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 ("SEC") and Item 1A in Part II 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      Thirty-nine weeks ended
                                  May 30,       May 24,       May 30,        May 24,
                                    2009          2008         2009           2008
Merchandise Sales - net and Home
   Delivery Income                    89.3%         89.7%         89.9%          90.0%
Charges to the Related Company         4.7%          4.4%          4.4%           4.1%
   Net Sales                          94.0%         94.1%         94.3%          94.1%

Revenue from Service Contracts         6.0%          5.9%          5.7%           5.9%

   Total Revenue                     100.0%        100.0%        100.0%         100.0%

Thirteen-Weeks Ended May 30, 2009 Compared to Thirteen-Weeks Ended May 24, 2008

Revenue

Net sales from continuing operations were $20,765,000 and $26,586,000 for the thirteen-week periods ended May 30, 2009 and May 24, 2008, respectively. Net sales from continuing operations decreased by 21.9%, or $5,821,000 for the thirteen-week period ended May 30, 2009 compared to the thirteen-week period ended May 24, 2008. The decrease is comprised of a decrease of $6,589,000 in the net sales for the Jennifer segment net of an increase in the Ashley segment of $768,000 for the thirteen-week period ended May 30, 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.

Revenue from service contracts from continuing operations decreased by 20.2% in the thirteen-week period ended May 30, 2009 to $1,328,000, from $1,664,000 for the thirteen-week period ended May 24, 2008. The decrease was primarily attributable to fewer merchandise sales during the thirteen-week period ended May 30, 2009, compared to the same period ended May 24, 2008.

Same store sales from continuing operations (sales at those stores open for the entire current and prior comparable periods) decreased 26.5% for the thirteen weeks ended May 30, 2009, compared to the same period ended May 24, 2008. During the thirteen weeks ended May 30, 2009 two stores closed. Total square footage leased decreased by 8,857 square feet or 1.32%.

Cost of Sales

Cost of sales, as a percentage of revenue for the thirteen-week period ended May 30, 2009, was 71.6% compared to 71.2% for the same period ended May 24, 2008. Cost of sales from continuing operations decreased to $15,808,000 for the thirteen weeks ended May 30, 2009, from $20,128,000 for the thirteen weeks ended May 24, 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 fixed costs being spread over a decreased revenue base.

Cost of sales for the thirteen-week period ended May 30, 2009 includes a decrease of $8,000 in occupancy costs related to our Ashley operating segment, a decrease of $540,000 in occupancy costs related to our Jennifer operating segment and a decrease of $15,000 for corporate activities. Occupancy costs have decreased for the Jennifer segment and corporate activities as a result of lease modifications negotiated during the thirty-nine week period ended May 30, 2009.

Selling, general and administrative expenses

Selling, general and administrative expenses from continuing operations were $7,557,000 (34.2% as a percentage of revenue) and $8,591,000 (30.4% as a percentage of revenue) during the thirteen-week periods ended May 30, 2009 and May 24, 2008, respectively.

Selling, general and administrative expenses for the thirteen-week period ended May 30, 2009 includes an increase of $86,000 related to our Ashley operating segment, a decrease of $949,000 for the Jennifer segment and a decrease of $171,000 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 $447,000 during the thirteen-week period ended May 30, 2009 compared to the same period ended May 24, 2008. Compensation expense decreased by $338,000 for the Jennifer segment, increased $67,000 for the Ashley segment and decreased by $176,000 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 $550,000 during the thirteen-week period ended May 30, 2009 compared to the same period ended May 24, 2008. Advertising expense decreased by $577,000 for the Jennifer segment and increased by $27,000 for the Ashley segment. The decrease for the Jennifer segment was a result of a decrease in newspaper and circular ads as well as favorable rates.

Finance fees increased $47,000 during the thirteen-week period ended May 30, 2009 compared to the same period ended May 24, 2008. The increases for the Jennifer and Ashley segments in the amount of $36,000 and $11,000 respectively are primarily attributable to the termination of private label customer financing during March 2009, as well as increased transaction rates charged by our credit card processors that became effective February 2009.

Other administrative costs decreased $84,000 during the thirteen-week period ended May 30, 2009 compared to the same period ended May 24, 2008 as a result of cost reductions at the store and corporate levels.

Loss from Continuing Operations

The loss from continuing operations was $1,514,000 and $620,000 for the thirteen-week periods ended May 30, 2009 and May 24, 2008, respectively. The loss from continuing operations for the thirteen-week periods ended May 30, 2009 and May 24, 2008 includes income of $419,000 and $129,000, respectively, related to our Ashley segment.

Loss from Discontinued Operations

During the thirteen week period ended May 30, 2009, we closed three stores consisting of one each in New York, Illinois and Arizona, in addition to four previous store closings, one in Illinois, two in Missouri and one in Virginia. The operating results of the Arizona and Missouri stores are reported as discontinued operations in the consolidated statement of operations and the results of operations for the periods ended May 24, 2008 have been restated to include these stores as discontinued operations. The operating results of the closed stores in Virginia, New York and Illinois are 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, we 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. Loss from discontinued operations amounted to $18,000 and $91,000 for the thirteen-week periods ended May 30, 2009 and May 24, 2008, respectively.

Revenues from the closed stores reported as discontinued operations amounted to $60,000 and $441,000 in the thirteen-week periods ended May 30, 2009 and May 24, 2008, respectively.

Net Loss

Net loss for the thirteen-week period ended May 30, 2009 was $1,532,000, compared to net loss of $711,000 for the thirteen-week period ended May 24, 2008. This change is primarily attributable to the decrease in revenues due to the current economic conditions.

Thirty-nine Weeks Ended May 30, 2009 Compared to Thirty-nine Weeks Ended May 24, 2008

Revenue

Net sales from continuing operations were $67,275,000 and $84,168,000 for the thirty-nine week periods ended May 30, 2009 and May 24, 2008, respectively. Net sales from continuing operations decreased by 20.1%, or $16,893,000, for the thirty-nine week period ended May 30, 2009 compared to the same period ended May 24, 2008. The decrease is comprised of a decrease of $18,109,000 in the net sales for the Jennifer segment net of an increase in the Ashley segment of $1,216,000. 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 22.8% during the thirty-nine week period ended May 30, 2009 to $4,084,000, from $5,293,000 for the thirty-nine week period ended May 24, 2008. Such a decrease is primarily attributable to fewer merchandise sales during the thirty-nine week period ended May 30, 2009, compared to the same period ended May 24, 2008.

Same store sales from continuing operations (sales at those stores open for the entire current and prior comparable periods) decreased 23.9% for the thirty-nine weeks ended May 30, 2009, compared to the same period ended May 24, 2008. Two stores relocated and four stores closed during the thirty-nine weeks ended May 30, 2009. Total square footage leased decreased by 10,987 square feet or 1.64%.

Cost of Sales

Cost of sales, as a percentage of revenue for the thirty-nine week period ended May 30, 2009, was 71.5% compared to 71.2% for the same period ended May 24, 2008. Cost of sales from continuing operations decreased to $50,992,000 for the thirty-nine weeks ended May 30, 2009, from $63,663,000 for the thirty-nine weeks ended May 24, 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 fixed costs being spread over a decreased revenue base.

Cost of sales for the thirty-nine week period ended May 30, 2009 includes an increase of $118,000 in occupancy costs related to our Ashley operating segment, a decrease of $1,376,000 in occupancy costs related to our Jennifer operating segment and a decrease of $109,000 for corporate activities. Occupancy costs have decreased as a result of lease modifications negotiated during the thirty-nine week period ended May 30, 2009 and resultant adjustments to the deferred rent and allowances liability.

Selling, general and administrative expenses

Selling, general and administrative expenses from continuing operations were $24,994,000 (35.0% as a percentage of revenue) and $27,691,000 (31.0% as a percentage of revenue) during the thirty-nine week periods ended May 30, 2009 and May 24, 2008, respectively.

Selling, general and administrative expenses for the thirty-nine week period ended May 30, 2009 includes an increase of $191,000 related to our Ashley operating segment, a decrease of $2,284,000 for the Jennifer segment and a decrease of $604,000 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 $1,174,000 during the thirty-nine week period ended May 30, 2009 compared to the same period ended May 24, 2008. Compensation expense decreased by $926,000 for the Jennifer segment, increased $242,000 for the Ashley segment and decreased by $490,000 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 $1,262,000 during the thirty-nine week period ended May 30, 2009 compared to the same period ended May 24, 2008. Advertising expense decreased by $1,190,000 for the Jennifer segment and decreased by $72,000 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 $168,000 during the thirty-nine week period ended May 30, 2009 compared to the same period ended May 24, 2008. The decrease for the Jennifer segment in the amount of $141,000 is primarily attributable to the decline in merchandise sales, as well as the termination of private label customer financing during March 2009. The decrease for the Ashley segment in the amount of $27,000 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, net of the impact of the termination of private label customer financing during March 2009, as well as increased transaction rates charged by our credit card processors that became effective February 2009.

Other administrative costs decreased $93,000 during the thirty-nine week period ended May 30, 2009 compared to the same period ended May 24, 2008 as a result of cost reductions at the store and corporate levels.

Loss from Continuing Operations

The loss from continuing operations was $5,503,000 and $2,217,000 for the thirty-nine week periods ended May 30, 2009 and May 24, 2008, respectively. The loss from continuing operations for the thirty-nine week periods ended May 30, 2009 and May 24, 2008 include income of $859,000 and $593,000, respectively, related to our Ashley segment.

Loss from Discontinued Operations

During the thirty-nine week period ended May 30, 2009, we closed seven stores consisting of two stores in Illinois, two in Missouri, one in Virginia, one in Arizona and one in New York. The operating results of the Missouri and Arizona stores are reported as discontinued operations in the consolidated statement of operations and the results of operations for the period ended May 24, 2008 has been restated to include these stores as discontinued operations. The operating results of the closed stores in Illinois, Virginia and New York are 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, we 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. Loss from discontinued operations amounted to $242,000 and $245,000 for the thirty-nine week periods ended May 30, 2009 and May 24, 2008, respectively.

Revenues from the closed stores reported as discontinued operations amounted to $352,000 and $1,969,000 in the thirty-nine week periods ended May 30, 2009 and May 24, 2008, respectively.

Net Loss

Net loss for the thirty-nine week period ended May 30, 2009 was $5,745,000, compared to net loss of $2,462,000 for the thirty-nine week period ended May 24, 2008. This change is primarily attributable to the decrease in revenues due to the current economic conditions.

Liquidity and Capital Resources

As of May 30, 2009, we had a working capital deficiency of $1,368,000 compared to an aggregate working capital of $2,818,000 at August 30, 2008 and had available cash and cash equivalents of $6,018,000 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. As of May 30, 2009, the related company owed to us $3,694,000. During the thirteen-week period ended May 30, 2009, the related company failed to make payment in full twice. In one case, the shortfall was $300,000 (representing approximately 8.3% of the amount due) and, in the other case, the shortfall was $400,000 (representing approximately 10.8% of the amount due). The shortfalls were paid off in full 17 days after the original due date, including interest at a rate of 9% per annum. At any given time, the related company owes us approximately $3,000,000 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. Failure by the related company to pay amounts due to us would have a material adverse effect on our cash flows, liquidity, results of operations and financial position. 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 65 of our stores. We are exploring increasing the extent to which we use unrelated third party vendors to provide these services.

On July 11, 2005, we entered into a Credit Agreement, as amended (the "Credit Agreement) and a Security Agreement, as amended (the "Security Agreement") with Caye Home Furnishings, LLC ("Agent"), Caye Upholstery, LLC and Caye International Furnishings, LLC (collectively, "Caye"). Under the Credit Agreement, Caye agrees to make available to us a credit facility, as amended (the "Credit Facility") of up to $11,500,000, effectively extending Caye's payment terms for merchandise shipped to us from 75 days to 105 days after receipt of goods. The amount available under this facility may be reduced in the event that we do not maintain a specified level of eligible accounts receivable, eligible inventory and cash in deposit accounts. We must pay each extension of credit under the Credit Agreement within 105 days after receipt of goods. For the period between 75 and 105 days after receipt of goods, the annual interest rate will be the prime rate plus 0.75%. If any extensions of credit were not repaid after 105 days, the interest rate would be the prime rate plus 2.75%.

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 $3,000,000 for 180 days and (ii) adjusted net earnings from continuing operations of at least $2,000,000 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 May 30, 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 the 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 the Security Agreement with Caye, pursuant to which such agreements were amended to (1) increase our credit facility from $11,500,000 to $13,500,000 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 $2,000,000 to $1,000,000.

On April 3, 2008, we entered into a Fourth Amendment to Credit Agreement and Third Amendment to the 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 May 30, 2009, we owed Caye approximately $888,000, no portion of which exceeded the 75-day payment terms.

During January 2009, we began to transition from Caye to a Chinese supplier. The Chinese company which currently manufactures approximately 95% of what we order through Caye, has given us a letter agreement to the effect that if Caye stops supplying us prior to November 12, 2009, it will supply us with goods without interest or penalty and provide us 75 days to pay for those goods and an additional 30 days grace period on amounts over 75 days at a per annum rate of 0.75% over prime, provided that in no event will the amount payable by us exceed $10,000,000. This arrangement is substantially the same as our current arrangement with Caye except that under the Caye agreement we can owe up to $13,500,000. On April 13,2009, we amended and restated the terms of the letter agreement with the Chinese supplier to provide, that effective August 1, 2009, we have up to 150 days to pay for the goods without interest or penalty. The amended and restated letter agreement terminates on September 30, 2010, provided that the parties have an understanding that they will review certain terms on October 31, 2009.

On July 10, 2009, we entered into a letter agreement with Caye pursuant to which we agreed to pay down our debt to Caye by approximately $400,000 in exchange for Caye releasing their security interest in all of our assets and terminating all obligations under the Credit Facility. In addition, the amount required to be maintained in deposit accounts of no less than $1,000,000 (which is classified as restricted cash on the accompanying consolidated balance sheets) is unrestricted and available for operating purposes. In exchange for this release, Caye has provided us with $500,000 of trade credit. Neither Caye nor we will incur any termination costs or penalties as a result of the termination of the Credit Facility.

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 . . .