The following discussion of financial condition and results of operations should be read in conjunction with (i) our Consolidated Financial Statements, and notes thereto, as set forth in this Quarterly Report on Form 10-Q and (ii) our Annual Report on Form 10-K for the year ended June 30, 2008.

Forward-Looking Statements

Management's discussion and analysis of financial condition and results of operations and other sections of this Quarterly Report contain forward-looking statements relating to our future results. Such forward-looking statements are identified by use of forward-looking words such as "anticipates", "believes", "plans", "estimates", "expects", and "intends" or words or phrases of similar expression. These forward-looking statements are subject to management decisions and various assumptions, risks and uncertainties, including, but not limited to:
the effects of terrorist attacks or conflicts or wars involving the United States or its allies or trading partners; the effects of labor strikes; weather conditions that may affect sales; volatility in fuel, utility, transportation and security costs; changes in global or regional political or economic conditions, including changes in governmental and central bank policies; changes in business conditions in the furniture industry, including changes in consumer spending patterns and demand for home furnishings; effects of our brand awareness and marketing programs, including changes in demand for our existing and new products; our ability to locate new design center sites and/or negotiate favorable lease terms for additional design centers or for the expansion of existing design centers; competitive factors, including changes in products or marketing efforts of others; pricing pressures; fluctuations in interest rates and the cost, availability and quality of raw materials; those matters discussed in Items 1A and 7A of our Annual Report on Form 10-K for the year ended June 30, 2008 and in our SEC filings; and our future decisions. Accordingly, actual circumstances and results could differ materially from those contemplated by the forward-looking statements.

Critical Accounting Policies

There have been no material changes with respect to the Company's critical accounting policies from those disclosed in its 2008 Annual Report on Form 10-K filed with the SEC on August 22, 2008.

Results of Operations

Our revenues are comprised of (i) wholesale sales to independently owned and Company-owned retail design centers and (ii) retail sales of Company-owned design centers. See Note 14 to our Consolidated Financial Statements for the three months ended September 30, 2008 and 2007.

The components of consolidated revenue and operating income were as follows (in millions):

                                       Three Months Ended
                                         September 30,
                                        2008         2007
Revenue:
Wholesale segment                    $    121.3    $  156.3
Retail segment                            155.9       182.8
Elimination of inter-company sales        (71.3 )     (90.4 )
Consolidated Revenue                 $    205.8    $  248.7

                                            Three Months Ended
                                              September 30,
                                            2008          2007
Operating Income:
Wholesale segment (1)                    $     11.9    $     26.8
Retail segment (2)                             (3.1 )         0.9
Adjustment of inter-company profit (3)          3.4           0.1
Consolidated Operating Income            $     12.2    $     27.8

Quarter Ended September 30, 2008 Compared to Quarter Ended September 30, 2007

Consolidated revenue for the three months ended September 30, 2008 decreased by $42.9 million, or 17.2%, to $205.8 million, from $248.7 million for the three months ended September 30, 2007. During the quarter, sales were negatively affected by a weak retail environment for home furnishings which we believe is due to a continued weakening of consumer confidence with current economic conditions in the U.S. and abroad. We believe these factors were partially offset by (i) our ongoing efforts to reposition the retail network, (ii) new product introductions, and (iii) an increase in the continued use of national television as an advertising medium. Net sales for the period largely reflect the delivery of product associated with booked orders and backlog existing as of the end of the preceding quarter. The Company's sales decrease is primarily the result of lower volume, not lower prices. By maintaining our everyday best price policy, we believe we have avoided the cyclicality associated with discount sales and preserved decent profitability during these challenging times.

Wholesale revenue for the first quarter of fiscal 2008 decreased by $35.0 million, or 22.4%, to $121.3 million from $156.3 million in the prior year comparable period. The quarter-over-quarter decrease was primarily attributable to a decline in the incoming order rate due to a continued soft retail environment for home furnishings noted throughout the current period. In addition, there were 20 fewer independent retail design centers, which decreased to 132 from 152, including eight locations transferred in to the company's Retail division during the year. There was one more shipping day this quarter.

Retail revenue from Ethan Allen-owned design centers for the three months ended September 30, 2008 decreased by $26.9 million, or 14.7%, to $155.9 million from $182.8 million for the three months ended September 30, 2007. We believe the decrease in retail sales by Ethan Allen-owned design centers is due to the same soft market conditions experienced by the wholesale segment, as evidenced by a 19% decrease in comparable store sales. Partially offsetting this was a $4.0 million increase in new/closed store sales, and a net increase in the number of Ethan Allen-owned design centers to 160 as of September 30, 2008 as compared to 159 as of September 30, 2007. During that twelve month period, we acquired eight design centers from independent retailers and opened fourteen design centers (nine of which were relocations), and closed twelve design centers.

Comparable design centers are those which have been operating for at least 15 months. Minimal net sales, derived from the delivery of customer ordered product, are generated during the first three months of operations of newly opened (including relocated) design centers. Design centers acquired by us from independent retailers are included in comparable design centers sales in their 13th full month of Ethan Allen-owned operations.

Quarter-over-quarter, written business of Ethan Allen-owned design centers decreased 24.3% while comparable design centers written business decreased 27.7%. Over that same period, wholesale orders decreased 25.6%. Both

retail and wholesale written business reflects the softer retail environment for home furnishings noted throughout the period. We believe this has been offset, to some degree, by (i) our continued efforts to reposition the retail network,
(ii) product introductions, and (iii) an increase in the continued use of national television as an advertising medium. During the quarter, we also believe we benefitted from the continued access to credit for our clients through our third party consumer credit program.

We have made considerable investment within the retail network to strengthen the level of service, professionalism, interior design competence, efficiency, and effectiveness of the retail design center personnel. The implementation of the "team" concept has resulted in the development of over 280 interior design teams. We believe that this team structure will help us continue to improve the customer service experience.

Gross profit decreased during the quarter to $111.9 million from $133.5 million in the prior year comparable quarter. The $21.5 million, or 16.1%, decrease in gross profit was primarily attributable to (i) the reduction in net sales of 17.2%, with an overall decrease in shipments in both market segments, and
(ii) lower margin percentages within the wholesale segment due to under absorbing of plant overhead costs on the lower production volume. These factors were partially offset by (i) an improved margin percentage in our retail segment and (ii) a favorable shift in sales mix with retail sales representing a higher proportionate share of total sales in the current quarter (76%) compared to the prior year period (73%). Consolidated gross margin increased to 54.4% for the first quarter of fiscal 2009 from 53.7% in the prior year quarter as a result, primarily, of the factors set forth above.

Operating profit, the elements of which are discussed in greater detail below, was impacted by the following items during the three months ended September 30, 2008 and 2007:

On January 10, 2008, we announced a plan to consolidate the operations of certain company owned retail design centers and retail service centers. In connection with this initiative, we have permanently ceased operations at eleven design centers and six retail service centers which, for the most part, were consolidated into other existing operations. We also implemented our design team concept across the Retail division at the end of fiscal 2008. These decisions resulted in a reduction in headcount of approximately 400 employees, with the reduction in headcount occurring mostly during the third and fourth quarters of fiscal 2008. Additionally, other actions taken during fiscal 2008 were not included in the restructuring plan. Altogether, there were more than 500 fewer associates in our Retail business by the end of fiscal 2008. In the first quarter of fiscal 2009, a $1.6 million restructuring and impairment net gain was recorded. Of this amount, $4.2 million was a realized gain on the sale of property classified as held for sale and was partially offset by $2.2 million in lease termination costs and adjustments for expected charges on leased properties no longer being used. Since the plan was announced, we have recorded pre-tax restructuring and impairment charges totaling $4.8 million, including $0.9 million in employee severance and other payroll and benefit costs, $5.3 million in lease termination and other exit costs, and a benefit of $1.4 million on long-lived assets. We do not anticipate any additional new charges related to this retail restructuring, however, the estimated present value of future lease payments with terms ranging from less than one to seven years, and one ground lease with 25 years remaining are included in the balance at September 30, 2008 and contain estimates that will likely require adjustment in the future. In addition to the retail charges, $0.4 million was recorded in the quarter to update the fair value of a wholesale plant site held for sale.

Operating expenses decreased $5.9 million, or 5.6%, to $99.7 million, or 48.5% of sales, in the current quarter from $105.7 million, or 42.5% of sales, in the prior year quarter. Decreases in salary related costs were experienced due to the reduced number of employees. Advertising expenses were down $2.7 million despite a 32% increase in national TV advertising. These reductions were partly offset by an incremental charge of $4.6 million due to the implementation of the team concept in the retail division whereby design associates are paid a base salary with an opportunity to earn a bonus. This caused a temporary overlap of expenses.

Consolidated operating income for the three month period ended September 30, 2008 totaled $12.2 million, or 5.9% of sales, as compared to $27.8 million, or 11.2% of sales, for the three months ended September 30, 2007. This

decrease of $15.6 million is due to a decrease in gross profit mostly due to reduced sales, partly offset by a decrease in period over period operating expenses, both of which were discussed previously.

Wholesale operating income for the three months ended September 30, 2008 totaled $11.9 million, or 9.8% of sales, as compared to $26.8 million, or 17.1% of sales, in the prior year comparable quarter. The decrease of $14.9 million was primarily attributable to (i) a decrease in sales volume, (ii) higher unabsorbed costs in our manufacturing plants due to lower production volumes.

Retail operating income decreased $4.0 million to a loss of $3.1 million, or 2.0% of sales, for the first quarter of fiscal 2009 from income of $0.9 million, or 0.5% of sales, for the first quarter of fiscal 2008. The decrease in retail operating income generated by Ethan Allen-owned design centers was primarily due to reduced sales attributed to the weak retail environment for home furnishings.

Interest and other miscellaneous income, net decreased $1.8 million from the prior year comparable quarter. The decrease was due, primarily to a decrease in investment income resulting from lower cash and cash equivalent balances and lower rates of interest during the current period, and by gains recorded in connection with the sale of selected real estate assets in the prior year.

Interest and other related financing costs amounted to $2.9 million in both the current and prior year periods. This amount consists, primarily, of interest expense incurred in connection with our issuance of senior unsecured debt in September 2005.

Income tax expense for the three months ended September 30, 2008 totaled $3.0 million as compared to $10.3 million for the three months ended September 30, 2007. Our effective tax rate for the current quarter was 28.7% compared to 37.0% in the prior year quarter. The reduction in effective tax rate for the current quarter was primarily due to a one time adjustment of $0.7 million made during the current quarter.

Net income for the three months ended September 30, 2008, was $7.4 million as compared to $17.5 million in the prior year comparable period. Net income per diluted share totaled $0.26 in the current quarter and $0.57 in the prior year quarter.

Liquidity and Capital Resources

At September 30, 2008, we held cash and cash equivalents of $79.9 million. Our principal sources of liquidity include cash and cash equivalents, cash flow from operations, and borrowings.

Global capital markets have recently been disrupted and volatile. The cost and availability of funding has been and may continue to be adversely affected by illiquid credit markets. Some lenders have reduced or, in some cases, ceased to provide funding to borrowers. However, our lenders have not indicated to us that they would not continue to provide funding to us or not honor or be able to fully perform their obligations under the credit facility. Continued turbulence in the financial markets, however, could adversely affect the cost and availability of financing to us in the future.

We maintain a $200 million revolving credit facility with a group of lenders that expires in July 2010. At September 30, 2008, we had no revolving loans, and $12.5 million in trade and standby letters of credit outstanding under the agreement. This facility includes an accordion feature which provides for an additional $100.0 million of liquidity, if needed, as well as sub-facilities for trade and standby letters of credit of $100.0 million and swingline loans of $5.0 million. The credit facility contains various covenants which may limit our ability to incur debt; engage in mergers and consolidations; make restricted payments; sell certain assets; make investments; and issue stock. We are also required to meet certain financial covenants including a fixed charge coverage ratio, which shall not be less than 3.00 to 1 for any period of four consecutive fiscal quarters ended on or after June 30, 2005, and a leverage ratio,

which shall not be greater than 3.00 to 1 at any time. As of September 30, 2008, we had satisfactorily complied with these covenants. If unfavorable business conditions persist, we may not comply with one or more of these covenants in the future. To address this possibility, we are discussing with our group of lenders possible amendments or changes to the facility. As noted above, our lenders have not indicated to us that they would not continue to provide funding to us under the credit facility. It is possible, however, that any amendments to the credit facility could result in a higher cost of borrowing for us. We believe that we will continue to have adequate liquidity to meet our current needs.

In addition, on September 27, 2005, we completed a private offering of $200.0 million in ten-year senior unsecured notes due 2015 (the "Senior Notes"). The Senior Notes were offered by Ethan Allen Global, Inc. ("Global"), a wholly-owned subsidiary of the Company, and have an annual coupon rate of 5.375%. We have used the net proceeds of $198.4 million to expand our retail network, invest in our manufacturing and logistics operations, and for other general corporate purposes.

A summary of net cash provided by (used in) operating, investing, and financing activities for the three month periods ended September 30, 2008 and 2007 is provided below (in millions):

                                                              Three Months Ended
                                                                September 30,
                                                               2008         2007
Operating Activities
Net income plus depreciation and amortization               $     13.7    $   23.4
Working capital                                                    9.0        11.2
Excess tax benefits from share-based payment arrangements            -        (2.1 )
Other (non-cash items, long-term assets and liabilities)          (4.6 )       9.0
Total provided by operating activities                      $     18.1    $   41.5

Investing Activities
Capital expenditures                                        $    (11.1 )  $  (12.5 )
Acquisitions                                                      (0.4 )      (0.7 )
Asset sales                                                        5.7         5.0
Other                                                             (0.2 )         -
Total provided by (used in) investing activities            $     (6.0 )  $   (8.2 )

Financing Activities
Issuances of common stock                                            -         0.3
Purchases of company stock                                           -       (44.1 )
Payment of dividends                                              (6.3 )      (6.2 )
Excess tax benefits from share-based payment arrangements            -         2.1
Total provided by (used in) financing activities            $     (6.3 )  $  (47.9 )

Operating Activities

As compared to the same period in fiscal year 2008, cash provided by operating activities decreased $23.4 million, primarily due to a $10.1 million decrease in net income, and a lower year to date benefit from a decrease in working capital (accounts receivable, inventories, prepaid and other current assets, customer deposits, payables, and accrued expenses and other current liabilities) largely arising from a decrease in customer deposits liability.

Investing Activities

As compared to the same period in fiscal year 2008, cash used in investing activities decreased $2.2 million during the three months ended September 30, 2008 due, primarily, to a reduction in cash utilized to fund capital expenditures and acquisitions. We anticipate that cash from operations will be sufficient to fund future capital expenditures.

Financing Activities

As compared to the same period in fiscal year 2008, cash used in financing activities decreased $41.6 million during the three months ended September 30, 2008, primarily as a result of a decrease in payments for the acquisition of treasury stock. On July 22, 2008, we declared a dividend of $0.25 per common share, payable on October 27, 2008, to shareholders of record as of October 10, 2008. We expect to continue to declare quarterly dividends for the foreseeable future.

As of September 30, 2008, our outstanding debt totaled $203.0 million, the current and long-term portions of which amounted to less than $0.1 million and $203.0 million, respectively. The aggregate scheduled maturities of long-term debt for each of the next five fiscal years are: less than $0.1 million in each of fiscal 2009 and 2010, $3.9 million in fiscal 2011 and less than $0.1 million in fiscal 2012. The balance of our long-term debt ($199.1 million) matures in fiscal years 2013 and thereafter.

We had no revolving loans outstanding under the credit facility as of September 30, 2008, and stand-by letters of credit outstanding under the facility at that date totaled $12.5 million. Remaining available borrowing capacity under the facility was $187.5 million at September 30, 2008.

There has been no material change to the amount or timing of cash payments related to our outstanding contractual obligations as set forth in Part II, Item
7 - Management's Discussion and Analysis of Financial Condition and Results of Operation of our Annual Report on Form 10-K for the year ended June 30, 2008 as filed with the Securities and Exchange Commission on August 22, 2008.

We believe that our cash flow from operations, together with our other available sources of liquidity, will be adequate to make all required payments of principal and interest on our debt, to permit anticipated capital expenditures, and to fund working capital and other cash requirements. As of September 30, 2008, we had working capital of $168.5 million and a current ratio of 2.23 to 1.

In addition to using available cash to fund changes in working capital, necessary capital expenditures, acquisition activity, the repayment of debt, and the payment of dividends, we have been authorized by our Board of Directors to repurchase our common stock, from time to time, either directly or through agents, in the open market at prices and on terms satisfactory to us. All of our common stock repurchases and retirements are recorded as treasury stock and result in a reduction of shareholders' equity.

During the three months ended September 30, 2008 and 2007, we repurchased and/or retired the following shares of our common stock:

                                    Three Months Ended
                                       September 30
                                   2008      2007(1)(2)
Common shares repurchased              -       1,144,000
Cost to repurchase common shares       -    $ 38,268,917
Average price per share                -    $      33.45

For each of the periods presented above, we funded our purchases of treasury stock with existing cash on hand and cash generated through current period operations. On November 13, 2007, the Board of Directors increased the then

remaining share repurchase authorization to 2,000,000 shares. As of September 30, 2008, we had a remaining Board authorization to repurchase 1,567,669 shares.

Off-Balance Sheet Arrangements and Other Commitments, Contingencies and Contractual Obligations

Except as indicated below, we do not utilize or employ any off-balance sheet arrangements, including special-purpose entities, in operating our business. As such, we do not maintain any (i) retained or contingent interests,
(ii) derivative instruments (other than as specified below), or (iii) variable interests which could serve as a source of potential risk to our future liquidity, capital resources and results of operations.

In connection with the issuance of the Senior Notes, Global, in July and August 2005, entered into six separate forward contracts to hedge the risk-free interest rate associated with $108.0 million of the related debt in order to mitigate the negative impact of interest rate fluctuations on earnings, cash flows and equity. The forward contracts were entered into with a major banking institution thereby mitigating the risk of credit loss. Upon issuance of the Senior Notes in September 2005, the related forward contracts were settled. At the present time we have no current plans to engage in further hedging activities.

We may, from time to time in the ordinary course of business, provide guarantees on behalf of selected affiliated entities or become contractually obligated to perform in accordance with the terms and conditions of certain business agreements. The nature and extent of these guarantees and obligations may vary based on our underlying relationship with the benefiting party and the business purpose for which the guarantee or obligation is being provided. Details of those arrangements for which we act as guarantor or obligor are provided below.

Retailer-Related Guarantees

Independent Retailer Credit Facility

We have obligated ourselves, on behalf of one of our independent retailers, with respect to a $1.5 million credit facility (the "Credit Facility") comprised of a $1.1 million revolving line of credit and a $0.4 million term loan. This obligation requires us, in the event of the retailer's default under the Credit Facility, to repurchase the retailer's inventory, applying such purchase price to the retailer's outstanding indebtedness under the Credit Facility. Our obligation remains in effect for the life of the term loan. The original agreement, which expired in April 2008, was replaced with a new agreement with the same terms and conditions which expires in December 2008. The maximum potential amount of future payments (undiscounted) that we could be required to make under this obligation is limited to the amount outstanding under the Credit Facility at the time of default (subject to pre-determined lending limits based . . .