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., ("Bassett", "we", "our", "the Company") 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 and Bassett Home Furnishings ("BHF") stores, with secondary distribution through multi-line furniture stores, many with in-store Bassett Design Centers. Bassett baby 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 106 stores in operation as of August 29, 2009, 35 of which we own and operate. Of the 35 Company-owned stores 26 were comparable stores (stores open longer than one year).

During the nine months ended August 29, 2009, six licensee stores completed liquidation sales and closed. Additionally, one licensee store, in which we have no real estate interest, began a going out of business inventory liquidation sale late in the third quarter which should be completed during the fourth quarter of 2009. Further store closures are possible during the remainder of 2009 that could result in lease exit charges or increases in our lease guarantee reserve.

We also closed four Corporate-owned stores during the third quarter of 2009 and recorded $1,777 in lease exit charges. 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 nine months ended August 29, 2009:

                         November 29, 2008   Closures      Transfers      August 29, 2009
 Licensee-owned stores                  84         (6 )           (8 )                 70
 Company-owned stores                   31         (4 )            8                   35

 Total                                 115        (10 )           -                   105

We define imported product as fully finished product that is sourced internationally. In the first nine months of 2009, 52% of our wholesale sales were of imported product compared to 55% in the first nine months 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 nine months 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 and notes receivable valuation charges related losses during the second half of 2008 as well as during the first half of 2009. For the third quarter of 2009, we recorded $1,230 in bad debt and notes receivable valuation charges as we have worked diligently to control our accounts and notes receivable exposure to our licensees. Although management will continue to work closely with our licensees to ensure the success of both the licensee and Bassett, further store closures are possible during the remainder of 2009 and beyond that could result in lease exit charges or increases in our lease guarantee reserve. 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 nine months of 2009, we acquired a total of eight licensee stores in the Scottsdale and Tucson, Arizona, Fredericksburg, Virginia, Memphis, Tennessee, Little Rock, Arkansas and Palm Beach, Wellington, and Jensen Beach, Florida markets.

Maintenance of a strong balance sheet is a stated management goal and is 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.

Results of Operations-Quarter and nine months ended August 29, 2009 compared with quarter and nine months ended August 30, 2008:

Due to our fiscal calendar, the nine months ended August 29, 2009 included 39 weeks compared to 40 weeks for the nine months ended August 30, 2008. Net sales, gross profit, selling, general and administrative (SG&A) expense, and operating income (loss) were as follows for the periods ended August 29, 2009 and August 30, 2008:

                                             Quarter Ended                                    Nine Months Ended
                                August 29, 2009          August 30, 2008          August 29, 2009           August 30, 2008
Net sales                     $ 57,670      100.0 %    $ 70,159      100.0 %    $ 173,199      100.0 %    $ 226,620      100.0 %

Gross profit                    25,986       45.1 %      28,054       40.0 %       75,162       43.4 %       90,199       39.8 %
SG&A (see note below)           25,965       45.0 %      28,196       40.2 %       78,932       45.6 %       89,450       39.5 %
Bad debt and notes
receivable valuation
charges                          1,230        2.1 %       4,051        5.8 %       12,971        7.5 %        6,059        2.7 %
Unusual charges, net             1,777        3.2 %         880        1.2 %        3,450        2.0 %        1,340        0.5 %

Loss from operations          $ (2,986 )     -5.2 %    $ (5,073 )     -7.2 %    $ (20,191 )    -11.7 %    $  (6,650 )     -2.9 %

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 third quarter of 2009 of $57,670, a decrease of $12,489 or 17.8% from sales levels attained in the third quarter of 2008. Sales for the nine months ended August 29, 2009 were $173,199, a decrease of $53,421 or 23.6%.

Restructuring, asset impairment charges and unusual gain, net

The results for the nine months ended August 29, 2009 included several restructuring and other non-cash items including $1,777 for lease exit charges and $376 for the write-off of leasehold improvements associated with the closure of Company-owned stores in Lewisville and Arlington, Texas, and Alpharetta, Georgia. 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 nine months ended August 30, 2008 included 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 $624 of impairment charges and $640 of lease exit costs associated with the closure of one Company-owned and one licensee-owned store.

The following table summarizes these net charges:

                                               August 29, 2009                    August 30, 2008
                                          Quarter       Year-to-Date        Quarter         Year-to-Date
Write-off of leasehold improvements      $      -       $       1,068      $      240      $          624
Severance charges                               -                 320              -                   -
Gain on sale of airplane                        -                  -               -               (1,342 )
Lease exit charges                           1,777              2,062             640                 640
Proxy defense costs                             -                  -               -                1,418

                                         $   1,777      $       3,450      $      880      $        1,340

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 the Bassett Industries Alternative Asset Fund ("BIAAF") and marketable securities, distributions in excess of affiliate earnings, primarily the International Home Furnishings Center ("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 loss, 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                                  Nine Months Ended
                             August 29, 2009          August 30, 2008          August 29, 2009          August 30, 2008
Net sales                   $   41,771   100.0 %    $ 59,466      100.0 %    $ 134,731      100.0 %    $  190,766   100.0 %

Gross profit                    12,656    30.3 %      17,654       29.7 %       38,668       28.7 %        56,748    29.7 %
SG&A (see note below)           11,136    26.7 %      14,598       24.5 %       36,137       26.8 %        48,130    25.2 %
Bad debt and notes
receivable valuation
charges                          1,230     2.9 %       4,051        6.8 %       12,971        9.6 %         6,059     3.2 %

Income (loss) from
operations                  $      290     0.7 %    $   (995 )     -1.7 %    $ (10,440 )     -7.7 %    $    2,559     1.3 %

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 $41,771 for the third quarter of 2009 as compared to $59,466 for the third quarter of 2008, a decrease of 29.8%. Approximately 51% of wholesale shipments during the third quarter of 2009 were imported products compared to approximately 53% for the third quarter of 2008. Gross margins for the wholesale segment were 30.3% for the third quarter of 2009 as compared to 29.7% for the third quarter of 2008. This increase is primarily due to lower material costs as a result of negotiated price decreases from vendors, in addition to lower freight costs. Wholesale SG&A, excluding bad debt and notes receivable valuation charges, decreased $3,462 during the third quarter of 2009 as compared to 2008, due primarily to lower spending due to lower sales and continued cost cutting measures. We recorded $1,230 of bad debt and notes receivable valuation charges for the third quarter of 2009 as compared to $4,051 for the third quarter of 2008. This significant decrease in charges is primarily due to the Company working diligently with the licensees to control increases in accounts and notes receivable exposure.

Net sales for the wholesale segment were $134,731 for the nine months ended August 29, 2009 as compared to $190,766 for the nine months ended August 30, 2008, a decrease of 29.4%. Gross margins for the wholesale segment were 28.7% for the nine months ended August 29, 2009 as compared to 29.7% for the nine months ended August 30, 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 $11,993 for the nine months ended August 29, 2009 as compared to the nine months ended August 30, 2008 due primarily to decreased wholesale spending due to lower sales and continued cost cutting measures. The Company recorded $12,971 of bad debt and notes receivable valuation charges for the nine months ended August 29, 2009, as compared to $6,059 during the nine months ended August 30, 2008, as our licensees have struggled to pay for the furniture shipped to them in this prolonged and severe recessionary environment.

Wholesale shipments by type:

                                           Quarter Ended                                 Nine Months Ended
                              August 29, 2009         August 30, 2008         August 29, 2009         August 30, 2008
Wood                         $   20,490    49.1 %    $   31,083    52.3 %    $   68,044    50.5 %    $  101,329    53.1 %
Upholstery                       20,907    50.0 %        27,168    45.7 %        65,110    48.3 %        86,995    45.6 %
Other                               374     0.9 %         1,215     2.0 %         1,577     1.2 %         2,442     1.3 %

Total                        $   41,771   100.0 %    $   59,466   100.0 %    $  134,731   100.0 %    $  190,766   100.0 %

Retail Segment-Company-Owned Retail Stores



                                        Quarter Ended                                   Nine Months Ended
                           August 29, 2009          August 30, 2008          August 29, 2009          August 30, 2008
Net sales                $ 28,484      100.0 %    $ 24,004      100.0 %    $ 77,887      100.0 %    $ 74,529      100.0 %

Gross profit               12,845       45.1 %      10,803       45.0 %      36,141       46.4 %      34,115       45.8 %
SG&A                       14,830       52.1 %      13,610       56.7 %      42,793       54.9 %      41,337       55.5 %

Operating loss           $ (1,985 )     -7.0 %    $ (2,807 )    -11.7 %    $ (6,652 )     -8.5 %    $ (7,222 )     -9.7 %

Our Company-owned store network had sales of $28,484 in the third quarter of 2009 as compared to $24,004 in the third quarter of 2008, an increase of 18.7%. On a comparable store basis (stores open for more

than one year), sales decreased 2.8%. Gross margins for the quarter were essentially flat when compared to the third quarter of 2008. Our gross margins for the third quarter of 2009 decreased 2.1 percentage points as compared to the second quarter of 2009 as we performed a fleet-wide inventory reduction sale which resulted in lower gross margins. SG&A increased $1,220 primarily due to corporate store acquisitions, partially offset by continued cost containment efforts during the quarter. On a comparable store basis, our operating loss was reduced by 32.8% to $1,512, primarily due to lower SG&A spending resulting from lower sales and our cost-containment efforts.

Our Company-owned store network had sales of $77,887 in the nine months ended August 29, 2009 as compared to $74,529 in the nine months ended August 30, 2008, an increase of 4.5%. On a comparable store basis, sales decreased 5.0%. Gross margins for the nine months ended August 29, 2009 increased 0.6 percentage points due to improved pricing and promotional strategies, partially offset by reduced margins from our inventory reduction sale. SG&A increased $1,456 primarily due to corporate store acquisitions, partially offset by continued cost containment efforts. As part of the store acquisitions during the nine months ended August 29, 2009, we did not acquire the existing delivery backlog at the time of acquisition for certain of the stores. Consequently, we incurred significant SG&A expenses (rent and administrative payroll) without a commensurate level of delivered sales. On a comparable store basis, our operating loss was reduced by 18.1% to $4,481, primarily due to lower SG&A spending resulting from lower sales and our cost-containment efforts.

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 Loss

Our investments and real estate segment consists of our investments (BIAAF and marketable securities), distributions in excess of affiliate earnings 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 loss, net in our condensed consolidated statements of operations and retained earnings. 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 nine months ended August 29, 2009 and August 30, 2008, are as follows:

                                                Quarter Ended                                       Nine Months Ended
                                  August 29, 2009            August 30, 2008            August 29, 2009            August 30, 2008
Loss from Alternative
Asset Fund                       $            (801 )        $            (472 )        $          (1,875 )        $          (1,424 )
Income (loss) from
marketable securities                          145                       (129 )                     (648 )                    1,439
Income from unconsolidated
affiliated companies, net                    1,048                      1,461                      3,457                      3,545
Interest expense                              (543 )                     (529 )                   (1,641 )                   (1,881 )
Loan and lease guarantee
(expense) income                              (554 )                       60                     (2,428 )                      194
Real estate expense, net                      (365 )                     (661 )                   (1,831 )                   (1,780 )
Other                                          224                       (475 )                     (364 )                     (553 )

Other loss, net                  $            (846 )        $            (745 )        $          (5,330 )        $            (460 )

The BIAAF recorded a loss of $801 for the quarter ended August 29, 2009 due to decreases in the value of our investment in the DB Zwirn Special Opportunities Fund. The General Partner has advised us that this decrease is due to the magnitude of the level of redemption requests, which are requiring the fund to totally liquidate all of its underlying holdings at less than favorable values.

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 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 quarters ended May 30, 2009 and August 29, 2009, we did not record a charge for other than temporary declines 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 our other equity method investment, Zenith Freight Lines, LLC ("Zenith"). We recognized income (loss) from IHFC and Zenith as follows:

                                       Quarter ended                                     Nine Months ended
                          August 29, 2009          August 30, 2008            August 29, 2009          August 30, 2008
IHFC                     $              979       $           1,470          $            3,187       $           3,896
Zenith                                   69                      (9 )                       270                    (351 )

Loan and lease guarantee expense consists of adjustments to our reserves for the net amount of our estimated losses on loan and lease guarantees that we have entered into on behalf of our licensees. We recognized expense of $554 and $2,428, respectively, for the quarter and nine months ended August 29, 2009 compared to income of $60 and $194, respectively, for the comparable 2008 periods to reflect the additional risk that we may have to assume the underlying obligations with respect to our guarantees.

Other income and expenses for the quarter and nine months ended August 29, 2009 include income of $456 associated with the receipt of a death benefit from a life insurance policy associated with our Supplemental Executive Retirement Income Plan.

Income taxes

We calculate an anticipated effective tax rate for the year based on our annual estimates of pretax income or loss and use that effective tax rate to record our year-to-date income tax provision. Any change in annual projections of pretax income or loss could have a significant impact on our effective tax rate for the respective quarter. During the fourth quarter of 2008, we recorded a $23,383 charge to establish a valuation allowance against substantially all of our deferred tax assets as we were in a cumulative loss position for the past three years, which is considered significant negative evidence as to whether our deferred tax assets will be realized. For the quarter and nine months ended August 29, 2009, a tax benefit on the losses generated was not recorded since the Company remained in a cumulative loss position, however, a tax benefit of . . .