Except for historical information contained herein, this "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, as amended. These statements involve known and unknown risks and uncertainties that may cause our actual results or outcomes to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause such differences include, but are not limited to risk factors, including those under the caption "Risk Factors" herein, such as uncertainty as to the outcome of the litigation concerning us, factors affecting the furniture industry generally, such as the competitive and market environment, continued volatility and further deterioration of the capital markets; the commercial and consumer credit environment, and other matters of national, regional and global scale, including those of a political, economic, business and competitive nature which may affect our suppliers or the related company. In addition to statements, which explicitly describe such risks and uncertainties, investors are urged to consider statements labeled with the terms "believes," "belief," "expects," "intends," "plans" or "anticipates" to be uncertain and forward-looking.

Overview

We are the owner and licensor of sofabed specialty retail stores that specialize in the sale of a complete line of sofa beds and companion pieces such as loveseats, chairs and recliners. We also have specialty retail stores that specialize in the sale of leather furniture. In addition, we have stores that sell both fabric and leather furniture. During May 2008 and May 2007, we opened full line home furniture retail stores that sell products and accessories of Ashley Homestores, Ltd. We have determined that we have two reportable segments organized by product line: Jennifer - sofabed specialty retail stores - and Ashley - big box, full line home furniture retail stores.

Results of Operations

The following table sets forth, for the periods indicated, the percentage of total revenue from continuing operations contributed by each category:

                                         August 30,      August 25,      August 26,
                                            2008            2007            2006
     Merchandise Sales - net                 79.2 %          78.7 %          80.5 %
     Home Delivery Income                    10.8 %          10.3 %           8.9 %
     Charges to the Related Company           4.1 %           4.5 %           3.8 %
          Net Sales                          94.1 %          93.5 %          93.2 %

     Revenue from Service Contracts           5.9 %           6.5 %           6.8 %

        Total Revenue                       100.0 %         100.0 %         100.0 %

Fiscal year ended August 30, 2008 compared to fiscal year ended August 25, 2007

Revenue

Net sales from continuing operations were $113,851,000 and $125,300,000 for the fiscal years ended August 30, 2008 and August 25, 2007, respectively. Net sales from continuing operations decreased by 9.1%, or $11,449,000 for the fiscal year ended August 30, 2008 compared to the fiscal year ended August 25, 2007. The decrease in net sales is attributable to a decline in overall demand within the furniture industry sector due to a poor housing market and an overall weak U.S economy.

Revenue from service contracts from continuing operations decreased by 17.8% for the fiscal year ended August 30, 2008 to $7,114,000 from $8,652,000 for the fiscal year ended August 25, 2007. The decrease was primarily attributable to fewer merchandise sales during the fiscal year ended August 30, 2008, compared to fiscal year ended August 25, 2007.

Same store sales from continuing operations for the Jennifer segment (sales at those stores open for the entire current and prior comparable periods) decreased by 16.8% for the fiscal year ended August 30, 2008 as compared to August 25, 2007. Not included in same store sales are two stores that combined through an expansion during the thirteen weeks ended May 24, 2008. These two combined stores did not have a material change in square footage. Total square footage leased for the Jennifer segment decreased approximately 1.21% during the fiscal year ended August 30, 2008, as a result of three closed stores and one relocated store. We increased our Ashley segment square footage by 20,000 square feet or 33.3%.

Cost of sales, as a percentage of revenue for the fiscal year ended August 30, 2008, was 70.7 % compared to 68.7 % for the same period ended August 25, 2007. Cost of sales from continuing operations decreased to $85,503,000 for the fiscal year ended August 30, 2008, from $92,045,000 for the fiscal year ended August 25, 2007.

Cost of sales is comprised of five categories: Cost of merchandise, occupancy costs, warehouse expenses, home delivery expenses and warranty costs.

The increase in the percentage of cost of sales is due to warehouse expenses and occupancy costs being spread over a decreased revenue base. In addition, cost of sales for the fiscal year ended August 30, 2008 includes an increase of $662,000 in occupancy costs related to our new Ashley operating segment.

Selling, general and administrative expenses

Selling, general and administrative expenses from continuing operations were $38,009,000 (31.4% as a percentage of revenue) and $37,452,000 (28.0% as a percentage of revenue) during the fiscal year ended August 30, 2008 and August 25, 2007, respectively.

Selling, general and administrative expenses are comprised of four categories: Compensation, advertising, finance fees and other administrative costs. Compensation is primarily comprised of compensation of executives, finance, customer service, information systems, merchandising, sales associates and sales management. Advertising expenses are primarily comprised of newspaper/magazines, circulars, television and other soft costs. Finance fees are comprised of fees paid to credit card and third party finance companies. Administrative expenses are comprised of professional fees, utilities, insurance, supplies, permits and licenses, property taxes, repairs and maintenance, and other general administrative costs.

Compensation expense increased $102,000 during the fiscal year ended August 30, 2008 compared to the same period ended August 25, 2007. Compensation expense decreased by $635,000 for the Jennifer segment, increased $1,000,000 for the Ashley segment and decreased by $263,000 for corporate. The decrease in the Jennifer segment was primarily attributable to lower sales volume, which resulted in lower compensation expense to salespersons in the form of commissions and bonuses. The increase for the Ashley segment is largely due to 53 weeks of compensation expense during fiscal 2008 compared to 13 weeks in fiscal 2007 and the opening of a second store during May 2008. Corporate compensation decreased due to no executive bonuses for fiscal 2008.

Advertising expense increased $765,000 during the fiscal year ended August 30, 2008 compared to the same period ended August 25, 2007. Advertising expense decreased by $125,000 for the Jennifer segment and increased by $890,000 for the Ashley segment. The increase from the Ashley segment is primarily attributable to 53 weeks of costs during fiscal 2008 compared to 13 weeks in fiscal 2007 and the opening of a second store during May 2008. The decrease from the Jennifer segment is largely attributable to a decrease in regional advertising costs in Ohio resulting from the closing of stores in that territory.

Finance fees decreased $193,000 during the fiscal year ended August 30, 2008 compared to the same period ended August 25, 2007. The decrease corresponds to the decrease in net sales from continuing operations.

Other administrative costs decreased $117,000 during the fiscal year ended August 30, 2008 compared to the same period ended August 25, 2007.

Selling, general and administrative expenses for the fiscal year ended August 30, 2008 includes an increase of $2,232,000, consisting of compensation, advertising, finance fees and other administrative costs related to our Ashley operating segment, a decrease of $1,222,000 for the Jennifer segment and a decrease of $453,000 related to corporate activities.

Interest Income

Interest income decreased by $215,000 to $521,000 for the fiscal year ended August 30, 2008, as compared to $736,000 during the prior year. The decrease is due principally to less cash available for investing purposes and lower market interest rates during the current fiscal year.

Income Tax Expense

We reported income tax expense of $10,000 and $124,000 in fiscal 2008 and 2007, respectively. Current minimum taxes are included in selling, general and administrative expenses for 2008 and there were no federal income taxes due to a net operating loss. The expense for 2007 consists principally of current state income taxes since federal income taxes were substantially eliminated by utilization of net operating loss carry forwards.

The (loss) income from continuing operations was ($3,060,000) and $4,151,000 for the fiscal year ended August 30, 2008 and August 25, 2007, respectively. The
(loss) income from continuing operations for fiscal 2008 and 2007 includes income (loss) of $903,000 and ($679,000), respectively, related to our Ashley segment.

During fiscal 2008, we closed ten stores of which six were reported as discontinued operations. During fiscal 2007, we closed eight stores of which two were reported as discontinued operations. The operating results of these eight stores were reported as discontinued operations for fiscal 2008 and 2007. Loss from discontinued operations amounted to $269,000 and $180,000 for the fiscal year ended August 30, 2008 and August 25, 2007, respectively.

Fiscal year ended August 25, 2007 compared to fiscal year ended August 26, 2006:

Revenue

Net sales from continuing operations were $125,300,000 and $127,875,000 for the fiscal years ended August 25, 2007 and August 26, 2006, respectively. Net sales from continuing operations decreased by 2.0%, or $2,575,000 for the fiscal year ended August 25, 2007 compared to the fiscal year ended August 26, 2006. The decrease in net sales is attributable to a decline in overall demand within the furniture industry sector due to a poor housing market.

Revenue from service contracts from continuing operations decreased by 6.5% for the fiscal year ended August 25, 2007 to $8,652,000, from $9,252,000 for the fiscal year ended August 26, 2006. The decrease was primarily attributable to fewer merchandise sales during the fiscal year ended August 25, 2007, compared to fiscal year ended August 26, 2006.

Same store sales from continuing operations (sales at those stores open for the entire current and prior comparable periods) decreased by 4.8% for the fiscal year ended August 25, 2007 as compared to August 26, 2006. Total square footage leased increased approximately 0.7% as a result of two relocated stores. Also, we expanded our square footage in one of our existing stores during the fiscal year ended August 25, 2007.

Cost of Sales

Cost of sales, as a percentage of revenue for the fiscal year ended August 25, 2007, was 68.7% compared to 68.3% for the same period ended August 26, 2006. Cost of sales from continuing operations decreased to $92,045,000 for the fiscal year ended August 25, 2007, from $93,711,000 for the fiscal year ended August 26, 2006.

Cost of sales is comprised of five categories: Cost of merchandise, occupancy costs, warehouse expenses, home delivery expenses and warranty costs.

The increase in the percentage of cost of sales is due to warehouse expenses and occupancy costs being spread over a decreased revenue base. In addition, cost of sales for the fiscal year ended August 25, 2007 included $573,000 of occupancy costs related to our new Ashley operating segment.

Selling, general and administrative expenses

Selling, general and administrative expenses from continuing operations were $37,452,000 (28.0% as a percentage of revenue) and $37,460,000 (27.3% as a percentage of revenue) during the fiscal year ended August 25, 2007 and August 26, 2006, respectively.

Selling, general and administrative expenses are comprised of four categories: Compensation, advertising, finance fees and other administrative costs. Compensation is primarily comprised of compensation of executives, finance, customer service, information systems, merchandising, sales associates and sales management. Advertising expenses are primarily comprised of newspaper/magazines, circulars, television and other soft costs. Finance fees are comprised of fees paid to credit card and third party finance companies. Administrative expenses are comprised of professional fees, utilities, insurance, supplies, permits and licenses, property taxes, repairs and maintenance, and other general administrative costs.

Advertising expense decreased $197,000 during the fiscal year ended August 25, 2007 compared to the same period ended August 26, 2006. Advertising expense decreased by $601,000 for the Jennifer segment and includes $404,000 for the Ashley segment. The decrease for the Jennifer segment was a result of a reduction in marketing due to unfavorable advertising rates.

Finance fees increased $14,000 during the fiscal year ended August 25, 2007 compared to the same period ended August 26, 2006.

Other administrative costs increased $394,000 during the fiscal year ended August 25, 2007 compared to the same period ended August 26, 2006.

Selling, general and administrative expenses for the fiscal year ended August 25, 2007 includes an increase of $885,000 consisting of compensation, advertising, finance fees and other administrative costs related to our Ashley operating segment, a decrease of $1,453,000 for the Jennifer segment and an increase of $560,000 related to corporate activities.

Interest Income

Interest income increased by $334,000 to $736,000 for the fiscal year ended August 25, 2007, as compared to $402,000 during the prior year. The increase is due principally to more cash available for investing purposes and higher market interest rates during the current fiscal year.

Income Tax Expense

We reported income tax expense of $124,000 and $321,000 in fiscal 2007 and 2006, respectively. The expense for 2007 consists principally of current state income taxes since federal income taxes were substantially eliminated by utilization of net operating loss carryforwards.

Income from Continuing Operations

The income from continuing operations was $4,151,000 and $5,207,000 for the fiscal year ended August 25, 2007 and August 26, 2006, respectively. The decline in continuing operations is primarily attributable to $679,000 loss related to our Ashley operating segment.

During fiscal 2007, we closed eight stores of which two were reported as discontinued operations. During fiscal 2006, we closed three stores, of which all three were reported as discontinued operations. The operating results of these 5 stores were reported as discontinued operations for fiscal 2007 and 2006. Income (loss) from discontinued operations, restated for store closings reported as discontinued operations during fiscal 2008, amounted to $180,000 and ($13,000) for the fiscal year ended August 25, 2007 and August 26, 2006, respectively.

Liquidity and Capital Resources

As of August 30, 2008, we had an aggregate working capital of $2,818,000 compared to an aggregate working capital of $7,359,000 at August 25, 2007 and had available cash and cash equivalents of $9,057,000 at August 30, 2008 compared to $8,375,000 at August 25, 2007. In addition, we had $1,400,000 available in marketable securities at August 30, 2008 compared to $8,300,000 at August 25, 2007.

The weighted average interest rate over the term of our short-term borrowings is 8.65%.

All obligations of the related company and the unconsolidated licensees due as of August 30, 2008, were paid based on the payment terms of 85 days from end of month. However, at any given time, the related company owes us approximately $4 million for the services and goods we provide to it. We assume that like other retailers and us, the related company has been adversely affected by the economy. If the related company were unable to pay the amounts due to us, it would have a material adverse effect on our cash flow and financial condition. The related company also provides fabric protection services to our Jennifer segment customers and, if the related company were unable to provide such services, we would have to find an alternative provider in order to sell those services to our customers in the future and would, as a matter of customer relations, likely have to pay for such provider to supply services with respect to previously sold fabric protection services.

The Credit Agreement contains various negative covenants restricting our ability to enter into a merger or sale, make guarantees, pay dividends to common stockholders, incur debt or take other actions, without the consent of the Agent. In addition, the Credit Agreement provides for the following: a fixed charge coverage ratio; a cross-default with certain other of our debt; appraisal rights; periodic reporting requirements; and other customary terms. We may terminate the Credit Agreement at any time, so long as all outstanding amounts have been paid in full. We may also terminate the Credit Agreement if we have
(i) maintained a tangible net worth of at least $3.0 million for 180 days and
(ii) adjusted net earnings from continuing operations of at least $2.0 million for four fiscal quarters.

Pursuant to the Security Agreement, so long as amounts are outstanding under the Credit Agreement, Caye will have a first priority security interest in all of our assets and properties, including inventory, accounts receivable and equipment, as well as a license to our intellectual property in the event of a default.

On October 27, 2006, we entered into the Second Amendment to the Credit Agreement and First Amendment to Security Agreement with Caye, pursuant to which such agreements were amended to permit us to open and operate several licensed Ashley Furniture HomeStores in New York.

On July 7, 2007 we entered into the Third Amendment to the Credit Agreement and Second Amendment to Security Agreement with Caye, pursuant to which such agreements were amended to (1) increase the Caye Credit Facility from $11.5 million to $13.5 million and (2) reduce the amount we are required by us to maintain in the deposit account to a balance no less at all times from $2 million to $1 million in the restricted deposit account.

On April 3, 2008, the Company entered into the Fourth Amendment to the Credit Agreement and Third Amendment to Security Agreement to (1) expand the scope of the Caye Credit Facility to include Ashley stores in additional New York metropolitan areas and (2) increase the amount of capital expenditures allowable in certain New York metropolitan areas.

As of August 30, 2008, we owed Caye approximately $9,050,000, no portion of which exceeded the 75-day payment terms.

We have obtained a waiver expiring on August 29, 2009, for breach of the fixed charge coverage ratio in the Credit Agreement with Caye. Based on current economic conditions it is uncertain we will be in compliance when the waiver expires. If Caye does not extend the waiver, Caye will be entitled to stop supplying us credit and to accelarate all amounts currently due to Caye. Caye has advised us that, as a result of current economic conditions and conditions in the credit market, it may substantially decrease the amount of inventory it supplies us. Caye has indicated that it expects to continue to supply us at least through the end of March 2009 but it is uncertain whether it will continue after such date to take orders from us, except for orders from its domestic factories, which represent approximately 5% of our business with Caye. Given the time lag between the taking of orders and delivery, that means that after June 2009, we may need to get substantially all of our inventory from other sources.

The Chinese company which currently manufactures approximately 95% of what we order through Caye, has given us a letter agreement to the effect that if Caye stops supplying us prior to November 12, 2009, it will, for at least a year thereafter, supply us with goods and provide us 75 days to pay for those goods without interest or penalty and an additional 30 days grace period on amounts over 75 days at a per annum rate of 0.75% over prime, provided that in no event will the amount payable by us exceed $10 million. This arrangement is substantially the same as our current arrangement with Caye except that under the Caye agreement we can owe up to $13.5 million.

Settlement Agreements between us and the related company impact our liquidity, capital resources and operations in a number of ways as more fully discussed under "Certain Relationships and Related Transactions" in our Proxy Statement to be furnished in connection with our Annual Meeting of Stockholders to be held February 17, 2009, which is hereby incorporated by reference.

The transactions with the related company, including our assumption of the warehousing responsibilities, adversely affected our operating results by $617,000 in fiscal 2008 and improved our operating results by $759,000 in fiscal 2007 and $667,000 in fiscal 2006, compared to the results we would have achieved based on the same sales levels under the agreements effective prior to the Initial Operating Agreement as more fully described under the caption "Certain Relationships and Related Transactions" in our Proxy Statement to be furnished in connection with our Annual Meeting of Stockholders to be held February 17, 2009, which is hereby incorporated by reference.

On November 24, 2008, we entered into a fifth amendment to the management agreement and license, pursuant to which the related company also agreed, for a one year period commencing January 2009, to increase its advertising contribution from $125,750 per month to $150,000 per month, an increase of $291,000 per year, and to contribute an additional $180,000, in three monthly installments of $60,000, beginning on January 15, 2009, for a planned television advertising campaign. In addition, we eliminated the reductions to the related company's share of the advertising costs, which reductions were tied to shortfalls in the related company's net delivered sales.

The credit card companies have, for the past several years, paid us shortly after credit card purchases by our customers. However, they have indicated to us that in light of current economic and credit conditions they are reexamining their payment policies. Extensions of the time they take to pay us would adversely affect our cash flow. In this connection, we have entered into an agreement with one of our credit card companies for the interim period ending December 17, 2008, pursuant to which there will be a $500,000 reserve established as, in effect, a performance bond against delivery by us of the merchandise ordered by their credit card customers.

Based on the current level of operations at our stores, and after giving effect to cost cutting programs we intend to implement, and the recently amended arrangements with the related company described above, we anticipate that we will have the capital resources to operate for at least the next 12 months. However, if current economic and credit conditions prevail beyond the next year or worsen, there would be significant doubt as whether we could continue to operate significantly beyond that time without an infusion of capital or other measures, the availability of which there can be no assurance.

Contractual Obligations and Commitments

   The following table sets forth our future contractual obligations in total,
for each of the next five years and thereafter, as of August 30, 2008. Such
obligations include the retail store and warehouse leases, the lease for the
executive office, written employment contracts for two of our executive
officers, and agreements to pay the related company royalties.

(Dollars in thousands)                      2009        2010        2011       2012       2013       Thereafter      Total
Operating leases for retail stores,
    warehouses and executive office       $ 17,549    $ 13,962    $ 10,983    $ 8,438    $ 5,996    $     16,527    $ 73,455
Capital leases for equipment                    54          54          44         26         17              24         219
Royalty payments to the related
   company (1)                                 400         400         400        400        400           4,667       6,667
Employment contracts                           900                                                                       900
Fabric protection fees to the related
   company                                     600                       -                     -               -         600
Total contractual obligations             $ 19,503    $ 14,416    $ 11,427    $ 8,864    $ 6,413    $     21,218    $ 81,841


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