interest rate
      indices such as LIBOR and prime rate. The variable rate credit card loans are
      indexed to the prime rate. Securitization certificates and notes are indexed
      to
      LIBOR-based rates of interest and are periodically repriced. Certificate of
      deposits are priced at the current prevailing market rate at the time of
      issuance. We manage and mitigate our interest rate sensitivity through several
      techniques, but primarily by modifying the contract terms with our cardholders,
      including interest rates charged, in response to changing market conditions.
      Additional techniques we use include managing the maturity, repricing and
      distribution of assets and liabilities by issuing fixed rate securitization
      certificates and notes and by entering into interest rate swaps to hedge our
      fixed rate exposure from interest strips. ** The
      table
      below shows the mix of account balances at each interest rate at each period
      presented.


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**July
                1,**
              **2006**
            **December
                31,**
              **2005**
            **July
                2,**
              **2005***As
                a percentage of total balances outstanding*Balances
                carrying interest rate based upon the national prime lending
                rate.
            60.1%
            58.0%
            59.6%Balances
                carrying an interest rate of 9.99%.
            2.4%
            3.0%
            2.3%Balances
                carrying an interest rate of 0.00%
            0.1%
            0.1%
            0.0%Balances
                not carrying interest because their previous month's balance was
                paid in
                full.
            37.4%
            38.9%
            38.1%





Charges
      on the credit cards issued by our Financial Services segment are priced at
      a
      margin over the defined national prime lending rate, subject to certain interest
      rate floors, except purchases of Cabela’s merchandise, certain other charges and
      balance transfer programs, which are financed at a fixed interest rate of 9.99%.
      No interest is charged if the account is paid in full within 20 days of the
      billing cycle.





Management
      has performed an interest rate gap analysis to measure the effects of the timing
      of the repricing of our interest sensitive assets and liabilities. Based on
      this
      analysis, we believe that if there had been an immediate 100 basis point, or
      1.0%, increase in the market rates for which our assets and liabilities are
      indexed during the next twelve months, our projected operating results would
      not
      be materially affected. Management also has performed a projected interest
      rate
      gap analysis for the same future twelve month period to measure the effects
      of a
      change in the spread between the prime interest rate and the LIBOR interest
      rate. Based on this analysis, we believe that an immediate 50 basis point,
      or
      0.5%, decrease or increase in this spread would cause a decrease or increase
      of
      $4.3 million to $4.4 million on the projected pre-tax income of our Financial
      Services segment over the next twelve months, which could have a material effect
      on our operating results.





**Merchandising
      Interest Rate Risk**





One
      of
      our economic development bond agreements is priced at a variable interest rate
      with its base rate tied to prime rate and adjusted annually in November.
      Portions of this bond were retired in June 2006 and the interest rates were
      renegotiated. If the prime rate rose 2%, our results from operations and cash
      flows could be materially affected.





The
      interest payable on our line of credit is based on variable interest rates
      and
      therefore affected by changes in market interest rates. If interest rates on
      existing variable rate debt rose 1%, our results from operations and cash flows
      would not be materially affected.





**Foreign
      Currency Risk**





We
      purchase a significant amount of inventory from vendors outside of the U.S.
      in
      transactions that are primarily U.S. dollar transactions. A small percentage
      of
      our international purchase transactions are in currencies other than the U.S.
      dollar. Any currency risks related to these transactions are immaterial to
      us. A
      decline in the relative value of the U.S. dollar to other foreign currencies
      could, however, lead to increased merchandise costs.





**Item
      4.**   **Controls
      and Procedures** .




We
        maintain disclosure controls and procedures (as defined in Rule 13a-15(e)
        under
        the Securities Exchange Act of 1934 (the “Exchange Act”)) designed to ensure
        that information required to be disclosed in reports filed under the Exchange
        Act is recorded, processed, summarized and reported within specified time
        periods. Disclosure controls and procedures include, without limitation,
        controls and procedures designed to ensure that information required to be
        disclosed by us in the reports that we file or submit under the Exchange
        Act is
        accumulated and communicated to management, including our Chief Executive
        Officer and Chief Financial Officer, or persons performing similar functions,
        as
        appropriate to allow timely decisions regarding required disclosure. As of
        the
        end of the period covered by this report, our Chief Executive Officer and
        Chief
        Financial Officer evaluated, with the participation of our management, the
        effectiveness of our disclosure controls and procedures. Based on management’s
        evaluation, our Chief Executive Officer and Chief Financial Officer each
        concluded that our disclosure controls and procedures were not effective
        as of
        July 1, 2006 solely because of a material weakness in internal control over
        financial reporting with respect to the accounting for and disclosure of
        short-term investments. Specifically, effective controls were not designed
        and
        in place to ensure that (i) short-term investments were properly excluded
        from
        cash and cash equivalents on the balance sheet, and (ii) the corresponding
        presentation of the purchases and sales of short-term investments were properly
        reflected in the investing section of the statement of cash flows. As a result,
        material adjustments were necessary to present the condensed consolidated
        financial statements in accordance with generally accepted accounting
        principles.
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In
        order
        to remediate this material weakness in our internal control over financial
        reporting, management is in the process of designing, implementing and
        continuing to enhance controls to ensure the proper presentation and disclosure
        of short-term investments on our consolidated balance sheets and statements
        of
        cash flows. We expect to remediate this material weakness in our internal
        control over financial reporting by the end of fiscal 2006.
 
 Change
        in Internal Control Over Financial Reporting
 
 During
        the second quarter of fiscal 2006, the Company completed the implementation
        of a
        new warehouse management system in its distribution centers for tracking
        inventory in a multi-channel environment. Process level controls related
        to
        maintaining our inventory at the unit level were impacted by this change.
        There
        were no other changes in our internal control over financial reporting that
        occurred during the quarter ended July 1, 2006 that materially affected,
        or are
        reasonably likely to materially affect, our internal control over financial
        reporting.


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**PART
      II - OTHER INFORMATION**





**Item
      1** **.**   **Legal
      Proceedings.**





We
      are
      party to certain lawsuits in the ordinary course of our business. The subject
      matter of these proceedings primarily includes commercial disputes, employment
      issues and product liability lawsuits. We do not believe that the ultimate
      dispositions of these proceedings, individually or in the aggregate, will have
      a
      material adverse effect on our consolidated financial position, results of
      operations or liquidity .





**Item
      1****A** **.** **Risk
      Factors.**





There
      have been no material changes to the risk factors disclosed in the “Risk
      Factors” section of our Annual Report on Form 10-K for the fiscal year ended
      December 31, 2005.




**Item
      2.**   **Unregistered
      Sales of Equity Securities and Use of Proceeds.**





Not
      applicable.





**Item
      3.**   **Defaults
      Upon Senior Securities.**





Not
      applicable.





**Item
      4.**   **Submission
      of Matters to Vote of Security Holders.**





The
      Annual Meeting of Shareholders of Cabela’s Incorporated was held on May 10,
      2006. The matters voted upon at the meeting and the votes cast with respect
      to
      such matters are as follows:





1.
            Election
                of four Class II directors.





FOR
            WITHHELDTheodore
                M. Armstrong
            51,713,904
            723,224Richard
                N. Cabela
            50,072,890
            2,364,238Dennis
                Highby
            51,722,167
            714,961Stephen
                P. Murray
            51,713,806
            723,322







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2.
            Approval
                of management’s proposal to declassify the Company’s Board of
                Directors.




FOR
            AGAINST
            ABSTAIN
            BROKER
              NON-VOTES51,446,916
            757,270
            232,942
            0





3.
            Ratification
                of appointment of Deloitte & Touche LLP as the Company’s independent
                registered public accounting firm for fiscal 2006.




FOR
            AGAINST
            ABSTAIN
            BROKER
              NON-VOTES51,619,162
            642,311
            175,655
            0








**Item
      5.**   **Other
      Information.**





Not
      applicable.





**Item
      6.**   **Exhibits.**





(a)
            Exhibits.




Exhibit
              Number
            Description31.1
            Certification
                of CEO Pursuant to Rule 13a-14(a) under the Exchange
                Act31.2
            Certification
                of CFO Pursuant to Rule 13a-14(a) under the Exchange
                Act32
            Certifications
                Pursuant to 18 U.S.C. Section 1350





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SIGNATURES





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








CABELA'S
                INCORPORATEDDated:
                August 10, 2006
            By:
            /s/
                Dennis HighbyDennis
                HighbyPresident
                and Chief Executive OfficerDated:
                August 10, 2006
            By:
            /s/
                Ralph W. CastnerRalph
                W. CastnerVice
                President and Chief Financial
                Officer











41
 Table
          of Contents





EXHIBIT
      INDEX





Exhibit
              Number
            Description31.1
            Certification
                of CEO Pursuant to Rule 13a-14(a) under the Exchange
                Act31.2
            Certification
                of CFO Pursuant to Rule 13a-14(a) under the Exchange
                Act32
            Certifications
                Pursuant to 18 U.S.C. Section 1350











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