Overview

The following discussion should be read along with the unaudited condensed consolidated financial statements included in this Form 10-Q, as well as the Company's 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission, which provides a more thorough discussion of the Company's products and services, industry outlook, and business trends.

Bassett Furniture Industries Inc., based in Bassett, Va., is a leading retailer, manufacturer and marketer of branded home furnishings. Bassett's products are sold primarily through Bassett Furniture Direct (BFD) and Bassett Home Furnishings (BHF) stores, with secondary distribution through multi-line furniture stores, many with in-store Bassett Design Centers. Bassettbaby cribs and casegoods are sold through specialty stores and mass merchants.

Bassett Furniture Direct ("BFD" or "store") was created in 1997 as a single source home furnishings retail store that provides a unique combination of stylish, well-made furniture and accessories with a high level of customer service. This service includes complimentary room planning, in-home design visits, quick delivery, and custom-order furniture. The retail store program had 112 stores in operation as of May 30, 2009, 38 of which we own and operate.

During the six months ended May 30, 2009, three licensee stores completed liquidation sales and closed. Additionally, two licensee stores, in which we have no real estate interest, began going out of business inventory liquidation sales during the second quarter with a third such licensee store liquidation sale beginning in July. All three of these stores should be closed by the end of the third quarter of 2009. We expect three to five additional licensee stores to close over the remainder of 2009 which would likely result in charges for lease exit costs or increases in our lease guarantee reserve. We also are in the process of closing four Corporate-owned stores which should be completed during the third quarter of 2009. Consequently, we plan to recognize lease exit charges of $1,500 to $2,500 during the last six months of 2009 for three of these stores. We expect that the lease expiration on the remaining store will coincide with its closure; therefore no lease termination charges will be recognized. We expect to have between 100 and 105 stores by the end of 2009.

The following table summarizes the changes in store count during the six months ended May 30, 2009:

                          November 29, 2008   Closures      Transfers      May 30, 2009
  Licensee-owned stores                  84         (3 )           (7 )              74
  Company-owned stores                   31         -               7                38


  Total                                 115         (3 )           -                112

We define imported product as fully finished product that is sourced internationally. In the first half of 2009, 52% of our wholesale sales were of imported product compared to 56% in the first half of 2008. Our domestic product includes certain products that contain components which are also sourced internationally. We continue to believe that a blended strategy including domestically produced products primarily of a custom-order nature combined with importing certain product categories and major collections, provides the best combination of value and quality to our customers.

Overall conditions for our industry and our Company have been difficult over the past several years and have persisted throughout the first half of 2009. New housing starts are down significantly and consumers continue to be faced with general economic uncertainty fueled by difficult consumer credit markets and lagging consumer confidence. All of these factors have significantly impacted "big ticket" consumer purchases such as furniture. Consequently, this has put pressure on certain of our dealers' ability to generate adequate profits to fully pay us for the furniture we have sold to them. As a result, we incurred significantly increased bad debt related losses during the second half of 2008 as well as during the first half of 2009. Although management will continue to work closely with our licensees to ensure the success of both the licensee and Bassett, we expect an additional three to five

underperforming stores to close during the remainder of 2009, but are currently unable to estimate our losses on these closures. We also may increase the number of Company-owned stores during the remainder of 2009, through acquisitions of certain licensee-owned stores. During the first half of 2009, we acquired 7 licensee stores in the Scottsdale and Tucson, Arizona, Fredericksburg, Virginia, Memphis, Tennessee, and Palm Beach, Wellington, and Jensen Beach, Florida markets.

Maintenance of a strong balance sheet is a stated management goal and vital to our retail strategy. The store program entails key business risks, including the realization of receivables and the coverage of both direct and contingent liabilities primarily associated with retail real estate. We have established decision criteria and business disciplines aimed at minimizing potential losses from these risks.

Given the difficult and somewhat unprecedented environment, we have had no choice but to take several important actions aimed at improving our results and liquidity in the short-term. These include:

• Aggressively working with certain licensees to close those stores that are underperforming thereby limiting further exposure in our accounts receivable.

• Reducing our inventory levels to improve working capital and cash flow.

• Right-sizing our expense structure in both our wholesale and corporate retail divisions.

• Suspending our quarterly dividend.

• Delaying certain capital expenditures.

We will also continue to work diligently with our network of licensees to improve their operating results. With the existing and planned improvements in our retail program and our strong balance sheet, we believe we are well positioned not only to survive these turbulent times, but also to gain market share as some of our competitors exit the industry.

On March 19, 2009, we announced actions to reduce our overall cost structure that will result in lower expenditures for payroll, employee benefits, warehousing and distribution, marketing, and other miscellaneous items. Approximately 50 positions in departments throughout the Company were affected including corporate retail, administration, customer service, manufacturing, and marketing resulting in an approximate 6% reduction in payroll. Accordingly, we recorded severance charges of $320 during the quarter ended May 30, 2009. Additionally, our Mt. Airy, N.C., distribution facility closed on March 1, 2009 and has been listed for sale. Its inventory was consolidated to other warehouses in the U.S. and Asia, which we believe will reduce our overall distribution costs by 7%. Marketing expenditures have been trimmed primarily through reduced television production costs and upcoming changes to our consumer catalog format. As a result of these actions, we expect to realize annualized savings of $7,000 to $8,000. We have, however, continued to invest in our website. A new site debuted in May and featured enhanced aesthetics, easier navigation for individual items and collections, and improved E-commerce capabilities.

During the first and second quarter of 2009, the Staff of the Securities and Exchange Commission (the "SEC") performed a review of our Form 10-K for the year ended November 29, 2008 and subsequently our Form 10-Q for the quarter ended February 28, 2009. Among other items, the Staff identified issues with our initial valuation of notes receivable issued to our licensees (primarily for amounts converted from past due accounts receivable due from them) and our methodology for determining reserves for our accounts receivable, notes receivable, and loan guarantees. As a result of the SEC's comments, we reviewed our accounting policies and processes in these areas previously mentioned and determined that we should have recorded lower values for certain of our notes receivable upon inception and, subsequently, recorded additional reserves on those notes due to an error in how we determined an appropriate market rate of interest for those notes. In addition, we also concluded that we should have recognized revenue for certain customers on a cost recovery basis for shipments beginning in the first quarter of 2009 and that additional reserves for loan guarantees should be established. Therefore, we recorded an additional $3,280 of net charges in the quarter ended February 28, 2009 to account for these lower note values, increased reserves and reduced revenue and filed an amended Form 10-Q for the quarter then ended. Of the amount recorded, $1,936 related to periods prior to the quarter ended February 28, 2009. However, based on our consideration of the underlying quantitative and qualitative factors surrounding the prior period errors, the effects on the previous annual and interim periods were determined to be immaterial and, therefore, periods prior to the quarter ended February 28, 2009 have not been restated.

Results of Operations - Quarter and six months ended May 30, 2009 compared with quarter and six months ended May 30, 2008:

Net sales, gross profit, selling, general and administrative (SG&A) expense, and operating income (loss) were as follows for the periods ended May 30, 2009 and May 30, 2008:

                                                Quarter Ended                                     Six months ended
                                    May 30, 2009             May 31, 2008              May 30, 2009              May 31, 2008

Net sales                        $ 57,718      100.0 %    $ 74,862      100.0 %    $ 115,529      100.0 %    $ 156,460      100.0 %

Gross profit                       25,033       43.4 %      29,518       39.4 %       49,176       42.6 %       62,144       39.7 %
SG&A (see note below)              26,115       45.2 %      29,777       39.8 %       52,967       45.8 %       61,222       39.1 %
Bad debt and notes receivable
valuation charges                   5,849       10.1 %       1,266        1.7 %       11,741       10.2 %        2,036        1.3 %
Unusual charges, net                1,673        2.9 %         460        0.6 %        1,673        1.4 %          460        0.3 %

Loss from operations             $ (8,604 )    -14.9 %    $ (1,985 )     -2.7 %    $ (17,205 )    -14.9 %    $  (1,574 )     -1.0 %

Note: For comparability purposes, we have presented our selling, general and administrative expenses above without consideration of the effects of the bad debt and notes receivable valuation charges.

On a consolidated basis, we reported net sales for the second quarter of 2009 of $57,718, a decrease of $17,144, or 23%, from sales levels attained in the second quarter of 2008. Sales for the six months ended May 30, 2009 were $115,529, a decrease of $40,931 or 26.2%. Due to our fiscal calendar, the six months ended May 30, 2009 included 26 weeks compared to 27 weeks for the six months ended May 31, 2008.

Restructuring, asset impairment charges and unusual gain, net

The results for the quarter and six months ended May 30, 2009 included several restructuring and other non-cash items including asset impairment charges of $376 to write-off the remaining leasehold improvements for our Arlington, Texas and Alpharetta, Georgia stores. We concluded that these stores, along with the Lewisville, Texas store, would run inventory liquidation sales and close during the third quarter of 2009. There were no unamortized leasehold improvements recorded for our Lewisville, Texas store. We expect to record additional lease exit charges of $1,500 to $2,500 in the third quarter. We also recorded a non-cash asset impairment charge of $258 to write-off the remaining leasehold improvements and a $285 lease exit charge associated with the closure of our retail office in Greensboro, North Carolina. In addition, we recorded a $434 non-cash impairment charge in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", to write-down the carrying value of our long-lived assets associated with a nonperforming retail location. Lastly, we recorded $320 in severance charges associated with the downsizing announced in March of 2009.

The results for the quarter and six months ended May 31, 2008 included three unusual pretax items consisting of $1,418 of legal and other expenses for the proxy contest with Costa Brava Partnership III L.P., a $1,342 gain associated with the sale of our airplane and a $384 impairment charge associated with the writeoff of leasehold improvements for a closed store.

The following table summarizes these charges:

                                              Quarter and Six Months            Quarter and Six Months
                                                Ended May 30, 2009                Ended May 31, 2008

Proxy defense costs                          $                     -           $                  1,418
Write-off of leasehold improvements                             1,068                               384
Severance charges                                                 320                                -
Gain on sale of airplane                                           -                             (1,342 )
Lease exit charges                                                285                                -

                                             $                  1,673          $                    460

Segment Information

We have strategically aligned our business into three reportable segments:
Wholesale, Retail and Investments/Real Estate. The wholesale home furnishings segment is involved principally in the design, manufacture, sourcing, sale and distribution of furniture products to a network of stores (independently-owned stores, Company-owned retail stores and partnership licensees) and independent furniture retailers. Our wholesale segment includes our wood and upholstery operations as well as all corporate selling, general and administrative expenses, including those corporate expenses related to both corporate and licensee owned stores.

Our retail segment consists of Company-owned stores. Our retail segment includes the revenues, expenses, assets and liabilities (including real estate) and capital expenditures directly related to these stores.

Our investments/real estate segment consists of our investments (BIAAF and marketable securities), distributions in excess of affiliate earnings (IHFC) and retail real estate related to licensee stores. Although this segment does not have operating earnings, income from the segment is included in other income, net in our condensed consolidated statements of income and retained earnings.

The following is a discussion of operating results for our wholesale and retail segments:

Wholesale Segment



                                              Quarter Ended                                 Six Months Ended
                                   May 30, 2009            May 31, 2008            May 30, 2009            May 31, 2008

Net sales                       $ 45,013      100.0 %    $ 61,991   100.0 %    $  92,960      100.0 %    $ 131,299   100.0 %

Gross profit                      12,823       28.5 %      18,102    29.2 %       26,012       28.0 %       39,094    29.8 %
SG&A (see note below)             11,989       26.6 %      16,166    26.1 %       25,001       26.9 %       33,505    25.5 %
Bad debt and notes receivable
valuation charges                  5,849       13.0 %       1,266     2.0 %       11,741       12.6 %        2,036     1.6 %


Loss from operations            $ (5,015 )    -11.1 %    $    670     1.1 %    $ (10,730 )    -11.5 %    $   3,553     2.7 %

Note: For comparability purposes, we have presented our selling, general and administrative expenses above without consideration of the effects of the bad debt and notes receivable valuation charges.

Net sales for the wholesale segment were $45,013 for the second quarter of 2009 as compared to $61,991 for the second quarter of 2008, a decrease of 27%. Approximately 51% of wholesale shipments during the second quarter of 2009 were imported products compared to 54% for the second quarter of 2008. Gross margins for the wholesale segment were 28.5% for the second quarter of 2009 as compared to 29.2% for the second quarter of 2008. This decrease is primarily due to lower realized margins on our wood furniture and certain discount programs designed to sell more furniture, partially offset by increased margins on our upholstered furniture due to its custom nature.

Wholesale SG&A, excluding bad debt and notes receivable valuation charges, decreased $4,177 during the second quarter of 2009 as compared to 2008 due primarily to lower spending due to lower sales and continued cost cutting measures. We recorded $5,849 of bad debt and notes receivable valuation charges for the second quarter of 2009 as compared to $1,266 for the second quarter of 2008, as our licensees continued to struggle to pay for the furniture shipped to them in a prolonged and severe recessionary environment.

Net sales for the wholesale segment were $92,960 for the six months ended May 30, 2009 as compared to $131,299 for the six months ended May 31, 2008, a decrease of 29%. Due to our fiscal calendar, the six months ended May 30, 2009 included 26 weeks compared to 27 weeks for the six months ended May 31, 2008. Gross margins for the wholesale segment were 28.0% for the six months ended May 30, 2009 as compared to 29.8% for the six months ended May 31, 2008. This decrease is primarily due to lower realized margins on our wood furniture and certain discount programs designed to sell more furniture, partially offset by increased margins on our upholstered furniture due to its custom nature. Wholesale SG&A, excluding bad debt and notes receivable valuation charges, decreased $8,504 during the 26 weeks of 2009 as compared to the 27 weeks of 2008 due primarily to decreased wholesale spending due to lower sales and continued cost cutting measures. The Company recorded $11,741 of bad debt and notes receivable valuation charges for the first half of fiscal 2009 as compared to $2,036 during the first half of fiscal 2008.

                                             Quarter Ended                              Six Months Ended
Wholesale shipments by type:       May 30, 2009          May 31, 2008          May 30, 2009          May 31, 2008

Wood                             $ 22,427    49.8 %    $ 33,242    53.6 %    $ 47,554    51.2 %    $  70,245    53.5 %
Upholstery                         22,211    49.4 %      28,450    45.9 %      44,203    47.5 %       59,827    45.6 %
Other                                 375     0.8 %         299     0.5 %       1,203     1.3 %        1,227     0.9 %

Total                            $ 45,013   100.0 %    $ 61,991   100.0 %    $ 92,960   100.0 %    $ 131,299   100.0 %

Retail Segment - Company-Owned Retail Stores



                                                Quarter Ended                                    Six Months Ended
                                    May 30, 2009             May 31, 2008             May 30, 2009             May 31, 2008

Net sales                        $ 25,660      100.0 %    $ 24,597      100.0 %    $ 49,403      100.0 %    $ 50,525      100.0 %

Gross profit                       12,117       47.2 %      11,263       45.8 %      23,298       47.2 %      23,312       46.1 %
SG&A                               14,126       55.1 %      13,617       55.4 %      27,966       56.6 %      27,723       54.9 %

Operating loss                   $ (2,009 )     -7.8 %    $ (2,354 )     -9.6 %    $ (4,668 )     -9.4 %    $ (4,411 )     -8.7 %

Our Company-owned store network had sales of $25,660 in the second quarter of 2009 as compared to $24,597 in the second quarter of 2008, an increase of 4.3%. On a comparable store basis (stores open for more than one year), sales decreased 5.5%. Gross margins for the quarter increased 1.4 percentage points primarily due to the effects of prior year store closing events which generated significantly lower margins. SG&A increased $509 primarily due to corporate store acquisitions, partially offset by continued cost containment efforts during the quarter. As part of the store acquisitions during the second quarter of 2009 and late in 2008, we did not acquire the existing delivery backlog at the time of acquisition on certain of the stores. Consequently, we incurred significant SG&A expenses (rent and administrative payroll) without a commensurate level of delivered sales. Excluding the effects of these acquired stores, SG&A as a percent of sales would have been 54.1% for the second quarter of 2009. On a comparable store basis, our operating loss was reduced by 18.4% to $1,515, primarily due to lower SG&A spending due to lower sales and cost-containment efforts.

Our Company owned store network had sales of $49,403 in the first half of 2009 as compared to $50,525 in the first half of 2008, a decrease of 2.2%. On a comparable store basis, sales decreased 8.2%. Gross margins for the first half of 2009 increased 1.1 percentage points primarily due to the effects of prior year store closing events which generated significantly lower margins. SG&A increased $243 primarily due to corporate store acquisitions, partially offset by continued cost containment efforts. As part of the store acquisitions during the first half of 2009 and late in 2008, we did not acquire the existing delivery backlog at the time of acquisition on certain of the stores. Consequently, we incurred significant SG&A expenses (rent and administrative payroll) without a commensurate level of delivered sales. Excluding the effects of these acquired stores, SG&A as a percent of sales would have been 56.2% for the first half of 2009. On a comparable store basis, our operating loss remained essentially flat to prior year.

Our retail segment includes the expenses of retail real estate utilized by Company-owned retail stores. Rental income and expenses from our properties utilized by independent licensees and partnership licensees are included in our investment and real estate segment.

Investment and Real Estate Segment and Other Items Affecting Net Income (Loss)

Our investments and real estate segment consists of our investments (Alternative Asset Fund and marketable securities), distributions in excess of affiliate earnings (IHFC) and retail real estate related to licensee-owned stores. Although this segment does not have operating earnings, income (loss) from the segment is included in other income (loss), net in our condensed consolidated statements of operations. Our equity investment in IHFC is not included in the identifiable assets of this segment since it has a negative book value and is therefore included in the long term liabilities section of our condensed consolidated balance sheet. Income and expense items for the quarter and six months ended May 30, 2009 and May 31, 2008, are as follows:

                                                Quarter Ended                             Six Months Ended
                                      May 30, 2009         May 31, 2008          May 30, 2009          May 31, 2008

Income (loss) from Alternative
Asset Fund                           $          118        $        (749 )      $       (1,073 )      $         (953 )
Income (loss) from marketable
securities                                      358                1,072                  (794 )               1,567
Income from unconsolidated
affiliated companies, net                     1,554                1,273                 2,409                 2,085
Interest expense                               (541 )               (696 )              (1,099 )              (1,344 )
Loan and lease guarantee
(expense)/income                             (1,448 )                166                (1,874 )                 134
Real estate expense, net                       (978 )               (835 )              (1,467 )              (1,119 )
Other                                          (250 )               (134 )                (586 )                 (86 )


Other income (loss), net             $       (1,187 )      $          97        $       (4,484 )      $          284

In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", we review our marketable securities to determine whether a decline in fair value of a security below the cost basis is other than temporary. Should the decline be considered other than temporary, we write down the cost basis of the security and include the loss in current earnings as opposed to recording an unrealized holding loss. Due to the continued decline in the financial markets during the fiscal first quarter of 2009, many of our holdings sustained significant losses. Consequently, we recorded $1,255 in losses in our consolidated statement of operations for the quarter ended February 28, 2009. Due to overall market gains during the quarter ended May 30, 2009, we did not record a charge for other than temporary decline in the fair value of our investments.

Income from unconsolidated affiliated companies, net includes income from our investment in IHFC as well as income (loss) from the other equity method . . .