The following discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes filed as part of this report.

Forward-Looking Information

Except for historical information contained herein, this "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, as amended. These statements involve known and unknown risks and uncertainties that may cause our actual results or outcome to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Factors that might cause such differences include, but are not limited to, the risk factors set forth under the caption "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended August 30, 2008, as filed with the Securities and Exchange Commission and Item 1A of this Quarterly Report. In addition to statements that explicitly describe such risks and uncertainties, investors are urged to consider statements labeled with the terms "believes," "belief," "expects," "intends," "plans" or "anticipates" to be uncertain and forward-looking.

Overview

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

Results of Operations

The following table sets forth, for the periods indicated, the percentage of
total revenue contributed by each class:

                                         Thirteen weeks ended             Twenty-six weeks ended
                                     February 28,     February 23,     February 28,     February 23,
                                         2009             2008             2009             2008
Merchandise Sales - net and Home
     Delivery Income                        90.1%            90.1%            90.1%            90.1%
Charges to the Related Company               4.3%             4.0%             4.3%             4.0%
     Net Sales                              94.4%            94.1%            94.4%            94.1%

Revenue from Service Contracts               5.6%             5.9%             5.6%             5.9%

     Total Revenue                         100.0%           100.0%           100.0%           100.0%

Thirteen-Weeks Ended February 28, 2009 Compared to Thirteen-Weeks Ended February 23, 2008

Revenue

Net sales from continuing operations were $21,518,000 and $25,997,000 for the thirteen-week periods ended February 28, 2009 and February 23, 2008, respectively. Net sales from continuing operations decreased by 17.2 %, or $4,479,000 for the thirteen-week period ended February 28, 2009 compared to the thirteen-week period ended February 23, 2008. The decrease is comprised of a decrease of $4,666,000 in the net sales for the Jennifer segment net of an increase in the Ashley segment of $187,000 for the thirteen-week period ended February 28, 2009. The decrease in the Jennifer segment is attributable to the decline in overall demand within the furniture industry sector due to a poor housing market and the current economic conditions. The increase in the Ashley segment is due to the opening of a second store during May 2008.

Prior to January 2009, we offered a private label customer financing pursuant to which we financed sales and sold financed receivables on a non-recourse basis to an independent finance company. We did not retain any interests in or service the sold receivables. The selling price of the receivables was dependent upon the payment terms with the customer and resulted in either a payment to or receipt from the finance company of a percentage of the receivable as a fee. During January 2009, the finance company terminated its dealer agreement with us effective March 8, 2009. We believe that this termination will have little impact on our net sales, however it will increase our transaction fees due to the fact that traditional credit card transactions have higher transaction fees.

Same store sales (sales at those stores open for the entire current and prior comparable periods) decreased 21.2% for the thirteen weeks ended February 28, 2009, compared to the same period ended February 23, 2008. Two stores relocated and three closed during the thirteen weeks ended February 28, 2009. Total square footage leased decreased by 5,104 square feet or 0.78%.

Cost of Sales

Cost of sales, as a percentage of revenue for the thirteen-week period ended February 28, 2009, was 72.0% compared to 72.5% for the same period ended February 23, 2008. Cost of sales from continuing operations decreased to $16,412,000 for the thirteen weeks ended February 28, 2009, from $20,042,000 for the thirteen weeks ended February 23, 2008.

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

The decrease in the percentage of cost of sales is primarily attributable to lower occupancy costs.

Cost of sales for the thirteen-week period ended February 28, 2009 includes an increase of $9,000 in occupancy costs related to our Ashley operating segment, a decrease of $419,000 in occupancy costs related to our Jennifer operating segment and a decrease of $62,000 for corporate activities. Occupancy costs have decreased for the Jennifer segment and corporate activities as a result of adjustments to the deferred rent and allowances liability and lease modifications negotiated during the twenty-six week period ended February 28, 2009.

Selling, general and administrative expenses

Selling, general and administrative expenses from continuing operations were $8,134,000 (35.7% as a percentage of revenue) and $8,608,000 (31.1% as a percentage of revenue) during the thirteen-week periods ended February 28, 2009 and February 23, 2008, respectively.

Selling, general and administrative expenses for the thirteen-week period ended February 28, 2009 includes an increase of $63,000 related to our Ashley operating segment, a decrease of $286,000 for the Jennifer segment and a decrease of $251,000 related to corporate activities, consisting of compensation, advertising, finance fees and other administrative costs.

Compensation expense decreased $372,000 during the thirteen-week period ended February 28, 2009 compared to the same period ended February 23, 2008. Compensation expense decreased by $260,000 for the Jennifer segment, increased $83,000 for the Ashley segment and decreased by $195,000 for corporate activities. The decrease in the Jennifer segment was primarily attributable to lower sales volume, which resulted in lower compensation expense to salespersons in the form of commissions and bonuses. The increase for the Ashley segment is largely due to the opening of a second store during May 2008. Corporate compensation decreased due to voluntary salary reductions by the Chief Executive Officer and Executive Vice President.

Advertising expense decreased $14,000 during the thirteen-week period ended February 28, 2009 compared to the same period ended February 23, 2008. Advertising expense increased by $30,000 for the Jennifer segment and decreased by $44,000 for the Ashley segment. The increase for the Jennifer segment was a result of Thanksgiving promotional costs being incurred during the second quarter of fiscal 2009 versus the first quarter of fiscal 2008.

Finance fees decreased $79,000 during the thirteen-week period ended February 28, 2009 compared to the same period ended February 23, 2008. The decrease for the Jennifer segment in the amount of $61,000 is primarily attributable to the decline in merchandise sales. The decrease for the Ashley segment in the amount of $18,000 is due to a shift by our customers from credit card financing, which carries higher transaction fees to 90-day financing with the independent finance company.

Other administrative costs decreased $9,000 during the thirteen-week period ended February 28, 2009 compared to the same period ended February 23, 2008.

Loss from Continuing Operations

The loss from continuing operations was $2,184,000 and $1,073,000 for the thirteen-week periods ended February 28, 2009 and February 23, 2008, respectively. The loss from continuing operations for the thirteen week periods ended February 28, 2009 and February 23, 2008 include income of $329,000 and $318,000, respectively, related to our Ashley segment.

Loss from Discontinued Operations

During the thirteen week period ended February 28, 2009, the Company closed three stores consisting of two stores in Missouri and one in Virginia. The operating results of the Missouri stores are reported as discontinued operations in the consolidated statement of operations and the results of operations for the periods ended February 23, 2008 have been restated to include these stores as discontinued operations. The operating results of the closed store in Virginia were recorded in continuing operations based on management's judgment that there will be significant continuing sales to customers of the closed stores from other stores in their respective areas. During fiscal 2008, the Company closed ten stores, consisting of six stores in Ohio, one store in New York City, two stores in Georgia and one store in Florida. The operating results of the closed stores in Florida, Georgia and New York were recorded in continuing operations based on management's judgment that there will be significant continuing sales to customers of the closed stores from other stores in their respective areas. The operating results of the six closed stores in Ohio were reported as discontinued operations, and the results of operations for the period ended February 23, 2008 have been restated to include these stores as discontinued operations. Loss from discontinued operations amounted to $160,000 and $173,000 for the thirteen week periods ended February 28, 2009 and February 23, 2008, respectively.

Revenues from the closed stores reported as discontinued operations amounted to $82,000 and $390,000 in the thirteen-week periods ended February 28, 2009 and February 23, 2008, respectively.

Net loss for the thirteen week period ended February 28, 2009 was $2,344,000, compared to net loss of $1,246,000 for the thirteen week period ended February 23, 2008. This change is primarily attributable to the decrease in revenues due to the current economic conditions.

Twenty-Six Weeks Ended February 28, 2009 Compared to Twenty-Six Weeks Ended February 23, 2008

Revenue

Net sales from continuing operations were $46,632,000 and $57,853,000 for the twenty-six week periods ended February 28, 2009 and February 23, 2008, respectively. Net sales from continuing operations decreased by 19.4%, or $11,221,000, for the twenty-six week period ended February 28, 2009 compared to the same period ended February 23, 2008. The decrease is comprised of a decrease of $11,669,000 in the net sales for the Jennifer segment net of an increase in the Ashley segment of $448,000. The decrease in the Jennifer segment is attributable to the decline in overall demand within the furniture industry sector due to a poor housing market and the current economic conditions. The increase in the Ashley segment is due to the opening of a second store during May 2008.

Revenue from service contracts from continuing operations decreased by 24.3% during the twenty-six week period ended February 28, 2009 to $2,764,000, from $3,650,000 for the twenty-six week period ended February 23, 2008. Such a decrease is primarily attributable to fewer merchandise sales during the twenty-six week period ended February 28, 2009, compared to the same period ended February 23, 2008.

Prior to January 2009, we offered a private label customer financing pursuant to which we financed sales and sold financed receivables on a non-recourse basis to an independent finance company. We did not retain any interests in or service the sold receivables. The selling price of the receivables was dependent upon the payment terms with the customer and resulted in either a payment to or receipt from the finance company of a percentage of the receivable as a fee. During January 2009, the finance company terminated its dealer agreement with us effective March 8, 2009. We believe that this termination will have little impact on our net sales, however it will increase our transaction fees due to the fact that traditional credit card transactions have higher transaction fees.

Same store sales (sales at those stores open for the entire current and prior comparable periods) decreased 22.9% for the twenty-six weeks ended February 28, 2009, compared to the same period ended February 23, 2008. Two stores relocated and four closed during the twenty-six weeks ended February 28, 2009. Total square footage leased decreased by 7,904 square feet or 1.20%.

Cost of Sales

Cost of sales, as a percentage of revenue for the twenty-six week period ended February 28, 2009, was 71.4% compared to 71.1% for the same period ended February 23, 2008. Cost of sales from continuing operations decreased to $35,287,000 for the twenty-six weeks ended February 28, 2009, from $43,719,000 for the twenty-six weeks ended February 23, 2008.

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

The increase in the percentage of cost of sales is due to warehouse expenses and occupancy costs being spread over a decreased revenue base.

Selling, general and administrative expenses

Selling, general and administrative expenses from continuing operations were $17,473,000 (35.4% as a percentage of revenue) and $19,145,000 (31.1% as a percentage of revenue) during the twenty-six week periods ended February 28, 2009 and February 23, 2008, respectively.

Selling, general and administrative expenses for the twenty-six week period ended February 28, 2009 includes an increase of $104,000 related to our Ashley operating segment, a decrease of $1,342,000 for the Jennifer segment and a decrease of $434,000 related to corporate activities, consisting of compensation, advertising, finance fees and other administrative costs.

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

Compensation expense decreased $735,000 during the twenty-six week period ended February 28, 2009 compared to the same period ended February 23, 2008. Compensation expense decreased by $596,000 for the Jennifer segment, increased $175,000 for the Ashley segment and decreased by $314,000 for corporate activities. The decrease in the Jennifer segment was primarily attributable to lower sales volume, which resulted in lower compensation expense to salespersons in the form of commissions and bonuses. The increase for the Ashley segment is largely due to the opening of a second store during May 2008. Corporate compensation decreased due to voluntary salary reductions by the Chief Executive Officer and Executive Vice President, as well as fewer employees in fiscal 2009 as compared to the same period last year.

Advertising expense decreased $712,000 during the twenty-six week period ended February 28, 2009 compared to the same period ended February 23, 2008. Advertising expense decreased by $613,000 for the Jennifer segment and decreased by $99,000 for the Ashley segment. The decrease for the Jennifer segment was a result of favorable advertising rates in fiscal 2009 combined with the impact of the fiscal 2009 Labor Day promotional costs that were incurred during the last quarter of fiscal 2008.

Finance fees decreased $218,000 during the twenty-six week period ended February 28, 2009 compared to the same period ended February 23, 2008. The decrease for the Jennifer segment in the amount of $179,000 is primarily attributable to the decline in merchandise sales. The decrease for the Ashley segment in the amount of $39,000 is due to a shift by our customers from credit card financing, which carries higher transaction fees to 90-day financing with the independent finance company.

Other administrative costs decreased $7,000 during the twenty-six week period ended February 28, 2009 compared to the same period ended February 23, 2008.

The loss from continuing operations was $3,999,000 and $1,533,000 for the twenty-six week periods ended February 28, 2009 and February 23, 2008, respectively. The loss from continuing operations for the twenty-six week periods ended February 28, 2009 and February 23, 2008 include income of $439,000 and $464,000, respectively, related to our Ashley segment.

Loss from Discontinued Operations

During the twenty-six week period ended February 28, 2009, the Company closed four stores consisting of one store in Illinois, two stores in Missouri and one in Virginia. The operating results of the Missouri stores are reported as discontinued operations in the consolidated statement of operations and the results of operations for the periods ended February 23, 2008 have been restated to include these stores as discontinued operations. The operating results of the closed stores in Illinois and Virginia were recorded in continuing operations based on management's judgment that there will be significant continuing sales to customers of the closed stores from other stores in their respective areas. During fiscal 2008, the Company closed ten stores, consisting of six stores in Ohio, one store in New York City, two stores in Georgia and one store in Florida. The operating results of the closed stores in Florida, Georgia and New York were recorded in continuing operations based on management's judgment that there will be significant continuing sales to customers of the closed stores from other stores in their respective areas. The operating results of the six closed stores in Ohio were reported as discontinued operations, and the results of operations for the period ended February 23, 2008 have been restated to include these stores as discontinued operations. Loss from discontinued operations amounted to $214,000 and $218,000 for the twenty-six week periods ended February 28, 2009 and February 23, 2008, respectively.

Revenues from the closed stores reported as discontinued operations amounted $163,000 and $1,237,000 in the twenty-six week periods ended February 28, 2009 and February 23, 2008, respectively.

Net Loss

Net loss for the twenty-six week period ended February 28, 2009 was $4,213,000, compared to net loss of $1,751,000 for the twenty-six week period ended February 23, 2008. This change is primarily attributable to the decrease in revenues due to the current economic conditions.

Liquidity and Capital Resources

As of February 28, 2009, we had a working capital deficiency of $146,000 compared to an aggregate working capital of $2,818,000 at August 30, 2008 and had available cash and cash equivalents of $6,029,000 compared to $9,057,000 at August 30, 2008. The decrease in working capital is a result of the loss from operations.

Starting in 1995, we entered into agreements with a related company that permit us to offset our current monthly obligations to one another for an amount up to $1,000,000. Amounts in excess of $1,000,000 are paid in cash. Based on the payment terms of 85 days, all obligations of the related company and the unconsolidated licensees due as of February 28, 2009, were paid. However, at any given time, the related company owes us approximately $3 million for the services and goods we provide to it. We assume that like other retailers and us, the related company has been adversely affected by the economy. If the related company were unable to pay the amounts due to us, it would have a material adverse effect on our cash flow and financial condition. The related company also provides fabric protection services to our customers. Since January 2009, we have been using an unrelated third party vendor to supply fabric protection services for merchandise purchased from approximately 35 of our stores. We are exploring increasing the extent to which we use unrelated third party vendors to provide these services.

The Credit Agreement contains various negative covenants restricting our ability to enter into a merger or sale, make guarantees, pay dividends to common stockholders, incur debt or take other actions, without the consent of the Agent. In addition, the Credit Agreement provides for: a fixed charge coverage ratio, a cross-default with certain other of our debt, appraisal rights, periodic reporting requirements, and other customary terms. We may terminate the Credit Agreement at any time, so long as all outstanding amounts have been paid in full. We may also terminate the Credit Agreement if we have (i) maintained a tangible net worth of at least $3.0 million for 180 days and (ii) adjusted net earnings from continuing operations of at least $2.0 million for four fiscal quarters. We have satisfied all covenants as per the terms of the Credit Facility and the Amendments to Credit Agreement and Security Agreement, except for the fixed charge ratio for the trailing four-quarter period ended February 28, 2009 for which we have obtained a waiver through August 29, 2009.

Pursuant to the Security Agreement, so long as amounts are outstanding under the Credit Agreement, Caye will have a first priority security interest in all of our assets and properties, including inventory, accounts receivable and equipment, as well as a license to our intellectual property in the event of a default, except for restricted cash and the inventory owned by the Ashley Furniture HomeStore operating segment.

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

On July 7, 2007, we entered into the Third Amendment to the Credit Agreement and Second Amendment to Security Agreement with Caye, pursuant to which such agreements were amended to (1) increase our credit facility from $11.5 million to $13.5 million and (2) reduce the amount required to be maintained by us in the Restricted Deposit Account to a balance no less at all times from $2 million to $1 million.

On April 3, 2008, we entered into a Fourth Amendment to Credit Agreement and Third Amendment to Security Agreement, pursuant to which such agreements were amended to (1) expand the scope of the Credit Agreement and the Security Agreement to include Ashley stores in additional New York metropolitan areas and
(2) increase the amount of capital expenditures allowable in certain New York metropolitan areas.

As of February 28, 2009, we owed Caye approximately $6,798,000, no portion of which exceeded the 75-day payment terms.