UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549-1004

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

_{LA-Z-BOY INCORPORATED}

(Exact name of registrant as specified in its charter)

MICHIGAN		38-0751137
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1284 North Telegraph Road, Monroe, Michigan		48162-3390
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (734) 242-1444

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes þ     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o     Accelerated filer þ      Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o      No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Class		Outstanding at October 27, 2007
Common Shares, $1.00 par value		51,416,118

 

 

LA-Z-BOY INCORPORATED
FORM 10-Q SECOND QUARTER OF FISCAL 2008

TABLE OF CONTENTS

		Page
		Number(s)
PART I Financial Information
Item 1. Financial Statements
Consolidated Statement of Operations
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Changes in Shareholders’ Equity
Notes to Consolidated Financial Statements
Note 1. Basis of Presentation
Note 2. Interim Results
Note 3. Reclassification
Note 4. Inventories
Note 5. Goodwill and Other Intangible Assets
Note 6. Debt
Note 7. Pension Plans
Note 8. Financial Guarantees and Product Warranties
Note 9. Stock-Based Compensation
Note 10. Segment Information
Note 11. Restructuring
Note 12. Uncertain Tax Positions
Note 13. Variable Interest Entities
Note 14. Discontinued Operations
Note 15. Earnings per Share
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Concerning Forward-Looking Statements
Introduction
Results of Operations
Liquidity and Capital Resources
Critical Accounting Policies
Restructuring
Regulatory Developments
Recent Accounting Pronouncements
Business Outlook
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II Other Information
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits
Signature Page
Third Amendment to Credit Agreement
Certifications of Chief Executive Officer
Certifications of Chief Financial Officer
Section 1350 Certifications of Executive Officers
Press Release, dated November 13, 2007

PART I
FINANCIAL INFORMATION

LA-Z-BOY INCORPORATED

		Second Quarter Ended
														Percent of Sales
(Unaudited, amounts in thousands, except										% Over
per share data)		10/27/07				10/28/06				(Under)				10/27/07				10/28/06
Sales		$	365,434			$	414,614				-11.9	%			100.0	%			100.0	%
Cost of sales
Cost of goods sold			266,658				306,351				-13.0	%			73.0	%			73.9	%
Restructuring			518				(400	)			-229.5	%			0.1	%			-0.1	%
Total cost of sales			267,176				305,951				-12.7	%			73.1	%			73.8	%
Gross profit			98,258				108,663				-9.6	%			26.9	%			26.2	%
Selling, general and administrative			98,098				99,887				-1.8	%			26.8	%			24.1	%
Write-down of intangibles			5,809				—				N/M				1.6	%			—
Restructuring			449				2,265				-80.2	%			0.1	%			0.5	%
Operating income (loss)			(6,098	)			6,511				-193.7	%			-1.7	%			1.6	%
Interest expense			2,120				2,614				-18.9	%			0.6	%			0.6	%
Other income, net			1,374				1,348				1.9	%			0.4	%			0.3	%
Income (loss) from continuing operations before income taxes			(6,844	)			5,245				-230.5	%			-1.9	%			1.3	%
Income tax expense (benefit)			(3,192	)			1,949				-263.8	%			46.6	%*			37.2	%*
Income (loss) from continuing operations			(3,652	)			3,296				-210.8	%			-1.0	%			0.8	%
Loss from discontinued operations (net of tax)			(6,282	)			(1,342	)			-368.1	%			-1.7	%			-0.3	%
Net income (loss)		$	(9,934	)		$	1,954				-608.4	%			-2.7	%			0.5	%
Basic average shares			51,410				51,373
Basic income (loss) from continuing operations per share		$	(0.07	)		$	0.06
Discontinued operations per share (net of tax)		$	(0.12	)		$	(0.02	)
Basic net income (loss) per share		$	(0.19	)		$	0.04
Diluted average shares			51,410				51,639
Diluted income (loss) from continuing operations per share		$	(0.07	)		$	0.06
Discontinued operations per share (net of tax)		$	(0.12	)		$	(0.02	)
Diluted net income (loss) per share		$	(0.19	)		$	0.04
Dividends paid per share		$	0.12			$	0.12

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

LA-Z-BOY INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS

		Six Months Ended
														Percent of Sales
(Unaudited, amounts in thousands, except										% Over
per share data)		10/27/07				10/28/06				(Under)				10/27/07				10/28/06
Sales		$	709,830			$	808,537				-12.2	%			100.0	%			100.0	%
Cost of sales
Cost of goods sold			525,801				602,359				-12.7	%			74.1	%			74.5	%
Restructuring			3,079				(400	)			-869.8	%			0.4	%			—
Total cost of sales			528,880				601,959				-12.1	%			74.5	%			74.5	%
Gross profit			180,950				206,578				-12.4	%			25.5	%			25.5	%
Selling, general and administrative			192,606				194,570				-1.0	%			27.1	%			24.1	%
Write-down of intangibles			5,809				—				N/M				0.8	%			—
Restructuring			1,569				2,265				-30.7	%			0.2	%			0.3	%
Operating income (loss)			(19,034	)			9,743				-295.4	%			-2.7	%			1.2	%
Interest expense			4,217				5,140				-18.0	%			0.6	%			0.6	%
Other income, net			2,822				1,618				74.4	%			0.4	%			0.2	%
Income (loss) from continuing operations before income taxes			(20,429	)			6,221				-428.4	%			-2.9	%			0.8	%
Income tax expense (benefit)			(8,235	)			1,833				-549.3	%			40.3	%*			29.5	%*
Income (loss) from continuing operations			(12,194	)			4,388				-377.9	%			-1.7	%			0.5	%
Loss from discontinued operations (net of tax)			(6,434	)			(139	)			N/M	%			-0.9	%			—
Net income (loss)		$	(18,628	)		$	4,249				-538.4	%			-2.6	%			0.5	%
Basic average shares			51,395				51,580
Basic income (loss) from continuing operations per share		$	(0.24	)		$	0.08
Discontinued operations per share (net of tax)		$	(0.12	)			—
Basic net income (loss) per share		$	(0.36	)		$	0.08
Diluted average shares			51,395				51,806
Diluted income (loss) from continuing operations per share		$	(0.24	)		$	0.08
Discontinued operations per share (net of tax)		$	(0.12	)			—
Diluted net income (loss) per share		$	(0.36	)		$	0.08
Dividends paid per share		$	0.24			$	0.24

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

LA-Z-BOY INCORPORATED

										Increase/(Decrease)
(Unaudited, amounts in thousands)		10/27/07				10/28/06				Dollars				Percent				4/28/07
Current assets
Cash and equivalents		$	32,692			$	20,529			$	12,163				59.2	%		$	51,721
Receivables, net			215,275				253,519				(38,244	)			-15.1	%			230,399
Inventories, net			190,985				237,885				(46,900	)			-19.7	%			197,790
Deferred income taxes—current			14,337				16,043				(1,706	)			-10.6	%			17,283
Assets of discontinued operations			3,634				—				3,634				N/M				24,278
Other current assets			27,073				29,076				(2,003	)			-6.9	%			19,327
Total current assets			483,996				557,052				(73,056	)			-13.1	%			540,798
Property, plant and equipment, net			180,912				204,904				(23,992	)			-11.7	%			183,218
Deferred income taxes—long term			25,608				3,451				22,157				N/M				15,380
Goodwill			49,850				62,736				(12,886	)			-20.5	%			55,659
Trade names			9,006				18,794				(9,788	)			-52.1	%			9,472
Other long-term assets			76,545				80,166				(3,621	)			-4.5	%			74,164
Total assets		$	825,917			$	927,103			$	(101,186	)			-10.9	%		$	878,691
Current liabilities
Short-term borrowings		$	—			$	35,000			$	(35,000	)			-100.0	%		$	—
Current portion of long-term debt			38,353				3,295				35,058				N/M				37,688
Accounts payable			54,194				72,308				(18,114	)			-25.1	%			68,089
Liabilities of discontinued operations			1,664				—				1,664				N/M				3,843
Accrued expenses and other current liabilities			103,130				114,762				(11,632	)			-10.1	%			118,590
Total current liabilities			197,341				225,365				(28,024	)			-12.4	%			228,210
Long-term debt			110,774				147,799				(37,025	)			-25.1	%			111,714
Income taxes payable — long term			7,084				—				7,084				N/M				—
Other long-term liabilities			56,474				54,920				1,554				2.8	%			53,419
Contingencies and commitments			—				—				—				—				—
Shareholders’ equity
Common shares, $1 par value			51,416				51,364				52				0.1	%			51,377
Capital in excess of par value			206,636				206,145				491				0.2	%			208,283
Retained earnings			193,681				236,635				(42,954	)			-18.2	%			223,896
Accumulated other comprehensive income			2,511				4,875				(2,364	)			-48.5	%			1,792
Total shareholders’ equity			454,244				499,019				(44,775	)			-9.0	%			485,348
Total liabilities and shareholders’ equity		$	825,917			$	927,103			$	(101,186	)			-10.9	%		$	878,691

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

LA-Z-BOY INCORPORATED

		Second Quarter Ended								Six Months Ended
(Unaudited, amounts in thousands)		10/27/07				10/28/06				10/27/07				10/28/06
Cash flows from operating activities
Net income (loss)		$	(9,934	)		$	1,954			$	(18,628	)		$	4,249
Adjustments to reconcile net income (loss) to cash used for operating activities
Loss (gain) on sale of discontinued operations (net of tax)			3,990				—				3,990				(1,280	)
Write-down of businesses held for sale (net of tax)			2,159				—				2,159				—
Write-down of intangibles (net of tax)			3,689				—				3,689				—
Restructuring			967				1,865				4,648				1,865
Provision for doubtful accounts			1,505				1,643				3,619				2,807
Depreciation and amortization			6,093				6,809				12,313				13,889
Stock-based compensation expense			1,001				1,861				1,862				2,732
Change in receivables			(13,409	)			(24,228	)			9,188				(2,945	)
Change in inventories			15,323				873				9,252				(17,117	)
Change in payables			1,000				(2,060	)			(14,414	)			(9,379	)
Change in other assets and liabilities			6,568				(8,623	)			(16,678	)			(15,570	)
Change in deferred taxes			(4,671	)			(3,110	)			(6,146	)			(6,766	)
Total adjustments			24,215				(24,970	)			13,482				(31,764	)
Net cash provided by (used for) operating activities			14,281				(23,016	)			(5,146	)			(27,515	)
Cash flows from investing activities
Proceeds from disposals of assets			867				3,633				7,282				24,962
Proceeds from sale of discontinued operations			4,019				3,184				4,019				33,166
Capital expenditures			(5,970	)			(5,767	)			(15,599	)			(15,010	)
Purchases of investments			(6,648	)			(2,760	)			(13,270	)			(8,392	)
Proceeds from sales of investments			7,801				2,320				14,593				8,017
Change in other long-term assets			365				(701	)			385				(196	)
Net cash provided by (used for) investing activities			434				(91	)			(2,590	)			42,547
Cash flows from financing activities
Proceeds from debt			171				56,276				817				78,675
Payments on debt			(192	)			(31,266	)			(1,092	)			(78,680	)
Stock issued for stock and employee benefit plans			(94	)			(342	)			(116	)			766
Repurchases of common stock			—				(3,261	)			—				(6,947	)
Dividends paid			(6,232	)			(6,213	)			(12,441	)			(12,462	)
Net cash provided by (used for) financing activities			(6,347	)			15,194				(12,832	)			(18,648	)
Effect of exchange rate changes on cash and equivalents			538				49				1,539				56
Change in cash and equivalents			8,906				(7,864	)			(19,029	)			(3,560	)
Cash and equivalents at beginning of period			23,786				28,393				51,721				24,089
Cash and equivalents at end of period		$	32,692			$	20,529			$	32,692			$	20,529
Cash paid (net of refunds) during period — income taxes		$	758			$	16,889			$	3,893			$	17,097
Cash paid during period — interest		$	1,495			$	1,748			$	3,405			$	4,660

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

LA-Z-BOY INCORPORATED

																		Accumulated
																		Other
						Capital in								Unearned				Compre-
		Common				Excess of Par				Retained				Compen-				hensive
(Unaudited, amounts in thousands)		Shares				Value				Earnings				sation				Income(Loss)				Total
At April 29, 2006		$	51,782			$	210,826			$	246,387			($	3,083	)		$	4,433			$	510,345
Reclassification of unearned compensation due to adoption of SFAS No. 123(R)							(3,083	)							3,083								—
Repurchases of common stock			(540	)							(6,407	)											(6,947	)
Stock issued for stock and employee benefit plans			135				(3,458	)			4,663												1,340
Stock option and restricted stock expense							3,959																3,959
Tax benefit from exercise of options							39																39
Dividends paid											(24,886	)											(24,886	)
Comprehensive income (loss)
Net income											4,139
Unrealized gain on marketable securities (net of tax of $0.5 million)																			1,145
Realized gain on marketable securities (net of tax of $0.3 million)																			(458	)
Translation adjustment																			1,418
Change in fair value of cash flow hedges (net of tax)																			(118	)
Change in additional minimum pension liability (net of tax of $0.1 million)																			319
Total comprehensive income																							6,445
Adjustment upon adoption of SFAS No. 158 for pension (net of tax of $3.2 million)																			(4,947	)			(4,947	)
At April 28, 2007		$	51,377			$	208,283			$	223,896			$	—			$	1,792			$	485,348
Stock issued for stock and employee benefit plans			39				(3,509	)			3,354												(116	)
Stock option and restricted stock expense							1,862																1,862
Dividends paid											(12,441	)											(12,441	)
Comprehensive income (loss)
Net loss											(18,628	)
Unrealized gain on marketable securities (net of tax of $0.2 million)																			409
Realized gain on marketable securities (net of tax of $0.1 million)																			(165	)
Translation adjustment																			443
Change in the fair value of cash flow hedges (net of tax)																			32
Total comprehensive loss																							(17,909	)
Impact of adoption of FIN 48											(2,500	)											(2,500	)
At October 27, 2007		$	51,416			$	206,636			$	193,681			$	—			$	2,511			$	454,244

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1: Basis of Presentation

The interim financial information is prepared in conformity with generally accepted accounting principles and such principles are applied on a basis consistent with those reflected in our fiscal 2007 Annual Report on Form 10-K, filed with the Securities and Exchange Commission, but does not include all the disclosures required by generally accepted accounting principles. In the opinion of management, the interim financial information includes all adjustments and accruals, consisting only of normal recurring adjustments, which are necessary for a fair presentation of results for the respective interim period.

Note 2: Interim Results

The foregoing interim results are not necessarily indicative of the results of operations which will occur for the full fiscal year ending April 26, 2008.

Note 3: Reclassification

Certain prior year information has been reclassified to be comparable with the current year presentation.

Note 4: Inventories

A summary of inventory follows:

(Amounts in thousands)		10/27/07				10/28/06				4/28/07
Raw materials		$	71,742			$	80,331			$	69,562
Work in process			17,652				23,115				19,972
Finished goods			126,014				156,245				132,679
FIFO inventories			215,408				259,691				222,213
Excess of FIFO over LIFO			(24,423	)			(21,806	)			(24,423	)
Inventories, net		$	190,985			$	237,885			$	197,790

Note 5: Goodwill and Other Intangible Assets

In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, (“SFAS No. 142”), trade names are tested at least annually for impairment by comparing their fair value to their carrying values. The fair value for each trade name is established based upon a royalty savings approach. Additionally, goodwill is tested for impairment by comparing the fair value of our operating units to their carrying values. The fair value for each operating unit is established based upon a combination of the discounted cash flows and the projected profitability of the market in which the entity operates.

With the decline in the housing market affecting Florida greater than the rest of the country, we have delayed our store growth in the market. The double-digit decline in sales over the past twelve months coupled with our change in the timing of our store build-out triggered us to evaluate our goodwill in South Florida in advance of our normal testing in the fourth quarter of each fiscal year. We have not experienced as dramatic of a sales decline and have not made any strategic decisions to delay store build-out in our other retail markets that have goodwill. As a result of the significant change in our valuation model for this business, we recorded an impairment charge of $5.8 million, $3.7 million after tax, in the second quarter of fiscal 2008.

In the first quarter of fiscal 2008, we reevaluated our tax reserves relating to an acquisition in fiscal 2000. Due primarily to the lapsing of statutes of limitations, a reduction of the tax reserves was recorded. This reduction in the tax reserves was recorded as a reduction in the remaining acquired intangible assets, which consisted of trade names and totaled $0.7 million. Of this reduction $0.3 million related to trade names of our discontinued operations and is not shown in the table that follows.

The following table summarizes the changes to goodwill and trade names during the first half of fiscal 2008:

		Balance				Impairments				Balance
		as of				and				as of
(Amounts in thousands)		4/28/07				Dispositions				10/27/07
Goodwill
Upholstery Group		$	19,632			$	—			$	19,632
Retail Group			27,905				(5,809	)			22,096
Corporate and Other			8,122				—				8,122
Consolidated		$	55,659			$	(5,809	)		$	49,850
Trade names
Casegoods Group		$	9,472			$	(466	)		$	9,006

Note 6: Debt

		Fiscal
		Year
(Amounts in thousands)		Maturity				10/27/07				4/28/07
Revolving credit facility			2010			$	—			$	—
Industrial revenue bonds			2010-2023				16,851				16,851
Private placement notes			2008				35,000				35,000
			2010				36,000				36,000
			2013				50,000				50,000
Other debt			2008-2011				9,948				9,768
Capital leases			2008-2011				1,328				1,783
Total debt							149,127				149,402
Less: current portion							(38,353	)			(37,688	)
Long-term debt						$	110,774			$	111,714

Certain of our debt agreements require that certain financial covenants be met. As of the end of the second quarter, we were not in compliance with the fixed charge coverage ratio requirement under our revolving credit facility. We obtained an amendment to our fixed charge coverage ratio from our revolving credit facility lenders, dated November 6, 2007, to amend the ratio for our quarter ended October 27, 2007 so that we were in compliance. Although we were in compliance with our other financial covenants, we believe that we will not be in compliance with the fixed charge coverage ratio requirements relating to both our revolving credit facility and private placement notes as of the end of the third quarter, and therefore we have engaged our lead bank to begin structuring a new secured credit facility. We had no unamortized debt issue costs as of the end of the second quarter of fiscal 2008.

We believe that by the end of our fiscal 2008 third quarter, we will be successful in negotiating a long-term credit facility, which we will utilize to pay off our private placement notes. There can be no assurance that an agreement can be reached; however, we consider this scenario unlikely. If an agreement cannot be reached and the lenders were to exercise their right to accelerate the maturity of their notes, this could result in an adverse effect on us unless the lenders were to agree to forbearance or restructuring of the debt.

In order to repay our private placement notes, we will be required to pay a ‘make-whole’ premium which is currently in the range of $2.5 — $3.0 million. We anticipate that the interest rate on the new debt, which is expected to be collateralized by accounts receivable and inventory, will be greater than the average interest rate for the private placement notes.

Note 7: Pension Plans

Net periodic pension costs were as follows:

		Second Quarter Ended								Six Months Ended
(Amounts in thousands)		10/27/07				10/28/06				10/27/07				10/28/06
Service cost		$	441			$	578			$	882			$	1,154
Interest cost			1,346				1,338				2,692				2,676
Expected return on plan assets			(1,839	)			(1,719	)			(3,678	)			(3,438	)
Net amortization and deferral			—				9				—				18
Net periodic pension cost (benefit)		$	(52	)		$	206			$	(104	)		$	410

We are not required to make any contributions to the defined benefit plans in fiscal year 2008, however we may make discretionary contributions. We did not make any contributions to the plans during the first six months of fiscal 2008.

Note 8: Financial Guarantees and Product Warranties

We have provided financial guarantees relating to leases in connection with certain La-Z-Boy Furniture Galleries® stores which are not operated by the company. The lease guarantees are generally for real estate leases and have terms lasting from five to ten years. These lease guarantees enhance the credit of these dealers. The dealer is required to make periodic fee payments to compensate us for our guarantees. We have recognized liabilities for the fair values of the lease agreements that we have entered into, but they are not material to our financial position.

We would be required to perform under these agreements only if the dealer were to default on the lease. The maximum amount of potential future payments under lease guarantees was $15.5 million as of October 27, 2007.

We have, from time to time, entered into agreements which resulted in indemnifying third parties against certain liabilities, mainly environmental obligations. We believe that judgments, if any, against us related to such agreements would not have a material effect on our business or financial condition.

Our accounting policy for product warranties is to accrue an estimated liability at the time the revenue is recognized. This estimate is based on historical claims and adjusted for currently known warranty issues.

A reconciliation of the changes in our product warranty liability is as follows:

		Second Quarter Ended								Six Months Ended
(Amounts in thousands)		10/27/07				10/28/06				10/27/07				10/28/06
Balance as of the beginning of the period		$	13,960			$	17,816			$	13,983			$	19,655
Accruals during the period			4,148				3,574				8,331				7,007
Adjustments for discontinued operations			—				—				—				(956	)
Other adjustments during the period			—				(1,496	)			—				(2,267	)
Settlements during the period			(4,198	)			(3,503	)			(8,404	)			(7,048	)
Balance as of the end of the period		$	13,910			$	16,391			$	13,910			$	16,391

Other adjustments of $1.5 million and $2.3 million for the quarter and six months ended October 28, 2006, respectively, reflected a trend of lower warranty costs incurred beyond one year after the sale of the product. Our current trends show that a majority of our claims were from product sold in the past twelve months thus reducing our liability, along with changes in estimated amounts required for currently known warranty issues.

Note 9: Stock-Based Compensation

We account for share-based compensation transactions in accordance with the provisions of Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment (“SFAS 123R”). SFAS 123R requires all companies to measure and recognize compensation expense at an amount equal to the fair value of share-based payments granted under compensation arrangements. The fair value for the employee stock options granted during the respective periods were estimated at the date of grant using the Black-Scholes option-pricing model and are amortized on a straight-line basis as compensation expense over the vesting periods of the options. For the three and six months ended October 27, 2007, we recorded total stock-based compensation expense of approximately $1.0 million and approximately $1.9 million, respectively. For the three and six months ended October 28, 2006, we recorded total stock-based compensation expense of approximately $1.9 million and approximately $2.7 million, respectively.

As of October 27, 2007, there was approximately $4.0 million of total unrecognized compensation expense related to restricted stock, which we expect to recognize on a straight-line basis over an average remaining service period of approximately 2.5 years.

Note 10: Segment Information

Our reportable operating segments are the Upholstery Group, the Casegoods Group and the Retail Group.

Upholstery Group. The operating units in the Upholstery Group are Bauhaus, England, La-Z-Boy and La-Z-Boy UK. This group primarily manufactures and sells upholstered furniture to furniture retailers. Upholstered furniture includes recliners and motion furniture, sofas, loveseats, chairs, ottomans and sleeper sofas.

Casegoods Group. The operating units in the Casegoods Group are American Drew/Lea, Hammary and Kincaid. This group primarily sells manufactured or imported wood furniture to furniture retailers. Casegoods product includes tables, chairs, entertainment centers, headboards, dressers, accent pieces and some upholstered furniture.

Retail Group. The Retail Group consists of 70 company-owned La-Z-Boy Furniture Galleries® stores (“the retail network”). The Retail Group sells mostly upholstered furniture to end consumers.

		Second Quarter Ended								Six Months Ended
		10/27/07				10/28/06				10/27/07				10/28/06
(Amounts in thousands)		(13 weeks)				(13 weeks)				(26 weeks)				(26 weeks)
Sales
Upholstery Group		$	269,749			$	304,598			$	524,506			$	599,995
Casegoods Group			58,892				74,164				112,466				135,190
Retail Group			46,163				52,485				91,394				104,689
VIEs/Eliminations			(9,370	)			(16,633	)			(18,536	)			(31,337	)
Consolidated		$	365,434			$	414,614			$	709,830			$	808,537
Operating income (loss)
Upholstery Group		$	19,036			$	20,162			$	27,903			$	37,787
Casegoods Group			3,577				6,200				6,177				9,442
Retail Group			(9,119	)			(8,769	)			(19,193	)			(16,484	)
Corporate and Other*			(12,816	)			(9,217	)			(23,464	)			(19,137	)
Intangible write-down			(5,809	)			—				(5,809	)			—
Restructuring			(967	)			(1,865	)			(4,648	)			(1,865	)
		$	(6,098	)		$	6,511			$	(19,034	)		$	9,743

Note 11: Restructuring

In the fourth quarter of fiscal 2007, we committed to a restructuring plan which included the closures of our Lincolnton, North Carolina and Iuka, Mississippi upholstery manufacturing facilities, the closure of our rough mill lumber operation in North Wilkesboro, North Carolina, the consolidation of operations at our Kincaid Taylorsville, North Carolina upholstery operation and the elimination of a number of positions throughout the remainder of the organization. The Lincolnton and Iuka facility closures occurred in the first quarter of fiscal 2008 and impacted approximately 250 and 150 employees, respectively. The closure of our North Wilkesboro lumber operation, the consolidation of operations at Kincaid’s Taylorsville operation and the remaining activities occurred in the fourth quarter of fiscal 2007 and impacted approximately 100 positions. These decisions were made to help align our company with the current business environment and strengthen our positioning going forward.

During the second quarter and first half of fiscal 2008, we recorded pre-tax restructuring charges in cost of sales of $0.5 million and $3.1 million, respectively which equates to $0.01 and $0.04 per diluted share, respectively, covering severance and benefits and other restructuring costs. During fiscal 2007, we recorded pre-tax restructuring charges of $4.3 million or $0.05 per diluted share covering severance and benefits, write-down of certain fixed assets in addition to other restructuring costs. Of these costs $4.0 million was reported as a component of Cost of Sales with the remainder in Selling, General and Administrative. The write-down was accounted for in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”). All other costs were accounted for in accordance with Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS No. 146”).

During fiscal 2007, several of our Retail warehouses were consolidated into larger facilities and several underperforming stores were closed. Approximately 100 jobs were eliminated as a result of these closures. During the second quarter and first half of fiscal 2008, we recorded pre-tax restructuring charges of $0.4 million and $1.5 million, respectively, which equates to $0.01 and $0.02 per diluted share, respectively, covering contract termination costs for the leases on these facilities, severance and benefits, write-down of certain leasehold improvements in addition to other relocation costs which were expensed as incurred. In fiscal 2007, we recorded pre-tax restructuring charges of $7.3 million or $0.08 per diluted share covering contract termination costs for the leases on these facilities, severance and benefits, write-down of certain leasehold improvements in addition to other relocation costs which were expensed as incurred. These costs were reported as a component of Selling, General and Administrative costs. The write-down was accounted for in accordance with SFAS No. 144. All other costs were accounted for in accordance with SFAS No. 146.

As of October 27, 2007, we had a remaining restructuring liability of $3.2 million which is expected to be paid out or written off as follows: $2.2 million in fiscal 2008, $0.5 million in fiscal 2009, $0.4 million in fiscal 2010 and $0.1 million thereafter. Contract terminations resulting from the closure of several of our retail stores and warehouses resulted in our restructuring liability being paid out over an extended length of time.

Restructuring liabilities along with charges to expense, cash payments or asset write-downs were as follows:

		Fiscal 2008
										Cash
										Payments
		4/28/07				Charges to				or Asset				10/27/07
(Amounts in thousands)		Balance				Expense				Write-Offs				Balance
Severance and benefit-related costs		$	2,177			$	1,828			$	(1,988	)		$	2,017
Fixed asset write-downs, net of gains			—				(144	)			144				—
Contract termination costs			1,257				1,197				(1,277	)			1,177
Other			—				1,767				(1,767	)			—
Total restructuring		$	3,434			$	4,648			$	(4,888	)		$	3,194

		Fiscal 2007
										Cash
										Payments
		4/29/06				Charges to				or Asset				4/28/07
(Amounts in thousands)		Balance				Expense				Write-Offs				Balance
Severance and benefit-related costs		$	891			$	2,537			$	(1,251	)		$	2,177
Fixed asset write-downs, net of gains			—				1,091				(1,091	)			—
Contract termination costs			—				3,441				(2,184	)			1,257
Other			—				3,964				(3,964	)			—
Total restructuring		$	891			$	11,033			$	(8,490	)		$	3,434

Note 12: Uncertain Tax Positions

We adopted FASB interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB 109 (“FIN 48”), effective as of April 29, 2007. As a result of the implementation of FIN 48, we recognized a $2.5 million decrease to beginning retained earnings. We elected to continue to classify interest and penalties, accrued as required by FIN 48, as a part of income tax expense. As of April 29, 2007, the gross amount of interest and penalties due to unrecognized tax benefits was $3.1 million which was included as a part of the unrecognized tax benefit discussed below. An additional $0.3 million of interest and penalties was accrued during the second quarter of fiscal 2008.

The total amount of unrecognized tax benefits as of the end of the second quarter of fiscal 2008 was $9.4 million, which includes $1.7 million attributable to timing differences that, once resolved, will have no impact on our effective tax rate. If recognized, $7.4 million of unrecognized tax benefits would decrease our effective tax rate.

We believe that it is reasonably possible that the amount of unrecognized tax benefits will decrease by about $2.4 million within the next twelve months. The amount of the expected reduction is comprised of gross unrecognized tax benefits of $2.0 million and interest and penalties of $1.4 million, net of deferred taxes of $1.0 million. This decrease relates to anticipated settlements of several outstanding issues with various taxing authorities, including cash payments of about $1.2 million.

United States federal income tax returns filed by us remain subject to examination for tax years 2004 and subsequent. In addition, our State returns remain subject to examination for tax years 2003 and subsequent. Canadian federal and provincial returns remain subject to examination for tax years 2002 and subsequent.

Note 13: Variable Interest Entities

Financial Accounting Standards Board Interpretation No. 46R, Consolidation of Variable Interest Entities (“FIN 46”), requires the “primary beneficiary” of a VIE to include the VIE’s assets, liabilities and operating results in its consolidated financial statements. In general, a VIE is a corporation, partnership, limited-liability corporation, trust or any other legal structure used to conduct activities or hold assets that either (a) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (b) has a group of equity owners that are unable to make significant decisions about its activities, or (c) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations.

La-Z-Boy Furniture Galleries® stores that are not operated by us are operated by independent dealers. These stores sell La-Z-Boy manufactured products as well as various accessories purchased from approved La-Z-Boy vendors. In some cases we have extended credit beyond normal trade terms to the independent dealers, made direct loans and/or guaranteed certain leases. Most of these independent dealers have sufficient equity to carry out their principal operating activities without subordinated financial support. However, there are certain independent dealers that we have determined may not have sufficient equity.

We have consolidated several dealers where we were the primary beneficiary based on the fair value of our variable interests. All of our consolidated VIEs were recorded at fair value on the date we became the primary beneficiary. Because these entities are accounted for as if the entities were consolidated based on voting interests, we absorb all net losses of the VIEs in excess of the equity at the dealerships. We recognize all net earnings of these VIEs to the extent of recouping the losses we recorded. Earnings in excess of our losses are attributed to equity owners of the dealers and are shown as minority interest on our financial statements. We had four consolidated VIEs throughout the second quarter of fiscal 2008 and 2007.

Our consolidated VIEs recognized $12.2 million and $10.2 million in sales, net of intercompany eliminations, in the second quarter of fiscal 2008 and the second quarter of fiscal 2007, respectively.  Additionally, we recognized a net loss per share of $0.04 in the second quarter of fiscal 2008 and the second quarter of fiscal 2007, resulting from the operating results of these VIEs.  Our consolidated VIEs recognized $24.0 million and $21.9 million in sales, net of intercompany eliminations, in the first half of fiscal 2008 and fiscal 2007, respectively.  Additionally, we recognized a net loss per share of $0.07 and $0.06 in the first half of fiscal 2008 and fiscal 2007, respectively, resulting from the operating results of these VIEs.  The VIEs had $0.6 million, $4.9 million and $2.8 million of assets net of elimination of intercompany balances at the end of the second quarter of fiscal 2008, the second quarter of fiscal 2007 and at the end of fiscal 2007, respectively.   

Note 14: Discontinued Operations

During the third quarter of fiscal 2007, we committed to a plan to sell Sam Moore, which was a part of our Upholstery Group, and to sell Clayton Marcus and Pennsylvania House, which were part of our Casegoods Group.  As we have continued to assess our long-term strategic direction, we have determined that these operating units do not align with our current strategic plan.  Due to this decision these operating units were presented as discontinued operations beginning in the third quarter of fiscal 2007 and segment data was reclassified.  Accordingly, our Consolidated Statement of Operations for the prior year has been reclassified to reflect the results of these operations as discontinued operations, with taxes allocated based on the operating units’ estimated effective tax rate and no corporate expenses or interest allocated. 

As a result of the decision to sell Sam Moore, Clayton Marcus and Pennsylvania House and subsequent testing of the fair value of the assets remaining to be sold, we recorded a $17.5 million ($13.7 million net of taxes) impairment charge in the third quarter of fiscal 2007 that is included in discontinued operations on our Consolidated Statement of Operations.  The pretax impairment charge was comprised of $3.6 million for impairment of the trade names, $7.3 million for impairment of goodwill, $0.2 million of other intangibles, $1.7 million for write-down of LIFO inventory relating to the APB 16 acquisition adjustment, $1.0 million for allowance for inventory and $3.7 million for the write down of fixed assets.  During the fourth quarter of fiscal 2007, current market data indicated the fixed assets for Clayton Marcus and Pennsylvania House were recorded above fair value, which resulted in an additional $1.3 million impairment of their fixed assets.

During the second quarter of fiscal 2008, we completed the sale of our Clayton Marcus operating unit and we completed the sale of our Pennsylvania House trade name. The stock of Clayton Marcus was sold to Rowe Fine Furniture, Incorporated and resulted in a loss of about $5.8 million ($3.6 million net of taxes), of which about $3.4 million related to the intangible assets of Clayton Marcus. The Pennsylvania House trade name was sold to Universal Furniture for $1.7 million resulting in a pre-tax charge of about $0.6 million ($0.4 million net of taxes). We are in the process of liquidating the remaining Pennsylvania House inventory at discounted prices, and as a result have recorded an additional loss of $3.0 million to write the inventory down to fair value.

On April 27, 2007, we completed the sale of our Sam Moore operating unit, an upholstered chair manufacturer. We sold the business for $9.9 million, consisting of $9.5 million in cash and a receivable of $0.4 million, recognizing a loss in the fourth quarter of $0.3 million. The receivable was subsequently collected in the first quarter of fiscal 2008.

During the first quarter of fiscal 2007, we completed the sale of our American of Martinsville operating unit, which supplied contract furniture to the hospitality, assisted-living and governmental markets. This operating unit was not a strategic fit with our current business model, which is centered on providing comfortable and stylish furnishings for the home, and was not a large enough component of our overall business (about 5% of sales) to justify our continued corporate focus and resources. We sold the business for $33.2 million, recognizing a pre-tax gain in the first quarter of $2.1 million.  This disposition qualified as discontinued

operations. Accordingly, our Consolidated Statement of Operations for the prior year has been reclassified to reflect the results of operations of this divested business as discontinued operations with taxes allocated based on the operating units’ estimated effective tax rate and no corporate expenses or interest allocated.  The business unit was previously included in the Casegoods Group, which was reclassified to reflect the discontinued operations.

For Clayton Marcus and Pennsylvania House, the assets and liabilities have been reclassified as assets and liabilities of discontinued operations. For the quarter ended October 27, 2007, the assets and liabilities mainly reflect the remaining accounts of Pennsylvania House, most of which will be liquidated or paid during our third fiscal quarter of 2008: 

(Amounts in thousands)		10/27/07				4/28/07
Assets of discontinued operations:
Receivables, net		$	2,038			$	7,140
Inventories, net			1,596				10,978
Trade names			—				5,740
Other assets			—				420
		$	3,634			$	24,278
Liabilities of discontinued operations:
Accounts payable		$	84			$	1,591
Accrued expenses			1,298				2,057
Non-current liabilities			282				195
		$	1,664			$	3,843

The results of the discontinued operations for Clayton Marcus and Pennsylvania House for the second quarter ended fiscal 2008 and for Sam Moore, Clayton Marcus, Pennsylvania House, and American of Martinsville for the second quarter ended fiscal 2007 were as follows:

		Second Quarter Ended								Six Months Ended
(Amounts in thousands)		10/27/07				10/28/06				10/27/07				10/28/06
Net sales		$	10,323			$	26,910			$	21,058			$	76,309
Loss from discontinued operations, net of tax		$	(2,292	)		$	(1,342	)		$	(2,444	)		$	(1,419	)
Gain (loss) on sale of discontinued operations, net of tax		$	(3,990	)		$	—			$	(3,990	)		$	1,280

In the Consolidated Statement of Cash Flows, the cash flows of discontinued operations were not reclassified for fiscal 2008 and fiscal 2007. The assets and liabilities of these operating units were not reclassified for second quarter of fiscal 2007. They are reported in the respective categories of the Consolidated Balance Sheet and Statement of Cash Flows along with those of our continuing operations.

Note 15: Earnings per Share

Basic earnings per share is computed using the weighted average number of shares outstanding during the period. Diluted net income per share uses the weighted average number of shares outstanding during the period plus the additional common shares that would be outstanding if the dilutive potential common shares issuable under employee stock options were issued. A reconciliation of basic and diluted weighted average common shares outstanding follows:

		Second Quarter								Six Months
		Ended								Ended
(Amounts in thousands)		10/27/07				10/28/06				10/27/07				10/28/06
Weighted average common shares outstanding (basic)			51,410				51,373				51,395				51,580
Effect of options and unvested restricted stock			—				266				—				226
Weighted average common shares outstanding (diluted)			51,410				51,639				51,395				51,806

The weighted average common shares outstanding (diluted) at October 27, 2007 excludes the effect of options to purchase 0.2 million shares because the net loss in the second quarter and first six months of fiscal 2008 would cause the effect of options to be anti-dilutive.

The effect of additional options to purchase 2.7 million and 1.1 million shares for the quarters ended October 27, 2007 and October 28, 2006 with a weighted average exercise price of $15.52 and $20.10 respectively, were excluded from the diluted share calculation because the exercise prices of these options were higher than the weighted average share price for the quarters and would have been anti-dilutive. 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Management’s Discussion and Analysis is an integral part of understanding our financial results. This Management’s Discussion and Analysis should be read in conjunction with the accompanying Consolidated Financial Statements and related Notes to Consolidated Financial Statements. We begin the Management’s Discussion and Analysis with an introduction to La-Z-Boy Incorporated’s key businesses, strategies and significant operational events in fiscal 2008. We then provide a discussion of our results of operations, liquidity and capital resources, quantitative and qualitative disclosures about market risk, and critical accounting policies.

Cautionary Statement Concerning Forward-Looking Statements

We are making forward-looking statements in this report. Generally, forward-looking statements include information concerning possible or assumed future actions, events or results of operations. More specifically, forward-looking statements include the information in this document regarding:

future income, margins and cash flows		future economic performance
future growth		industry and importing trends
adequacy and cost of financial resources		management plans

Forward-looking statements also include those preceded or followed by the words “anticipates,” “believes,” “estimates,” “hopes,” “plans,” “intends” and “expects” or similar expressions. With respect to all forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Actual results could differ materially from those anticipated or projected due to a number of factors. These factors include, but are not limited to: (a) changes in consumer confidence; (b) changes in demographics; (c) changes in housing sales; (d) the impact of terrorism or war; (e) continued energy price changes; (f) the impact of logistics on imports; (g) the impact of interest rate changes; (h) changes in currency exchange rates; (i) competitive factors; (j) operating factors, such as supply, labor or distribution disruptions including changes in operating conditions or costs; (k) effects of restructuring actions; (l) changes in the domestic or international regulatory environment; (m) ability to implement global sourcing organization strategies; (n) fair value changes to our intangible assets due to actual results differing from projected; (o) the impact of adopting new accounting principles; (p) the impact from natural events such as hurricanes, earthquakes and tornadoes; (q) the impact of retail store relocation costs, the success of new stores or the timing of converting stores to the New Generation format; (r) the ability to procure fabric rolls or cut and sewn fabric sets domestically or abroad; (s) the ability to sell the remaining assets of our discontinued operations for their recorded fair value; (t) those matters discussed under “Risk Factors” in our most recent Annual Report of Form 10-K and subsequent Quarterly Reports on Form 10-Q and factors relating to acquisitions and other factors identified from time to time in our reports filed with the Securities and Exchange Commission. We undertake no obligation to update or revise any forward-looking statements, either to reflect new developments or for any other reason.

INTRODUCTION

Our Business

La-Z-Boy Incorporated manufactures, markets, imports, distributes and retails upholstery products and casegoods (wood) furniture products. Our La-Z-Boy brand is the most recognized brand in the furniture industry, and we are the leading global producer of reclining chairs. We own 70 La-Z-Boy Furniture Galleries® stores, which are retail locations dedicated to marketing our La-Z-Boy branded product. These 70 stores are part of the larger network of La-Z-Boy Furniture Galleries® stores, which includes a total of 338 stores, the balance

of which are independently owned and operated. The network constitutes the industry’s largest single-branded upholstered furniture retailer in North America. These stores combine the style, comfort and quality of La-Z-Boy furniture with our in-home design service to help consumers furnish certain rooms in their homes.

In addition to our company-owned stores, we consolidate certain of our independent dealers who did not have sufficient equity to carry out their principal business activities without our financial support. These dealers are referred to as Variable Interest Entities (“VIEs”). During the second quarter of fiscal 2007 we had four VIEs, operating 28 stores, consolidated into our Statement of Operations. During the fiscal 2008 second quarter, we had four VIEs, operating 30 stores, in our Consolidated Statement of Operations.

Our reportable operating segments are the Upholstery Group, the Casegoods Group and the Retail Group. Below is a chart that shows the organizational structure of La-Z-Boy segments.

In terms of revenue, our largest segment is the Upholstery Group, which includes La-Z-Boy, our largest operating unit. We import cut and sewn fabric kits to complement our leather kits that allow us to take full advantage of both the cost-saving opportunities presented in Asia and the speed to market advantages of a United States manufacturing base. The Upholstery Group sells furniture mainly to La-Z-Boy Furniture Galleries® stores, general dealers and department stores.

Our Casegoods Group today is primarily an importer, marketer and distributor of casegoods (wood) furniture as well as operates two manufacturing facilities in North Carolina. In order to compete globally, we have significantly changed the cost structure from fixed to highly variable.

The Retail Group consists of 70 company-owned La-Z-Boy Furniture Galleries® stores in eight markets ranging from the Midwest to the East Coast of the United States and also including southeastern Florida.

According to the May, 2007 Top 100 ranking by Furniture Today, an industry trade publication, the La-Z-Boy Furniture Galleries® stores network ranks as the largest retailer of upholstered single-brand furniture in the U.S. One of our major strategic initiatives is to expand the retail opportunities of the La-Z-Boy brand name in the United States and Canada by opening new stores, relocating stores to better locations and converting existing stores to our New Generation store format. Slightly more than half of the 338 stores in the network—the majority of which are independently owned—are concentrated in the top 25 markets in the U.S. We will attempt to increase our market penetration over the next few years in the top 25 markets, allowing our dealers and company-owned stores to create operating efficiencies, particularly in the areas of advertising, distribution and

administration. Additionally, we have an extensive La-Z-Boy in-store gallery program with 215 in-store galleries. During the first quarter, we began rolling out a new model for our in-store galleries referred to as our Comfort Studios. Comfort Studios are less expensive than the current in-store gallery model and provide a better presentation to our consumer. During the second quarter of fiscal 2008 we opened 117 Comfort Studios, and we expect to open 173 Comfort Studios during the remainder of fiscal 2008. Kincaid, England and Lea also have in-store gallery programs. The chart below shows the current structure of the La-Z-Boy Furniture Galleries® store network.

Highlights of Our Current Quarter

All of our segments experienced a degradation in sales resulting from the weak consumer demand. We continue to aggressively focus on advertising and merchandising of our product in an attempt to reverse this trend. In addition, we have focused on cutting costs and will continue to do so as needed to keep our expenses in line with revenue.

For the remainder of fiscal 2008, we plan to continue to take the following actions to grow sales and improve the operating results for the Retail Group as well as to take advantage of synergies between the company-owned markets:

•

Centralize certain of our advertising and marketing functions, and take advantage of the efficiencies gained as we continue the warehouse consolidation we began during the second quarter of fiscal 2007.

	•		Continue to consolidate information systems and eliminate redundant processes. We are currently in the process of consolidating our information systems into one system and expect to complete this process by the end of this fiscal year.
	•		Expand our in-home design service, which has increased the average sale per customer where employed. Currently, 71% of our company-owned locations have this service available.
	•		Improve our gross margins based on better merchandising and pricing of product and services.

During the second quarter of fiscal 2008, we evaluated the goodwill at our South Florida retail market as a result of a decision to delay our planned store openings in this market. These delays are the result of a slow housing market causing double-digit declines in sales in the market over the past twelve months. We recognized a $5.8 million impairment charge for the full amount of goodwill of this retail market in the second quarter of fiscal 2008.

Certain of our debt agreements require that certain financial covenants be met. As of the end of the second quarter, we were not in compliance with the fixed charge coverage ratio requirements under our revolving credit facility. We obtained an amendment to our fixed charge coverage ratio from our revolving credit facility lenders, dated November 6, 2007, to amend the ratio for our quarter ended October 27, 2007 so that we were in compliance. Although we were in compliance with our other debt covenants, we believe that we will not be in compliance with the fixed charge coverage ratio requirements relating to both our revolving credit facility and private placement notes as of the end of the third quarter, and therefore we have engaged our lead bank to begin structuring a new secured credit facility. We had no unamortized debt issue costs as of the end of the second quarter of fiscal 2008.

We believe that by the end of our fiscal 2008 third quarter, we will be successful in negotiating a long-term credit facility, which we will utilize to pay off our private placement notes. There can be no assurance that an agreement can be reached; however, we consider this scenario unlikely. If an agreement cannot be reached and the lenders were to exercise their right to accelerate the maturity of their notes, this could result in an adverse effect on us unless the lenders were to agree to forbearance or restructuring of the debt. For more information about the risks and anticipated costs associated with our financing plans, see “Liquidity and Capital Resources.”

During the second quarter of fiscal 2008, we completed the sale of our Clayton Marcus operating unit and the sale of our Pennsylvania House trade name. The stock of Clayton Marcus was sold to Rowe Fine Furniture, Incorporated for $2.9 million, resulting in a pre-tax loss of about $5.8 million, of which about $3.4 million related to the intangible assets of Clayton Marcus. The Pennsylvania House trade name was sold to Universal Furniture for $1.7 million, resulting in a pre-tax charge of about $0.6 million. We are in the process of liquidating the remaining Pennsylvania House inventory at discounted prices, and as a result have recorded an additional pre-tax loss of $3.0 million to adjust the inventory to fair value.

Results of Operations
Analysis of Operations: Quarter Ended October 27, 2007
(Second Quarter 2008 compared with 2007)

		Quarter Ended								Percent
(Amounts in thousands, except per share amounts and percentages)		10/27/07				10/28/06				change
Upholstery sales		$	269,749			$	304,598				-11.4	%
Casegoods sales			58,892				74,164				-20.6	%
Retail sales			46,163				52,485				-12.0	%
Other/eliminations*			(9,370	)			(16,633	)			43.7	%
Consolidated sales		$	365,434			$	414,614				-11.9	%
Consolidated gross profit		$	98,258			$	108,663				-9.6	%
Consolidated gross margin			26.9	%			26.2	%
Consolidated S,G&A		$	98,098			$	99,887				-1.8	%
S,G&A as a percent of sales			26.8	%			24.1	%
Upholstery operating income		$	19,036			$	20,162				-5.6	%
Casegoods operating income			3,577				6,200				-42.3	%
Retail operating loss			(9,119	)			(8,769	)			-4.0	%
Corporate and other			(12,816	)			(9,217	)			-39.0	%
Intangible write-down			(5,809	)			—				N/M
Restructuring			(967	)			(1,865	)			48.2	%
Consolidated operating income (loss)		$	(6,098	)		$	6,511				-193.7	%
Upholstery operating margin			7.1	%			6.6	%
Casegoods operating margin			6.1	%			8.4	%
Retail operating margin			-19.8	%			-16.7	%
Consolidated operating margin			-1.7	%			1.6	%
Income (loss) from continuing operations		$	(3,652	)		$	3,296
Diluted income (loss) per share from continuing operations		$	(0.07	)		$	0.06
Loss from discontinued operations		$	(6,282	)		$	(1,342	)
Diluted loss per share from discontinued operations		$	(0.12	)		$	(0.02	)