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 Company has been severely impacted by the ongoing recession in the United States and abroad. Continued weakness in the U.S. economy, high unemployment, volatile capital markets, depressed housing prices and tight consumer lending practices have driven consumer confidence down to, or near, historical lows and resulted in considerable negative pressure on spending by individual consumers, our primary customer base. The Company is continuing to adjust our infrastructure to match our sales volumes as we work through these difficult times.

Management performed testing for the impairment of goodwill as of March 31, 2009 due to the acceleration of severe adverse changes in the business climate, as evidenced by the sudden and dramatic adverse changes in macroeconomic indicators like unemployment, capital market prices, housing prices and consumer lending practices, coupled with a decline in our net sales. The fair value of goodwill was measured by first determining the fair value of the Wholesale and Retail segment, using both a market approach and an income approach, and then reconciling to the total market capitalization of the Company ("step 1"). For the Retail segment, a separate estimation of the fair value of all identifiable assets and liabilities was required ("step 2"). The estimated fair value determined from step 2 was greater than the value of the Retail segment determined in step 1. Consequently all goodwill on the Retail segment was considered impaired and a non-cash charge of $48.4 million was recorded against income.

On January 6, 2009, the Company announced a plan to consolidate the operations of its Eldred, Pennsylvania upholstery manufacturing plant and several of its retail service centers. Business previously serviced by the

Eldred Pennsylvania facility has been transferred to the Company's facilities in North Carolina and California, and the Company is expanding the production in those facilities. Business currently served by the retail service centers is being transferred to other Company locations serving the same general market areas. The Company expects pre-tax restructuring, impairment, and other related charges will total approximately $9 million, with approximately $4 million in employee severance and other payroll and benefit costs, $3 million in write down of long-lived assets, and $2 million in other associated costs, after which time we expect the actions to be complete. By segment, we expect $6 million in costs for the wholesale segment and $3 million for the retail segment. The majority of charges will be non-cash in nature representing an approximate after-tax impact of $5.7 million or $0.20 per diluted share.

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 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 June 2008. In fiscal 2009, a $1.8 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 $2.4 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 $5.2 million, including $0.9 million in employee severance and other payroll and benefit costs, $5.6 million in lease termination and other exit costs, and a benefit of $1.4 million on long-lived assets. 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 March 31, 2009 and contain estimates that will likely require adjustment in the future. In addition to the retail charges, $0.4 million was recorded in the first fiscal quarter of 2009 to update the fair value of a wholesale plant site held for sale.

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 and nine months ended March 31, 2009 and 2008.

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

                                       Three Months Ended       Nine Months Ended
                                           March 31,                March 31,
                                        2009         2008        2009        2008
Revenue:
Wholesale segment                    $     88.1    $  156.3   $    318.2    $ 468.5
Retail segment                            103.3       172.8        406.4      548.1
Elimination of inter-company sales        (51.2 )     (93.1 )     (189.0 )   (272.5 )
Consolidated revenue                 $    140.2    $  235.9   $    535.6    $ 744.1




                                           Three Months Ended       Nine Months Ended
                                               March 31,                March 31,
                                            2009         2008        2009         2008
Operating income (loss):
Wholesale segment (1)(2)                 $      (6.1 )  $  26.7   $      14.4    $ 79.8
Retail segment (3)(4)                          (71.9 )     (8.6 )       (78.2 )    (1.3 )
Adjustment of inter-company profit (5)           3.3       (2.6 )        11.4      (1.7 )
Consolidated operating income (loss)     $     (74.7 )  $  15.6   $     (52.4 )  $ 76.9

Quarter Ended March 31, 2009 Compared to Quarter Ended March 31, 2008

Consolidated revenue for the three months ended March 31, 2009 decreased 40.6% to $140.2 million, from $235.9 million for the three months ended March 31, 2008. During the quarter, sales were negatively affected by a number of factors including, but not limited to, the continued weakness in the U.S. economy, high unemployment, volatile capital markets, depressed housing prices and tight consumer lending practices. Although the granting of new credit through our third party consumer credit program saw a return to stability, default rates continue to rise. We believe the factors cited above have caused consumer confidence levels to drop to, or near, historic lows. We believe these factors were partially offset by (i) our ongoing efforts to reposition the retail network, (ii) new product introductions, (iii) improved use of technology including our state-of-the-art website coupled with personal service from our design professionals and (iv) the continued use of national television and shelter magazines as 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.

Wholesale revenue for the third quarter of fiscal 2009 decreased 43.6% to $88.1 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 8 fewer independent retail design centers at March 31, 2009, which decreased to 131 from 139, including seven locations transferred in to the company's Retail division during the year. There were the same number of shipping days in the quarter both this year and last year.

Retail revenue from Ethan Allen-owned design centers for the three months ended March 31, 2009 decreased 40.2% to $103.3 million from $172.8 million for the three months ended March 31, 2008. 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 41.8% decrease in comparable store sales. Partially offsetting this was a net $5.2 million decrease in new/closed store sales, and a net increase in the number of Ethan Allen-owned design centers to 159 as of March 31, 2009 as compared to 153 as of March 31, 2008. During that twelve month period, we acquired seven design centers from independent retailers and opened eleven design centers (four of which were relocations where the original site was also closed), and closed eight 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 38.5% while comparable design centers written business decreased 40.4%. Over that same period, wholesale orders decreased 42.6%. Both retail and wholesale written business reflect the softer retail environment for home furnishings noted throughout the period as a result of continued weakness in the U.S. economy, high unemployment, volatile capital markets, depressed housing prices and tight consumer lending practices, and general uncertainty about the economy in the U.S. and abroad.

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. We also believe that over time, we will benefit from (i) our repositioning of the retail network, (ii) regular new product introductions, (iii) improved use of technology including our state-of-the-art website coupled with personal service from our design professionals, and
(iv) the continued use of national television and shelter magazines as advertising media.

Gross profit decreased during the quarter to $66.1 million from $125.2 million in the prior year comparable quarter. The 47.2%, decrease in gross profit was primarily attributable to (i) the reduction in net sales of 40.6%, with an overall decrease in shipments in both market segments, (ii) lower margin percentages within the wholesale segment due to under absorbing of plant overhead costs on the lower production volume, as well as disruptions and costs due to restructuring activities, and (iii) slightly lower margins within the retail segment, due to sales of discontinued product and floor samples to make room for the new American Artisan product introduction, and design center consolidations and repositioning. These factors were partially offset by a favorable shift in sales mix with retail sales representing a higher proportionate share of total sales in the current quarter (74%) compared to the prior year period (73%). Consolidated gross margin decreased to 47.1% from 53.1% in the prior year 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 March 31, 2009 and 2008:

Operating expensesincreased 28.4% to $140.8 million, and increased to 100.4% of sales, in the current quarter from $109.6 million, or 46.5% of sales, in the prior year quarter. Selling expenses were down in absolute terms due to lower sales volume. Salary related costs decreased due to the reduced number of employees and other cost cutting efforts taken by the Company that impacted bonus and benefits. Advertising expenses were down $4.7 million.

Consolidated operating income (loss) for the three month period ended March 31, 2009 was a loss of $74.7 million, or 53.3% of sales, as compared to income of $15.6 million, or 6.6% of sales, for the three months ended March 31, 2008. This decrease of $90.3 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 (loss) for the three months ended March 31, 2009 totaled a loss of $6.1 million, or 6.9% of sales, as compared to income of $26.7 million, or 17.1% of sales, in the prior year comparable quarter. The decrease of $32.7 million was primarily attributable to a decrease in sales volume, and higher unabsorbed costs in our manufacturing plants due to lower production volumes.

Retail operating income (loss) decreased $63.4 million to a loss of $71.9 million, or -69.6% of sales, for the third quarter of fiscal 2009 from a loss of $8.5 million, or -4.9% of sales, for the third 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, netdecreased $0.6 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.

Interest and other related financing costsamounted to just under $3.0 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 March 31, 2009 totaled a benefit of $28.2 million as compared to an expense of $5.2 million for the three months ended March 31, 2008. Our effective tax rate for the current quarter was 36.7% compared to 37.0% in the prior year quarter.

Net income (loss) for the three months ended March 31, 2009, was a loss of $48.7 million as compared to net income of $8.8 million in the prior year comparable period. There was a net loss per diluted share of $1.69 in the current quarter and net income per diluted share of $0.30 in the prior year quarter.

Nine Months Ended March 31, 2009 Compared to Nine Months Ended March 31, 2008

Consolidated revenue for the nine months ended March 31, 2009 decreased by 28.0%, to $535.6 million, from $744.1 million for the nine months ended March 31, 2008. During the period, sales were negatively affected by a weak retail environment for home furnishings which we believe is due to a number of factors including but not limited to continued weakness in the U.S. economy, high unemployment, volatile capital markets, depressed housing prices and tight consumer lending practices. 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.

Wholesale revenue for the first nine months of fiscal 2009 decreased 32.1%, to $318.2 million from $468.5 million in the prior year comparable period. The period-over-period 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 8 fewer independent retail design centers, which decreased to 131 from 139, including seven locations transferred in to the company's Retail division during the year. There was one more shipping day during the current nine month period.

Retail revenue from Ethan Allen-owned design centers for the nine months ended March 31, 2009 decreased by 25.9%, to $406.4 million from $548.1 million for the nine months ended March 31, 2008. 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 28.9% decrease in comparable store sales. Partially offsetting this was a net $0.1 million decrease in new/closed store sales, and a net increase in the number of Ethan Allen-owned design centers to 159 as of March 31, 2009 as compared to 153 as of March 31, 2008. During that twelve month period, we acquired seven design centers from independent retailers and opened eleven design centers (four of which were relocations), and closed eight design centers.

Period-over-period, written business of Ethan Allen-owned design centers decreased 30.8% while comparable design centers written business decreased 33.6%. Over that same period, wholesale orders decreased 33.8%. Both retail and wholesale written business reflects the softer retail environment for home furnishings noted throughout the period and discussed in the analysis of the quarter results.

Gross profit decreased during the nine months to $279.8 million from $398.1 million in the prior year comparable period. The 29.7%, decrease in gross profit was primarily attributable to the reduction in net sales of 28.0%, with an overall decrease in shipments in both market segments, and 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 nine months (76%) compared to the prior year period (74%) and from lower elimination of profit in consolidations due primarily to lower Retail inventory.

Consolidated gross margin decreased to 52.2% for the first nine months of fiscal 2009 from 53.5% in the prior year period 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 nine months ended March 31, 2009 and 2008:

Operating expensesincreased $11.0 million, or 3.4%, to $332.2 million, and increased to 62.0% of sales, in the current period from $321.2 million, or 43.2% of sales, in the prior nine month period. Decreases in salary related costs were experienced due to the reduced number of employees and other cost cutting efforts taken by the Company that impacted bonuses and benefits. Advertising expenses were down $9.2 million while enhancing our national TV and shelter magazine presence. These reductions were partly offset by an incremental charge of $7.0 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 which is now concluded.

Consolidated operating income (loss) for the nine month period ended March 31, 2009 totaled a loss of $52.4 million, or 9.8% of sales, as compared to income of $76.9 million, or 10.3% of sales, for the nine months ended March 31, 2008. This decrease of $129.3 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 (loss) for the nine months ended March 31, 2009 totaled $14.4 million, or 4.5% of sales, as compared to $79.8 million, or 17.0% of sales, in the prior year comparable period. The decrease of $65.4 million was primarily attributable to a decrease in sales volume and higher unabsorbed costs in our manufacturing plants due to lower production volumes.

Retail operating income (loss) increased $76.9 million to a loss of $78.2 million, or -19.2% of sales, for the first nine months of fiscal 2009 from a loss of $1.3 million, or -0.2% of sales, for the same period 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, netdecreased $3.5 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 costsamounted to approximately $8.8 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 nine months ended March 31, 2009 totaled a benefit of $22.4 million as compared to expense of $27.6 million for the nine months ended March 31, 2008. Our effective tax rate for the current period was 38.6% compared to 37.0% in the prior year period. The current effective tax rate is higher due primarily to the impact of the deduction for domestic production activities.

Net income (loss) for the nine months ended March 31, 2009, was a loss of $35.8 million as compared to income of $47.0 million in the prior year comparable period. Net income (loss) per diluted share totaled ($1.24) in the current period and $1.58 in the prior year.

Liquidity and Capital Resources

At March 31, 2009, we held cash and cash equivalents of $51.2 million. Our principal sources of liquidity include cash and cash equivalents, cash flow from operations, and borrowings.

Global capital markets continue to be 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. Our access to the credit facility could also be negatively affected if operating results fall below prescribed levels. Continued turbulence in the financial markets could also adversely affect the cost and availability of financing to us in the future.

The Company terminated its $100 million cash flow based revolving credit facility effective May 4, 2009. Although we have no plans to use any revolving credit facility in the near term, we are in negotiations to establish an asset based revolving credit facility of up to $60 million. At March 31, 2009, we had $12.5 million in trade and standby letters of credit outstanding under the revolving credit facility. These letters of credit continue to be supported by a separate facility with JP Morgan. We believe that we will continue to have adequate liquidity to meet our current needs.

In September 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 . . .