Welcome to the second quarter earning release call. (Operator Instructions) I would now like to introduce your host for today Chairman, President and CEO, Mr. Farooq Kathwari. Sir, you may begin.

With me today are Dave Cullen, the Vice President of Finance and Treasurer, and Peg Lupton, Director of Investor Relations. I am going to provide you with very brief opening comments followed by Dave Cullen giving details about our financial results. I will then discuss in greater detail our business initiatives and open for questions and plan to end by about 11:45 am. Despite a very difficult period, we saw our sales decline by 27%. We were able to generate a 5.3% operating income. We were able to maintain our consolidated growth margins at 53.7%, the same level as last year despite lower sales. Our inventories remain stable and operating expenses during the quarter were reduced by $14 million. Our board also decided to continue our cash dividend, although at a reduced rate of $0.10 per share. And we have also reached an agreement to amend our bank facility providing us $100 million unsecured revolver. Our objection continues to be to manage our cash so that we do not draw on the revolver. I will discuss in greater detail our business strategy, which focuses on two elements. First, positioning Ethan Allen as a provider of interior design services with stylish, good quality and value offerings. And second, continuing our process of reinvention by improving and simplifying our structure, adding technology to our personal services and continuing to reduce operating costs to counter the expectations of lower sales volume for the foreseeable future. With that, Dave?

Please note that in the earnings release issued this morning and in the course of our prepared remarks, reference has been made to certain non-GAAP information, which excludes the effects of restructuring, impairment and related charges recorded during the quarter and year-to-date ended December 31, 2008 and December 31, 2007. A reconciliation of this non-GAAP information to the most directly comparable GAAP measure is available on our website. Net sales for the quarter were $189.6 million compared to $259.5 million in the second quarter last year. The retail division’s net sales were $147.2 million versus $192.6 million last year with comparable design center delivered sales [inaudible] lower than in the prior year quarter. Written sales in retail decreased 29.9% and comparable written sales decreased 32.8% versus the prior year quarter. Wholesale net delivered sales were $108.8 million in the quarter compared to $155.9 million in last year’s second quarter. Consolidated gross margin for the quarter was equal to the prior year at 53.7% reflecting under absorption of overhead in our wholesale plants and some impact from warehouse and floor sample sales in retails that were offset by the increase in proportion of retail sales to our total net sales. Gross profit in the quarter was $101.8 million. Consolidated operating margin was 5.3% for the quarter, very healthy given the lower sales volumes. Wholesale operating margin was 7.9% and retail operating margin -2.1%, excluding the minimal restructuring charges. Consolidated selling expense decreased $8.9 million while general and administrative costs decreased $5.4 million compared to last year’s second quarter. Interest and other income decreased $1.1 million from the prior year due primarily to lower interest income with lower average invested balances and lower interest yield. Other factors, which positively impacted results for the period with a lower effective tax rate of 33.6%…

I mentioned earlier two important areas of focus. First, positioning Ethan Allen as a leader of providing interior design services with style, quality, value and personal service. And second, we continue as we mentioned to strengthen our enterprise while at the same time reducing our operating costs to counter the expectation of lower sales in volume for the foreseeable future. We have made good progress including the following key initiatives. Our teams at all levels are stronger, leaner and more cohesive. The migration to the team concept early this fiscal year has resulted in strengthening our ability to service and also lowered costs by reducing the number of associates needed to provide these services. We have strong credibility within our organization and externally with the public. We are perceived as the desired brand. Our offerings are stronger, relevant and stylish. We have enhanced our offering with introduction of the new modern attitude earlier this month. We have expanded our reach to a larger consumer base. Our offerings, including the new American Artisan with our new innovative eco-friendly water-based finishes are being well received by our professionals and our clients. We have continued to maintain a strong advertising presence. To project the strength of our brand, we increased our national television and our national print advertising during the second quarter by 25% over the last year quarter, while overall reducing our advertising costs. We are a more efficient organization and we have in place a continuous process of reinvention at all levels. We are more efficient in our design centers by closing underperforming design centers and consolidating several design studios, which lowered our operating costs. Last year, 18 retail warehouse service centers were consolidated. Earlier this month, we announced the consolidation of several additional retail service centers to our larger retail…

(Operator Instructions) Your first question comes from Robert Higginbotham – Goldman Sachs. Robert Higginbotham – Goldman Sachs: A couple of questions the first has to do with inventory and production rates. You called out the fact that your inventory is pretty much flattish against last year despite the big sales declines. And you also talked to the 60% kind of utilization rates in your factories, but you're talking to reducing those inventories and also increasing those utilization rates in your factories. Can you help me understand those two things are going to come together?

Yes. I also mentioned that our structure of everyday price has had many, many positive implications for our business. It has given us an opportunity to level our sales during the year. It also has given us an opportunity to forecast in every 12 to 13 weeks is our time frame now of forecasting rather than five to six months as it used to be before. Now, our forecasting every since say last September started to reflect the decline in sales but by December and January it now reflects even more the rate of sales that we have had in the last few months. So as our rate of sales have gone down our production and ordering from manufacturing overseas has also started to go down and that will start reflecting in this next quarter. Robert Higginbotham – Goldman Sachs: And the second question is on the dividend cut and also the credit line renegotiation. First on the dividend cut, can you help us out in terms of how you thought about what level to take that to? Was there a certain payout ratio in mind? And as part of that as you renegotiated your credit line, was that dividend cut part of that renegotiation process? And sorry lastly, if you could help us with what the revised covenant restrictions are.

Let me just first focus on our agreements with the banks. No the dividends were not part of any understandings because we have cash. The reason we reduced the dividend was because the fact it reflected the cash that we generated this last quarter. And overall, we're going to look at it closely but this dividend rate that we gave is approximately between 40% and 50% of our free cash that we generated last quarter. And as far as the covenants are concerned, as we have not signed the final agreement which we plan to do in the next day or two then we'll make it all public.

Your next question comes from Todd Schwartzman – Sidoti & Company Todd Schwartzman – Sidoti & Company: Can you just refresh what the pre-existing covenant is and how closely you came to tripping that?

First, I must tell you this that we have about $70 million of cash. We have not in the last few years drawn on this revolver. I was almost tempted to give it up. And as I said also in my comments our objective is not to use it. Yet we are paying fees in using it, yes based on the revolver that had previously been very, very high covenants, which we would have tripped. So by doing this we've avoided that. Todd Schwartzman – Sidoti & Company: Any sense in terms of how close it became?

No we would have tripped it. Todd Schwartzman – Sidoti & Company: Can you just go back to the inventory for a moment, Farooq? I'm just trying to understand over the past six months or so, I would have suspected inventory to be lower than it is. I just wanted to get my arms around why that's not been the case.

Well a number of factors, one of the ways that you get lower inventories is by markdowns in selling it and we could have done that too. That has an impact on our margins, it has an impact on our credibility, it has an impact on our structure and we felt a better way is to continue our business, maintain our structure the way it is and reduce it as we go along. And as I said, this quarter our plans are to reduce them to reflect the lower sales. This kind of sales have declined in the last quarter is like a tsunami hitting the economy. And the only way people have been able to reduce their inventories this quarter is just by giving it away and we have not done that because our inventory’s in good shape. They are all current. And over the next few months, as our incoming ordering is lower, and as I said also we're going to take some more downtime in our plans domestically we're going to bring it down. Todd Schwartzman – Sidoti & Company: So the flat levels have been largely overwhelmingly a function of the everyday value price strategy?

Well it really is a function of the major decline in the last quarter in sales. The amount of decline we had was so sudden and so fast that it will take us another three or four months to get that in line. Todd Schwartzman – Sidoti & Company: What color can you give us pertaining to the contract furniture objective here? Talk maybe about products, end-users, what about distribution, manufacturing, where are they going to be made, starter costs and any other costs involved in an ongoing basis and the timing especially of those initial costs to be incurred?

Yes. Now that we have changed about 85% of our product lines and expanded our range to a larger range of styles, we are in a much better position to also sell this the hospitality and the contract business which we initially we were not able to do. Now we operate our own upholstery manufacturing, which already in the past and currently, does make product which is somewhat more needed for contract contracts in flammability and things of that nature. We, for instance, have an upholstery manufacturing plant in California, which really has to meet all kinds of flammability for domestic which is pretty similar to the contract. So to answer your question, we're not going to be investing a great deal in additional, either manufacturing or developing new products lines, but utilizing our manufacturing domestically both case goods and upholstery and also leveraging from our resources overseas of being able to do some contract business. For instance, we recently did a fairly major project in one of the most leading hotels in New York. They came to us and we were able to take one of our product lines, we had to slightly change the design, and they're very happy with it. But we didn't have any means of going ourselves to that business. People will come to us. But with Dan Grow coming in and his knowledge of that industry, I think he will leverage what we have. Our objective is not to spend additional costs or building inventories or build factories and all of that stuff. Also the other thing that Dan is going to do is, which we needed, is to also help the growth of our international business because we didn't really have anybody full time working on that. We have right now a number of people interested even despite this difficult environment, we're still doing well in China. And, as you know, we had hired somebody to work for us in Europe who is working hard, tough conditions right now, but we are going to be positioned well to do some business there plus in other parts of the country. So I think that this is a very important and a very cost effective way for us to get into that business. Todd Schwartzman – Sidoti & Company: Aside from the hospitality industry, you're not looking at entering the corporate office market it sounds like. Is that correct?

That's right. No we are not entering that other than what we already do, which is we do a fair amount of offices, but this is from our current programs. We are not involved with large scale commercial office business and our intention is not to go there. Todd Schwartzman – Sidoti & Company: And what about sourcing and just production in general, how much of these will be brand new products versus just repositioning or positioning some of the existing pieces and collections to a different consumer.

We'll watch it as we go along and if we have to, like as I mentioned this hotel in New York, they give us a special order and we made it. We are not going to build inventories for this program. Our objection is to utilize about 80% or so of what we have and 20% make it custom from our domestic resources and our overseas resources. Todd Schwartzman – Sidoti & Company: Any projection on a three to five-year basis as to what this could mean for the top line?

Well, three to five is a good time frame. I would say that internationally and in contract we should do close to $100 million of business. That's our objective. Todd Schwartzman – Sidoti & Company: Last question is, just how should we look at SG&A as a percentage of sales for the full year? Looking at the first half, it's been in a 48 to 48.5, I'll call it the 49 range, do you see that on a full year basis as well for 2009?

We reduced our operating expenses by $14 million this quarter, we are now running at a rate in excess of $60 million on the annual basis lower operating expenses and we are going to continue to reduce them. The top line is somewhat difficult to project. The good news is this that, tough times also gives you an opportunity to keep on operating more efficiently and this gives us an opportunity to continue to reduce our operating expenses to meet these lower sales. But on the other hand, we have a great leverage as business increases because our operating expenses will continue to remain relatively low.

Next question comes from Budd Bugatch – Raymond James Budd Bugatch – Raymond James: Can you kind of give us a goal for inventory at the end of Q3? You have been flat now for a couple of quarters and maybe characterize how much of the inventory is it retail and how much is it wholesale? What's a dollar level that you think you can reduce it by in the third quarter?

We are going to reduce it by at least $8 to $10 million. That's our objective and we could even do more. But it also depends on the top line. Budd Bugatch – Raymond James: And that's pretty much all in the wholesale segment, right? That will go in a

No, it's in both. It's the wholesale and the retail. Budd Bugatch – Raymond James: And the retail, too?

Yes. Budd Bugatch – Raymond James: I noticed that customer deposits at the end of the second quarter were down about 33% almost 34%, year-over-year and with the written comp down 33% at retail, is that a reasonable expectation for sales degradation in the third quarter?

It's a little bit early, January has still been relatively tough, better than December. The last week or so we have positive news, but overall concerns there, we are doing relatively better. We are still maintaining our margins. And I would say that our deposits do reflect the backlog and other factors is that, Budd, over the years we have continued to deliver our products faster. The faster we deliver, the lower the deposits. We could not, five years back, imagine that we would be able to deliver as fast as we are delivering and reduce our overall backlogs, which is good news and bad news, but it's good news. So, yes, it's good to have deposits, but on the other hand we are in a position of delivering our products faster from manufacturing to our retail service centers and to the consumers. That is also a factor of lowering the deposits. Budd Bugatch – Raymond James: But we're about six quarters away from when Mission Possible really had the biggest impact, so, I would think the year-over-year deposit comparison represents a pretty good indication of what the backlog looks like and what the future is. Am I mistaken on that?

No, absolutely. Our backlogs are lower, our business is lower, our backlogs are lower and we are shipping faster. That's why our deposits are even lower than our backlogs, lower than our incoming business. Budd Bugatch – Raymond James: There is not much different this year versus last year in terms of the relative size, in terms of the speed?

We are delivering faster this year. Budd Bugatch – Raymond James: Of the $14 million in expense reduction, how much varies with sales? How much happened because sales came down and how much was structural reductions, either home office or field organization that will not vary with sales?

I would say, again, I'm just giving you some broad ranges, David can perhaps give you some more analysis. I would say 85% of these came due because of structural changes and 15% due to lower sales. Budd Bugatch – Raymond James: Then that's a significant number, even if the sales do very significantly, right?

That's right. That's the reason I was talking about the leverage we have going the other way. Budd Bugatch – Raymond James: And what do you look for new openings? The dealer base obviously is challenged like everybody is in this environment in our industry and your industry as well, what do you look like for new openings in the second half of this year and maybe next and how many? What's the outlook for taking some of the dealer-owned business and bringing it back in house?

Budd, we are very blessed, fortunate, whatever you call it, of maintaining the base that we have. Our dealers are absolutely right, everybody else in this world is going through a rough time and it is amazing that they are holding on. One of the ways we have been is that we have increased our national advertising, so that gives us an advertising umbrella and helps them reduce somewhat of their operating expenses and also, as I said, it gives us an ability to drive more traffic in these difficult times. I would think that we are right now, a couple of design centers going to be opening up new ones that we are under construction. We have our dealers, a couple of them are also building and almost completed; for the next year, going to slow down considerably. Right now the objective is to make sure we do well in what we have and in some cases, we are going to be consolidating where it makes sense. For instance, currently we have opened up a major and in a very good place, a design center in Milwaukee. And this new one is replacing three older ones we had, which were neighborhood stores. So that kind of a process, we are right now, for instance, building in between Naples and Fort Myers. We earlier closed Fort Myers and we will move the Naples to this new location and it's under construction right now. We are right in the process of building a new one in Cincinnati. So we have a few of those going on, but good news from the company’s point of view is fortunately that most of this new construction was done before the tsunami hit us. Budd Bugatch – Raymond James: Farooq, are you going to close any more stores? Do you see any more consolidation?

It's possible. We've been looking at it very, very carefully. We are looking at some where we have the opportunity of consolidating in some areas we've opened up maybe two or three locations which, today if had to open them up we would not open them up. So as we get an opportunity, we might consider consolidating them. Budd Bugatch – Raymond James: How's that experiment progressing?

Which one? Budd Bugatch – Raymond James: The design studios?

We've got a couple of them going. Two more are opening up. It is a good concept in one of the worst times to open them. I cannot tell you that right now, that they're doing well because it is too early. But as things normalize, I believe all indications are they are going to do very well. Budd Bugatch – Raymond James: And lastly, let me just follow on a little bit with what Todd was asking about hospitality. One of the things, if I remember right, you lost a major contract a couple of years ago, maybe longer than a couple of years ago in hospitality, because the product line didn't have the breadth that it needed. Do you need to broaden the product line for hospitality to make that a viable business?

I think you're referring to a [inaudible] contract. Budd Bugatch – Raymond James: I am indeed.

We used to have that actually, and we then gave it up ourselves because we needed all the production for our domestic needs. And you're right, at that time we didn't have the breadth and in fact, we had to subcontract part of the program. We, today, are very well positioned to get if you want contracts like that.

Your next question comes from - [Rishi Sadarangani].

If we can keep it open for under ten minutes, because it's running a little bit late. All right, please go ahead. [Rishi Sadarangani]: Just a couple of quick questions, Farooq, I wanted your perspective. In case there were any unanticipated liquidity needs or needs for cash, even though I think you've been pretty clear that with your cash position and current borrowings you don't think that's the case, but if that were to be the case, then what might be any other sources of liquidity that you might consider or have available or be able to monetize? I guess my next question is that what would you be looking for in the external environment to tell you that things maybe are starting to pick up? What might be some of the early signs of that?

On the issue of liquidity, we have a number of opportunities in addition to the line of credit we have from the bank. We have at least in excess of $400 million of real estate. We are unsecured. We own about 50% of all of our retail design centers. We own most of our manufacturing, most of other distribution centers. So, we have invested in the last maybe number of years over half a billion dollars in our structure. So we have the opportunity if we wanted to, to raise some cash liquidity from those, we can. We have the opportunity of continuing to reduce and fine tune inventories because we have approximately $187 million of inventories, if we wanted to on a planed basis, we can if we wanted to reduce it by $30, $40 million and still be able to operate. It all depends on what the conditions are. So we have lots of options, but the best one really is that we have cash. We operate our business well. We are going to reduce our operating expenses to meet the current lower sales and be somewhat conservative, and as business picks up, we'll be in a good position. Now, as far as business picking up, we have a very strong network. In fact for instance, next Tuesday I have, which I periodically do, and I and my associates, we're going to be talking to over 3,000 of our associates on a webcast call discussing our business, discussing where we are and getting feedback. We do that constantly. So we have a lot of feedback coming in. And as I said, even for instance last week or so we already saw some positive signs of people willing to make some commitments, one week is not enough and there are a lot of there external factors. So we have a very strong network and feedback, which will make us operate almost get feedback instantaneously so that we are able to react to it. [Rishi Sadarangani]: And are there any indicators in terms of foot traffic or consumer confidence, or job losses, or anything that you can look at in terms of statistics and say, okay, this is starting to turn.

Yes, for us consumer confidence has always been a very important factor. We watch that very carefully because we know that we have people coming in to our design centers. In fact, our current advertising program and marketing program says plan now. We know people are interested, but may not necessarily be willing to commit. So our associates we encourage them to work with the clients, work on their projects, band right now because people are interested, yet they are somewhat, some people are concerned about the external environments. As soon as consumer confidence improves, our objective is to have a head start so that we are already working on projects. And, as you know, things are so much down. It's a matter of time that they're going to start going up, because there so much down and it happens all the time. And this time, the decline has been so strong and so large, which is good and bad. The bad has affected negatively many, many people. The good is we have an opportunity of going the other way also faster.

Your next question comes from Anthony Chukumba – FTN Midwest Securities Corp. Anthony Chukumba – FTN Midwest Securities Corp: Two questions, one, I just wanted to see if you saw any regional differences in terms of sales performance in the US. In other words, were some markets are relatively better than others. And then two, you said that part of bringing the dividend down was because your free cash flow was down. Would that imply that if the environment worsens and your free cash flow declines further that you would potentially cut your dividend again?

On the first question, Anthony, there was in the first quarter when oil prices were still higher, you could see some areas of the country doing better, for instance, Texas was okay. But by the second quarter or towards end of the year, they also got impacted with lower prices of oil, I do not think there are some small, little areas. The Dakota's are doing okay because of the economy. I think the interesting thing is that other than our own individual factors of having very strong relationships in some areas, where people have been able to maintain relatively better business, but I think this decline, in my view, for the first time I've seen has been consistently across the country. And the second question was? Anthony Chukumba – FTN Midwest Securities Corp: The second question was you alluded to the fact that –

On the dividends, yes, I've got it. We run our business with common sense. It would be unwise for us to give dividends if we are not producing cash. So, we're going to make sure that we balance our needs for dividends with that of security and going through this difficult time. I think the objective of most businesses is that we've got to survive this, and on top of it, come out stronger and that's what our objective is. I think that we should be able to maintain the dividend, but we're going to watch it. And if it makes sense, we'll increase it, and if it makes sense to decrease it, we'll do that too, or at least I'll recommend it to the Board.

Your next question comes from [Maggie Gillman]. [Maggie Gillman]: Most of my questions have been answered, but I just wanted one elaboration and that's on the selling expense. Does that include your retail store payroll or is that part of G&A?

No, that does include the retail store payroll and it also includes the delivery of our products to our whole retail network from wholesale. Because as you know, we deliver our products at one cost nationally. So our selling expenses also includes our delivery costs and our distribution costs. [Maggie Gillman]: Well, that's the part that's variable, right? I mean, your people aren't on commission or are they?

No, they're not. They're out on salary and their bonus, as you know, we changed it. So, last year it benefited us in the sense that many of our people would not have been able to pay their bills. Fortunately, we changed it earlier this fiscal year by converting our designers to salary plus a bonus, and it's a team bonus. And the salary represented approximately 75% of what they'd earned the previous year and on top of it, when we created the teams, we were able to operate our business with less associates, almost about 500 less associates. That also resulted in lowering our selling expenses.

Your next question comes from Joel Harvard – Hilliard Lyons Joel Harvard – Hilliard Lyons: Farooq, also a follow-up on selling cost. I believe advertising is included in that. Could you talk about how you all are considering or planning your traditional broadcast in print and media advertising component versus the experience you've had with the revamped website?

Joel, the new website has created new opportunities for us. As I mentioned, in the last quarter we increased our national advertising, both national television and national print, which is basically shelter magazines by 25% over what we had spent in the second quarter of the last fiscal year. Yet, overall our advertising expenditures were down because we decided that local print, local advertising was out in this environment we had to maintain a national presence, and that’s what we did. We are going to continue to do that. I also mentioned, and I’m sure you got that, is that starting next month national advertising is also going to a great degree promote our new website because we want people to come to our website, and from our website they are able to see all of our offerings in high definition, and I’m sure you have seen our new website. Also, we believe it will increase our traffic into our design centers. So, what were we are spending? Approximately what we spent last year, that is still focusing on national mediums, reducing our local print, that overall our advertising will be lower but it will be focused also on getting the message across about our website. Joel Harvard – Hilliard Lyons: One follow up please. The local spend component, was that sort of a co-op to the dealers?

No, it was not. There is no co-op at Ethan Allen.

Your next question comes from Budd Bugatch – Raymond James. Budd Bugatch – Raymond James: Farooq, a couple of follow ups. You had, I think, confirmed a couple months ago on the simple finance plan and I think either regenerated it or started to re-advertise it. Are you seeing much action on that and we’re hearing that credit is still a problem for extended credit from some of the providers.

Yes, we actually just offered in the month of January, Bud, two offerings. One was a 4.99% for a four-year term unsecured, actually it ends this Saturday so I would hope you go and buy some, but it’s a great, great offering, four-year at 4.99%. And the other one is, we are also offering a 10-month no interest, no payments. Now these are great offerings but you’re right, people are hesitant. The credit agencies that monitor it have also to some becoming more conservative in approving credit. In our case, we are fortunate we are still getting 80% to 82% plus approvals, which is I think much higher than most of the country. But the consumers are somewhat wary about credit, which is understandable. But we are offering them and I believe it still makes sense for us to offer the various menu of options that we have and will continue to do that. Budd Bugatch – Raymond James: You talked about advertising, increased advertising, during this period. Can you quantify a little bit for us on it? You typically quantify once a year but maybe we can get you to come out a little more often to that data point.

You are talking of quantifying in what way, Budd? Budd Bugatch – Raymond James: What was the advertising expense this year versus last, in terms of dollars?

All the information is the Q’s, 10-Qs and 8-Q’s and all that stuff, but, Dave?

Not in that level of detail.

Let me see what he is saying. Budd, our advertising, I would give in percentages, we got a lot of factors to consider. As I said, our national advertising went up 25% but our retail advertising, and this is our company operated design centers, went down, which is the same similar situation, I’m sure, with our dealers, that they reduced advertising by almost close to 15%, 20%. Budd Bugatch – Raymond James: So overall, did advertising go up or down?

Went down. And that’s our objective.

At this time, Sir, I’m showing no further questions.

All right, thank you very much. Any questions, please let us know and Peg Lupton is also available.

Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation. You may no disconnect and have a wonderful day.