UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~August~~May 28, ~~2005~~ 2006

Commission File Number 1-10226

THE ROWE COMPANIES

(Exact name of registrant as specified in its charter)


NEVADA		54-0458563
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1650 Tysons Boulevard, Suite 710, McLean, Virginia		22102
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 703-847-8670

N/A

Former name, former address and former fiscal year, if changed since last report.

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 x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated ~~filed~~filer, ~~(as~~or ~~defined~~a non accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one) ~~YES ¨ No x~~:

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the close of the period covered by this report.

Class		Outstanding at ~~August~~May 28, ~~2005~~2006
Common stock, par value $1.00 per share		13,~~292~~283,~~890~~628 shares

THE ROWE COMPANIES

INDEX

		Page
Part I. Financial Information
Consolidated Balance Sheets – August 28, 2005 and November 28, 2004		3
Consolidated Balance Sheets – May 28, 2006 and November 27, 2005		3
Consolidated Statements of Operations – Three Months and Nine Months Ended August 28, 2005 and August 29, 2004		4
Consolidated Statements of Operations – Three Months and Six Months Ended May 28, 2006 and May 29, 2005		4
Consolidated Statements of Cash Flows - Nine Months Ended August 28, 2005 and August 29, 2004		5
Consolidated Statements of Cash Flows - Six Months Ended May 28, 2006 and May 29, 2005		5
Notes to Consolidated Financial Statements		7
Management’s Discussion and Analysis of Financial Condition and Results of Operations		1514
Forward Looking Statements		2425
Quantitative and Qualitative Disclosures about Market Risk		2830
Part II. Other Information		3032

PART I1 - FINANCIAL INFORMATION

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

UNAUDITED

	August 28,2005			November 28,2004
	May 28,2006			November 27,2005
	(in thousands, except per share amounts)
	(in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,~~315~~460		$	51,~~560~~008
Restricted cash collateralizing letters of credit		1,~~961~~278			31,~~564~~961
Refundable income taxes		373			—
Accounts receivable, net		13,186			15,649
Accounts receivable, net		18,400			16,522
Income taxes receivable		—			1,499
Inventories (Note 4)		4339,~~680~~184			3742,~~781~~677
Deferred income tax asset		1,899			1,931
Deferred income tax asset, current (Note 13)		598			570
Prepaid expenses and other		43,~~396~~825			5,~~500~~304
Total current assets		7259,~~024~~531			7068,~~858~~668
PROPERTY AND EQUIPMENT, net (Note 6)		46,241			43,846
PROPERTY AND EQUIPMENT, net		44,700			45,994
INVESTMENT PROPERTY HELD FOR SALE (Note 11)		—			7,248
GOODWILL		13,182			13,182
OTHER NONCURRENT ASSETS		3,370			3,987
DEFERRED INCOME TAX ASSET, NON-CURRENT (Note 13)		7,024			2,528
	$	134,817		$	139,121
OTHER NONCURRENT ASSETS		7,302			3,844
	$	131,739		$	134,216
LIABILITIES
CURRENT LIABILITIES
Current maturities of long-term debt (Note 5)	$	35,281		$	1,867
Accounts payable and accrued liabilities		26,901			23,840
Accounts payable and accrued liabilities		22,009			25,366
Income taxes payable		419			1,071
Income taxes payable		—			1,064
Customer deposits		18,531			15,338
Customer deposits		13,840			14,296
Total current liabilities		45,851			40,249
Total current liabilities		71,130			42,593
LONG-TERM DEBT (Note 5)		34,530			34,183
LONG-TERM DEBT (Note 5)		—			24,077
DEFERRED RENT		10,563			10,634
LONG-TERM DEBT ASSOCIATED WITH INVESTMENT PROPERTY HELD FOR SALE (Note 11)		—			8,968
DEFERRED LIABILITIES		1,657			1,551
DEFERRED RENT (Note 6)		10,196			7,581
Total liabilities		92,601			86,617
DEFERRED LIABILITIES		3,223			3,222
Total liabilities		84,549			86,441
STOCKHOLDERS’ EQUITY
COMMON STOCK, par value $1 per share, 50,000,000 authorized shares; issued shares 16,726,234 and 16,674,653, respectively; outstanding shares 13,292,890 and 13,247,821 respectively		16,726			16,675
COMMON STOCK, par value $1 per share, 50,000,000 authorized shares; issued shares 16,726,234 and 16,726,234, respectively; outstanding shares 13,283,628 and 13,292,217 respectively		16,726			16,726
CAPITAL IN EXCESS OF PAR VALUE		23,285			23,~~206~~285
RETAINED EARNINGS		3221,~~213~~163			3429,~~779~~474
ACCUMULATED OTHER COMPREHENSIVE INCOME		63			9
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)		—			135
Less treasury stock, 3,433,344 shares in 2005 and 3,426,832 shares in 2004		(22,019	)		(21,989	)
Less treasury stock, 3,442,606 shares in 2006 and 3,434,017 shares in 2005		(22,036	)		(22,021	)
Total stockholders’ equity		5039,~~268~~138			5247,~~680~~599
	$	~~134~~131,~~817~~739		$	~~139~~134,~~121~~216

See notes to consolidated financial statements.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND ~~NINE~~SIX MONTHS ENDED ~~AUGUST~~MAY 28, ~~2005~~2006 AND ~~AUGUST~~MAY 29, ~~2004~~2005

UNAUDITED

	Three Months Ended						~~Nine~~Six Months Ended
	August 28,2005			August 29,2004			August 28,2005			August 29,2004
	May 28,2006			May 29,2005			May 28,2006			May 29,2005
	(in thousands, except per share amounts)
				Restated						Restated
Net shipments	$	67,747		$	79,915		$	134,796		$	145,426
Net shipments	$	79,466		$	76,149		$	224,892		$	222,132
Cost of shipments		45,015			55,732			88,793			100,972
Cost of shipments		53,564			49,593			154,536			143,745
Gross profit		22,732			24,183			46,003			44,454
Gross profit		25,902			26,556			70,356			78,387
Selling and administrative expenses		29,755			27,600			57,411			52,728
Selling and administrative expenses		27,870			25,380			80,598			74,684
Operating loss		(7,023	)		(3,417	)		(11,408	)		(8,274	)
Operating income (loss)		(1,968	)		1,176			(10,242	)		3,703
Interest expense		(887	)		(707	)		(2,028	)		(1,229	)
Interest expense		(862	)		(721	)		(2,091	)		(2,184	)
Other income, net		147			79			388			868
Other income, net (Note 13)		254			195			1,122			585
Loss from continuing operations before taxes		(7,763	)		(4,045	)		(13,048	)		(8,635	)
Earnings (loss) from continuing operations before taxes		(2,576	)		650			(11,211	)		2,104
Tax benefit		(2,818	)		(1,493	)		(4,737	)		(3,181	)
Tax expense (benefit)		(972	)		219			(4,153	)		767
Net loss from continuing operations		(4,945	)		(2,552	)		(8,311	)		(5,454	)
Net earnings (loss) from continuing operations		(1,604	)		431			(7,058	)		1,337
Discontinued operations (Note 10):
Discontinued operations (Note 11):
Earnings from discontinued real estate operations, net of tax expense of $0, $7, $0 and $51, respectively		—			11			—			81
Loss on contingencies associated with operations discontinued in prior years, net of tax benefit of $65		—			—			—			(105	)
Gain on disposal of Sylmar investment property, net of tax expense of $1,680		—			—			—			2,683
Earnings (loss) from discontinued real estate operations, net of tax expense (benefit) of $(8), $37, $43 and $37, respectively		(13	)		59			69			58
Net loss	$	(4,945	)	$	(2,541	)	$	(8,311	)	$	(2,690	)
Gains on disposal of real estate investment property, net of tax expense of $1,089 and $2,769, respectively		1,740			—			4,423			—
Net loss from continuing operations per common share	$	(0.37	)	$	(0.19	)	$	(0.63	)	$	(0.41	)
Net earnings (loss)	$	123		$	490		$	(2,566	)	$	1,290
Net loss per common share	$	(0.37	)	$	(0.19	)	$	(0.63	)	$	(0.20	)
Net earnings (loss) from continuing operations per common share	$	(0.12	)	$	0.03		$	(0.53	)	$	0.10
Weighted average common shares		13,287			13,293			13,289			13,283
Net earnings (loss) per common share	$	0.01		$	0.04		$	(0.19	)	$	0.10
Net loss from continuing operations per common share assuming dilution	$	(0.37	)	$	(0.19	)	$	(0.63	)	$	(0.41	)
Weighted average common shares		13,292			13,201			13,286			13,188
Net loss per common share assuming dilution	$	(0.37	)	$	(0.19	)	$	(0.63	)	$	(0.20	)
Net earnings (loss) from continuing operations per common share assuming dilution	$	(0.12	)	$	0.03		$	(0.53	)	$	0.10
Weighted average common shares and equivalents		13,287			13,293			13,289			13,283
Net earnings (loss) per common share assuming dilution	$	0.01		$	0.04		$	(0.19	)	$	0.10
Weighted average common shares and equivalents		13,292			13,591			13,286			13,531

See notes to consolidated financial statements.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE ~~NINE~~SIX MONTHS ENDED

~~AUGUST~~MAY 28, ~~2005~~2006 AND ~~AUGUST~~MAY 29, ~~2004~~2005

UNAUDITED

	2005			2004
	2006			2005
	(in thousands)
				Restated
Increase (Decrease) In Cash
Cash flows from operating activities:
Cash received from customers	$	~~222~~140,~~771~~089		$	~~220~~144,~~850~~782
Cash paid to suppliers and employees		(~~238~~138,~~497~~658	)		(~~213~~158,~~117~~108	)
Income taxes received (paid), net		~~(153~~1,139	)		(1,~~045~~179	)
Interest paid		(2,~~445~~028	)		(21,~~731~~503	)
Incentive payments received from landlords		~~2,810~~404			~~1,403~~844
Other receipts - net		~~1,616~~391			1,~~228~~283
Net cash and cash equivalents provided by (used in) operating activities		~~(13~~1,~~898~~337	)		6(11,~~588~~523	)
Cash flows from investing activities:
Payments received on notes receivable		—			100
Increase in cash surrender value		(56	)		(66	)
Increase in cash surrender value		(98	)		(77	)
Proceeds from sale of assets		7			5,173
Net proceeds from sale of assets		14,859			—
Capital expenditures		(1,851	)		(4,501	)
Capital expenditures		(7,180	)		(4,031	)
Net cash provided by (used in) investing activities		(1,900	)		606
Net cash provided by (used in) investing activities		7,581			(4,008	)
Cash flows from financing activities:
Restricted cash released from (deposited to) collateral for letters of credit		1,603			(1,290	)
Restricted cash released from collateral for letters of credit		683			540
Draws under revolving loans		143,~~998~~671			613,~~310~~274
Repayments under revolving loans		(3,061	)		(6,413	)
Initial draw under new revolving loan		34,035			—
Payments to reduce long-term debt		(11,568	)		(2,737	)
Repayments under revolving loans		(4,028	)		—
Proceeds from issuance of common stock		130			103
Payments to reduce long-term debt		(33,331	)		(4,167	)
Purchase of treasury stock		(30	)		(22	)
Proceeds from issuance of common stock		—			125
Net cash provided by (used in) financing activities		2,072			(4,049	)
Purchase of treasury stock		(15	)		(26	)
Net increase (decrease) in cash and cash equivalents		(4,245	)		(1,469	)
Net cash provided by financing activities		1,015			9,746
Cash at beginning of period		5,560			3,708
Net increase (decrease) in cash and cash equivalents		452			(1,171	)
Cash at end of period	$	1,315		$	2,239
Cash at beginning of period		1,008			5,560
Cash at end of period	$	1,460		$	4,389

See notes to consolidated financial statements.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE ~~NINE~~SIX MONTHS ENDED

~~AUGUST~~MAY 28, ~~2005~~2006 AND ~~AUGUST~~MAY 29, ~~2004~~ 2005

UNAUDITED

	2005			2004
	2006			2005
	(in thousands)
				Restated
Net loss	$	(8,311	)	$	(2,690	)
Net earnings (loss)	$	(2,566	)	$	1,290
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Pre-tax loss (gain) on disposition of assets		3			(4,354	)
Pre-tax gain on disposition of assets		(7,164	)		—
Depreciation and amortization		3,172			3,049
Depreciation and amortization		4,577			5,460
Provision for deferred compensation		126			80
Provision for deferred compensation		129			189
Payments made for deferred compensation		(122	)		(122	)
Payments made for deferred compensation		(181	)		(245	)
Provision for losses on accounts receivable		363			(273	)
Provision for losses on accounts receivable		(213	)		186
Provision for deferred taxes		(4,441	)		(57	)
Provision for deferred taxes		(57	)		11
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable		(12,~~665~~100	)		(~~718~~3,807	)
Decrease (increase) in inventories		(53,~~899~~493	)		(18,~~853~~881	)
Decrease (increase) in prepaid expenses and other		1,~~104~~410			~~(139~~1,339	)
Decrease (increase) in other miscellaneous assets		~~477~~(3,584	)		~~(385~~118	)
Increase (decrease) in accounts payable		(23,~~664~~530	)		~~1,051~~876
Increase (decrease) in income taxes payable		~~(1,437~~843	)		(~~317~~214	)
Increase (decrease) in accrued expenses		(~~498~~367	)		~~1,630~~(454	)
Increase (decrease) in customer deposits		~~(456~~3,193	)		~~(564~~3,163	)
Increase (decrease) in deferred rent		~~2,615~~(71	)		~~992~~704
Total adjustments		~~(11~~9,~~332~~648	)		5(8,~~298~~833	)
Net cash provided by (used in) operating activities	$	~~(13~~1,~~898~~337	)	$	6(11,~~588~~523	)

See notes to consolidated financial statements.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

Note 1 -		The Rowe Companies (the “Company”) operates primarily through Rowe Furniture, Inc., (“Rowe”), its upholstered furniture manufacturing subsidiary, and Storehouse Inc., (“Storehouse”), a multi-channel, lifestyle home furnishings business including 67 retail home furnishings stores.
Note 2 -		In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position as of August 28, 2005 and the results of operations and cash flows for the three and nine month periods ended August 28, 2005 and August 29, 2004. Selling and administrative expenses included $1,849,000 and $1,424,000 of retail delivery expenses for the three months ended August 28, 2005 and August 29, 2004, respectively, and $5,175,000 and $4,243,000 for the nine months ended August 28, 2005 and August 29, 2004, respectively.
		These interim financial statements and the related notes should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K/A for the fiscal year ended November 28, 2004. See Note 6.
Note 3 -		The results of operations for the nine months ended August 28, 2005 and August 29, 2004 are not necessarily indicative of the results to be expected for the full year.
Note 4 -		Inventory components are as follows:

Note 1 -

The Rowe Companies (the “Company”) operates primarily through Rowe Furniture, Inc., (“Rowe” or the “manufacturing segment”), its core upholstered furniture manufacturing subsidiary, and Storehouse Inc., (“Storehouse” or the “retail segment”), a multi-channel, lifestyle home furnishings business including 71 retail home furnishings stores.

	August 28,2005		November 28,2004
	(in thousands)
Retail merchandise	$	24,194	$	21,103
Finished goods		3,140		2,376
Work-in-process		3,739		3,507
Raw materials		12,607		10,795
Total inventories	$	43,680	$	37,781

Note 2 -

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position as of May 28, 2006 and the results of operations and cash flows for the three and six months ended May 28, 2006 and May 29, 2005. Selling and administrative expenses included $2,070,000 and $1,677,000 of retail delivery expenses for the three months ended May 28, 2006 and May 29, 2005, respectively, and $4,124,000 and $3,326,000 for the six months ended May 28, 2006 and May 29, 2005, respectively.

~~Note~~These 5interim -financial Asstatements ~~reported on October 13, 2005, the Company has been negotiating with its lenders to modify the terms of the agreement governing the Company’s working capital revolving credit facility~~ and ~~term loan, and~~ the ~~agreement~~related ~~governing~~notes ~~the~~should ~~capital lease of the Company’s Elliston, Virginia manufacturing facility, so that the Company would~~ be read in ~~compliance~~conjunction with ~~certain~~the ~~covenants~~financial ~~under~~statements ~~these agreements (specifically, cumulative monthly EBITDA (earnings before interest, taxes, depreciation~~ and ~~amortization)~~notes ~~targets)~~included asin ofour ~~August~~Annual Report ~~28,~~on ~~2005,~~Form ~~and~~10-K ~~based upon projected revenues and expenses,~~ for the ~~next~~fiscal ~~twelve~~year ~~months.~~ended ~~The Company has not been able to successfully complete these negotiations. As a result~~November 27, ~~the Company is in default under these agreements, and the lenders have the right to accelerate the Company’s obligation to repay this debt~~2005. To date, the lenders have not exercised such right. Were they to do so, it is unlikely that the Company would be able to repay the debt from existing resources. Further, the Company might be unable to obtain replacement debt from other lenders.

Note 3 -

The results of operations for the six months ended May 28, 2006 and May 29, 2005 are not necessarily indicative of the results to be expected for the full year.

Note 4 -

Inventory components are as follows:


	May 28, 2006		November 27, 2005
	*(in thousands)*
Retail merchandise	$	24,600	$	25,768
Finished goods		2,776		2,610
Work-in-process		2,797		3,172
Raw materials		9,011		11,127

Total inventories	$	39,184	$	42,677

Note 5 -

On January 6, 2006, the Company completed the refinancing of its existing long-term debt with a new lender, paying off the entire balance of its capital lease, term loan and revolving bank loan (which totaled $34.2 million as of November 27, 2005). The new financing consists of a senior secured $7.0 million Tranche B loan maturing January 6, 2009, and a three year senior secured revolving credit facility with a current maximum of $45.0 million that will increase to $50.0 million if the Company raises additional equity generating net proceeds of at least $9.5 million and secures a commitment to raise additional equity generating net proceeds of at least $2.0 million, in each case on terms and conditions reasonably satisfactory to the lender. The Company borrowed the full amount under the Tranche B loan, and approximately $27 million under the revolving credit facility, at closing to pay off the existing debt and to pay fees associated with the refinancing transaction. No principal payments are required under either the Tranche B loan or the revolving credit facility prior to the stated maturity absent an event of default giving the lender the right to accelerate the maturity of the debt.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

InThe ~~recognition~~interest ofrates ~~the~~on ~~lenders’~~both ~~right~~loans toare ~~accelerate~~variable and based on a margin, generally over 30 day LIBOR (the Company’s ~~obligation~~has the option to ~~repay~~choose ~~the~~30, ~~debt~~60, ~~all~~or 90 day LIBOR, or the greater of the prime rate or the Federal Funds rate plus 50 basis points). The margin re-sets quarterly based on the Company’s ~~outstanding~~available ~~bank~~additional ~~debt~~borrowings ~~has~~under ~~been~~the revolving ~~reflected~~credit asfacility, ~~current~~and after June 30, 2006, the interest rate on the ~~consolidated~~revolving ~~balance~~credit ~~sheet~~facility aswill ofalso ~~August~~vary based upon the Company’s financial performance. As of May 28, ~~2005~~2006, the margin over 30 day LIBOR was 1.75% ~~The~~for ~~components~~the revolving ofloan, and 5.50% for the ~~Company’s~~Tranche ~~outstanding~~B ~~debt~~loan; ~~are~~30 asday ~~follows:~~LIBOR was 5.08%.

	August 28,2005		November 28,2004
	(in thousands)
Capital lease obligation	$	10,356	$	12,206
Revolving bank loan		23,175		11,238
Term loan		1,750		2,500
		35,281		25,944
Less current maturities		35,281		1,867
Total long-term debt	$	—	$	24,077

As of May 28, 2006 and November 27, 2005, the components of the Company’s long-term debt were as follows:

In addition, the lenders have increased the spread over base rates on the term and revolving bank loans by 200 basis points effective October 14, 2005. The rate on the revolving bank loan will now be 30 day Libor plus 5%, while the term loan rate will become 30 day Libor plus 5.25%. As of October 14, 2005, 30 day Libor was 4.00%. Based upon the balances as of August 28, 2005, this increase in the spread over base rates will result in an additional interest charge of approximately $125,000 per quarter. Note 6 - As previously reported, like many other organizations, the Company completed an internal review in the first quarter of fiscal 2005 to ensure its accounting practices were consistent with the application of lease accounting under Generally Accepted Accounting Principles (GAAP). As a result, the Company corrected its method of accounting for certain leases and restated its consolidated balance sheet as of November 28, 2004 in its 2004 Form 10-K/A.


	May 28, 2006		November 27, 2005
	($ in thousands)
Revolving loan	$	27,530	$	22,544
Tranche B loan		7,000		—
Capital lease obligation		—		10,139
Term loan		—		1,500

		34,530		34,183
Less current maturities		—		—

	$	34,530	$	34,183

As of May 28, 2006, the Company had $5.8 million available for additional borrowings under the revolving credit facility (over and above the $10 million excess reserve requirement under the revolving credit facility i.e., the amount of money otherwise eligible to be borrowed by the Company against its assets that the lender is not required to fund), and was in compliance with the various covenants under the credit agreement governing the revolving credit facility and Tranche B Loans.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

~~Following~~Note is6 a- ~~summary~~The offollowing ~~the~~table ~~effects~~shows of the ~~lease~~components ~~accounting corrections on the Company’s consolidated statements~~ of ~~operations for~~ the ~~three~~loss ~~and~~per ~~nine~~share ~~months~~computations ~~ended~~shown ~~August 29, 2004 (~~in ~~thousands,~~the ~~except~~Consolidated ~~per~~Statements ~~share~~of ~~data):~~Operations.

Consolidated Statements of Operations and Comprehensive Income


	Three Months Ended						Six Months Ended
	May 28, 2006			May 29, 2005			May 28, 2006			May 29, 2005
	*(in thousands)*
Net loss available to basic and diluted shares	$	(4,945	)	$	(2,541	)	$	(8,311	)	$	(2,690	)

Weighted average common shares outstanding (Basic)		13,287			13,293			13,289			13,283

Effect of dilutive stock options		—			—			—			—

Weighted average common shares and equivalents outstanding (Diluted)		13,287			13,293			13,289			13,283

	As PreviouslyReported		LeaseAdjustments			AsRestated
Three months ended August 29, 2004
Selling and administrative expenses	$	25,353	$	27		$	25,380
Operating income (loss)		1,203		(27	)		1,176
Earnings (loss) from continuing operations before taxes		677		(27	)		650
Tax expense (benefit)		228		(9	)		219
Net earnings (loss) from continuing operations		449		(18	)		431
Net earnings		508		(18	)		490
Comprehensive income		647		(18	)		629
Net earnings (loss) from continuing operations per common share	$	0.03	$	—		$	0.03
Net earnings per common share	$	0.04	$	—		$	0.04
Net earnings (loss) from continuing operations per common share assuming dilution	$	0.03	$	—		$	0.03
Net earnings per common share assuming dilution	$	0.04	$	—		$	0.04
Nine months ended August 29, 2004
Selling and administrative expenses	$	74,719	$	(35	)	$	74,684
Operating income (loss)		3,668		35			3,703
Earnings (loss) from continuing operations before taxes		2,069		35			2,104
Tax expense (benefit)		755		12			767
Net earnings (loss) from continuing operations		1,314		23			1,337
Net earnings		1,267		23			1,290
Comprehensive income		1,776		23			1,799
Net earnings (loss) from continuing operations per common share	$	0.10	$	—		$	0.10
Net earnings per common share	$	0.10	$	—		$	0.10
Net earnings (loss) from continuing operations per common share assuming dilution	$	0.10	$	—		$	0.10
Net earnings per common share assuming dilution	$	0.10	$	—		$	0.10

As of May 28, 2006, there were 1,626,081 options with an exercise price equal to or greater than the average market price of the Company’s common stock for the three months then ended, and these options are excluded from the computation of the effect of dilutive stock options shown in the table above. In addition, due to the loss reported for the periods ended May 28, 2006, an additional 43,000 options which would have been dilutive if not for the loss for the period (as the exercise prices of these options were less than the average market price of the Company’s common stock for the three months then ended), were also excluded from the computation of the effect of dilutive options shown in the table above.

~~Following~~As isof aMay 29, ~~summary~~2005, ofthere ~~the~~were ~~effects~~990,375 ofoptions ~~lease~~with ~~accounting~~an ~~corrections~~exercise onprice equal to or greater than the ~~Company’s~~average ~~consolidated~~market ~~statements~~price of ~~cash~~the ~~flows~~Company’s common stock for the ~~nine~~three months then ended, ~~August~~and these options are excluded from the computation of the effect of dilutive stock options shown in the table above. In addition, due to the loss reported for the period ended May 29, ~~2004~~2005, an additional 942,295 options which would have been dilutive if not for the loss for the period, were also excluded from the computation of the effect of dilutive options shown in the table above.

	Consolidated Statements of Cash Flows
Nine months ended August 29, 2004	As Previously Reported			Adjustments			AsRestated
Net cash and cash equivalents provided by operating activities	$	5,185		$	1,403		$	6,588
Net cash provided by (used in) investing activities		(2,605	)		(1,403	)		(4,008	)

Note 7 -

The Company’s operations are classified into two business segments, manufacturing and retail home furnishings. The manufacturing segment, consisting specifically of Rowe, manufactures upholstered furniture (sofas, loveseats, occasional chairs and sleep sofas, covered primarily in fabric) for distribution through home furnishings retailers. The retail segment, consisting specifically of Storehouse, sells home furnishings and accessories to customers through Company-owned stores. These products consist of upholstered furniture (primarily obtained from Rowe), case goods, and home accessories. The other category is comprised of additional subsidiaries reviewed by management, including parent company expenses.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

Note 7 - The following table shows the components of the earnings per share computations shown in the Consolidated Statements of Operations.


	Manufacturing Segment			Retail Segment			Other			Inter- Segment Eliminations			Consolidated
	(in thousands)
2006

Net shipments	$	67,799		$	76,897		$	—		$	(9,900	)	$	134,796
Operating income (loss)		(3,923	)		(3,561	)		(4,046	)		122			(11,408	)
Interest expense		(970	)		(391	)		(667	)		—			(2,028	)
Other income, net		(994	)		(564	)		1,946			—			388
Earnings (loss) from continuing operations before taxes		(5,887	)		(4,516	)		(2,767	)		122			(13,048	)
Depreciation and amortization		1,520			1,604			48			—			3,172
Capital expenditures		255			1,596			—			—			1,851
Total assets		88,598			54,208			38,244			(49,311	)		131,739

2005

Net shipments	$	83,136		$	72,079		$	—		$	(9,789	)	$	145,426
Operating income (loss)		(3,094	)		(1,658	)		(3,357	)		(165	)		(8,274	)
Interest expense		(479	)		(355	)		(395	)		—			(1,229	)
Other income, net		(644	)		(479	)		1,991			—			868
Earnings (loss) from continuing operations before taxes		(4,217	)		(2,492	)		(1,761	)		(165	)		(8,635	)
Depreciation and amortization		1,621			1,328			100			—			3,049
Capital expenditures		1,129			3,240			132			—			4,501
Total assets		110,748			45,368			46,173			(52,699	)		149,590

	Three Months Ended				Nine Months Ended
	August 28,2005		August 29,2004		August 28,2005			August 29,2004
	(in thousands)
Net earnings (loss) available to basic and diluted shares	$	123	$	490	$	(2,566	)	$	1,290
Weighted average common shares outstanding (Basic)		13,292		13,201		13,286			13,188
Effect of dilutive stock options		—		390		—			343
Weighted average common shares and equivalents outstanding (Diluted)		13,292		13,591		13,286			13,531

		As of August 28, 2005, there were 1,304,359 options with an exercise price equal to or greater than the average market price of the Company’s common stock for the three months then ended, and these options are excluded from the computation of the effect of dilutive stock options shown in the table above. In addition, due to the loss reported for the nine month period ended August 28, 2005, an additional 617,670 options which would have been dilutive if not for the loss for the period (as the exercise prices of these options were less than the average market price of the Company’s common stock for the three and nine months then ended) were also excluded from the computation of the effect of dilutive options shown in the table above.
		As of August 29, 2004, there were 888,731 outstanding options whose exercise price was equal to or greater than the average market price of the Company’s common stock for the three months then ended. These options are excluded from the computation of the effect of dilutive stock options shown in the table above.
Note 8 -		The Company’s operations are classified into two business segments, manufacturing and retail home furnishings. The manufacturing segment, consisting specifically of Rowe, manufactures upholstered furniture (sofas, loveseats, occasional chairs and sleep sofas, covered primarily in fabric) for distribution through home furnishings retailers. The retail segment, consisting specifically of Storehouse, sells home furnishings and accessories to customers through Company-owned stores. These products consist of upholstered furniture (primarily obtained from Rowe), case goods, and home accessories. The other category is comprised of additional subsidiaries reviewed by management, including parent company expenses.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

	ManufacturingHomeFurnishingsSegment			RetailHomeFurnishingsSegment			Other			Inter-SegmentEliminations			Consolidated
	(in thousands)
2005
Net shipments	$	127,322		$	112,651		$	—		$	(15,081	)	$	224,892
Operating income (loss)		(3,651	)		(1,467	)		(4,989	)		(135	)		(10,242	)
Interest expense		(729	)		(550	)		(812	)		—			(2,091	)
Other income, net		(1,387	)		(619	)		3,128			—			1,122
Earnings (loss) from continuing operations before taxes		(5,767	)		(2,636	)		(2,673	)		(135	)		(11,211	)
Depreciation and amortization		2,355			2,093			129			—			4,577
Capital expenditures		1,117			5,902			161			—			7,180
Total assets		103,798			42,458			44,404			(55,843	)		134,817
2004
Net shipments	$	132,691		$	104,218		$	—		$	(14,777	)	$	222,132
Operating income (loss)		8,164			612			(5,156	)		83			3,703
Interest expense		(1,576	)		(487	)		(121	)		—			(2,184	)
Other income, net		(2,111	)		(742	)		3,438			—			585
Earnings (loss) from continuing operations before taxes		4,477			(617	)		(1,839	)		83			2,104
Depreciation and amortization		3,205			1,955			300			—			5,460
Capital expenditures		1,638			2,261			132			—			4,031
Total assets		115,659			34,247			44,831			(60,877	)		133,860

Note 8 -

The components of comprehensive income (loss) for the three and six months ended May 28, 2006 and May 29, 2005, are shown below:

Note 9 - The components of comprehensive income for the three months and nine months ended August 28, 2005 and August 29, 2004, are shown below:


	Three Months Ended						Six Months Ended
	May 28, 2006			May 29, 2005			May 28, 2006			May 29, 2005
	*(in thousands)*
Net loss	$	(4,945	)	$	(2,541	)	$	(8,311	)	$	(2,690	)

Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on derivatives		—			(36	)		(25	)		5
Payments (receipts) transferred to expense		—			10			(110	)		27

Comprehensive loss	$	(4,945	)	$	(2,567	)	$	(8,446	)	$	(2,658	)

	Three Months Ended					Nine Months Ended
	August 28,2005		August 29,2004			August 28,2005			August 29,2004
	(in thousands)
Net earnings (loss)	$	123	$	490		$	(2,566	)	$	1,290
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on derivatives		18		(70	)		23			(149	)
Payments transferred to expense		4		209			31			658
Comprehensive income (loss)	$	145	$	629		$	(2,512	)	$	1,799

Note 9 -

Prior to the start of fiscal year 2006, the Company used the intrinsic value method to account for stock-based employee compensation. As the Company’s awards of stock options carried an exercise price equal to the fair market value of the stock on the date of grant, no accounting cost was reflected in the Company’s Consolidated Statements of Operations. Effective in fiscal 2006, the Company has adopted Statement of Financial Accounting Standards No. 123R, “Share-Based Payment,” and will, upon the next grant of options, account for the options using a fair value based method, which will include recording the compensation cost of the options in the Consolidated Statements of Operations.

The following table shows the impact of using a fair value based method of accounting for employee stock options and the impact on loss and loss per share:


	Three Months Ended						Six Months Ended
	May 28, 2006			May 29, 2005			May 28, 2006			May 29, 2005
	*(in thousands, except per share amounts)*
Net loss, as reported	$	(4,945	)	$	(2,541	)	$	(8,311	)	$	(2,690	)
Loss per share, basic, as reported	$	(0.37	)	$	(0.19	)	$	(0.63	)	$	(0.20	)
Loss per share, diluted, as reported	$	(0.37	)	$	(0.19	)	$	(0.63	)	$	(0.20	)

Stock-based employee compensation cost, net of related taxes, included in net loss as reported		—			—			—			—

Stock-based employee compensation cost, net of related taxes, that would have been included in net loss if the fair value based method had been applied	$	—		$	500		$	—		$	511

Pro forma net loss, including the impact of applying the fair value based method	$	(4,945	)	$	(3,041	)	$	(8,311	)	$	(3,201	)
Pro forma loss per share, basic	$	(0.37	)	$	(0.23	)	$	(0.63	)	$	(0.24	)
Pro forma loss per share, diluted	$	(0.37	)	$	(0.23	)	$	(0.63	)	$	(0.24	)

The following table shows the change in unvested stock options during the six months ended May 28, 2006, a new disclosure required under SFAS 123R presented here for the first time. The vested options shown below bested during the three months ended May 28, 2006. No Options have been awarded or exercised during fiscal 2006.


	Options		Weighted Average Exercise Price
Balance, November 27, 2005	69,100		$	9.59
Vested during the period	(7,500	)	$	3.96

Balance, May 28, 2006	61,600		$	10.28

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

Note 10 - ~~The~~During ~~Company~~fiscal ~~uses~~2004 and 2005, the ~~intrinsic~~Company’s ~~value~~Board ~~method~~of Directors approved management’s plans to ~~account~~sell ~~for~~three ~~stock-based~~real ~~employee~~estate ~~compensation~~investment properties. AsThe ~~the~~first ~~Company’s~~property, ~~awards~~located ofin ~~stock~~Sylmar, ~~options~~California, ~~carry~~was ansold ~~exercise~~in ~~price~~December, ~~equal~~2004. Net proceeds of $5.2 million were used to ~~the~~pay ~~fair~~down ~~market~~debt ~~value~~and expenses of the ~~stock~~sale. onThe ~~the~~Company ~~date~~recognized a gain, net of ~~grant~~taxes, noof ~~accounting~~$2.7 ~~cost~~million, isor ~~reflected~~$0.20 inper ~~the~~share, ~~Company’s~~during ~~Consolidated~~the ~~Statements~~first quarter of ~~Operations~~fiscal 2005. ~~Had~~The ~~the~~ Company ~~utilized~~completed the ~~fair~~sales ~~value based method~~ of ~~accounting~~the ~~for~~other ~~stock-based~~two ~~employee compensation~~properties, ~~the~~located ~~impact~~in onJessup, ~~earnings~~Maryland, and ~~earnings~~Christiansburg, ~~per~~Virginia, ~~share~~during ~~would~~the ~~have~~third ~~been~~quarter asof ~~follows:~~fiscal 2005.

	Three Months Ended				Nine Months Ended
	August 28,2005		August 29,2004		August 28,2005			August 29,2004
	(in thousands, except per share amounts)
Net earnings (loss), as reported	$	123	$	490	$	(2,566	)	$	1,290
Earnings (loss) per share, basic, as reported	$	0.01	$	0.04	$	(0.19	)	$	0.10
Earnings (loss) per share, diluted, as reported	$	0.01	$	0.04	$	(0.19	)	$	0.10
Stock-based employee compensation cost, net of related taxes, included in net earnings as reported		—		—		—			—
Stock-based employee compensation cost, net of related taxes, that would have been included in net earnings if the fair value based method had been applied	$	4	$	8	$	515		$	324
Pro forma net earnings (loss), including the impact of applying the fair value based method	$	119	$	482	$	(3,081	)	$	966
Pro forma earnings (loss) per share, basic	$	0.01	$	0.04	$	(0.23	)	$	0.07
Pro forma earnings (loss) per share, diluted	$	0.01	$	0.04	$	(0.23	)	$	0.07

Income and expense items associated with these properties have been classified as discontinued operations. Included in earnings from discontinued operations in the Company’s consolidated statements of operations were the following amounts associated with these investment properties:

Note 11 - During fiscal 2004, the Company’s Board of Directors approved management’s plans to sell two investment real estate properties, and in March 2005 the Company’s Board of Directors approved management’s plan to sell a third real estate property. The first property, located in Sylmar, California, was sold in December, 2004. Net proceeds of $5.2 million were used to pay down debt and expenses of the sale. The Company recognized a gain, net of taxes, of $2.7 million, or $0.20 per share, during the quarter ended February 27, 2005. In July 2005, the Company closed on the sale of the second property located in Jessup, Maryland. Proceeds of $8.2 million were used to pay down debt and expenses of the sale. The Company recognized a gain of $635,000, or $0.05 per share. In August 2005, the Company closed on the sale of the third property located in Christiansburg, Virginia. Proceeds of $2 million were used to reduce the outstanding balance of the capital lease by $1.2 million and for general corporate purposes. The Company recognized an after-tax gain of $1.1 million or $0.08 per share on the sale of this property.


	Three Months Ended May 29, 2005			Six Months Ended May 29, 2005
	(in thousands)
Other income, net	$	136		$	407
Gain on sale		—			4,362
Interest expense		(119	)		(274	)

Earnings (loss) before taxes	$	17		$	4,495

Earnings (loss) per share	$	0.00		$	0.21
Earnings (loss) per diluted share	$	0.00		$	0.21

Note 11 -

The Company has been named as a defendant in various lawsuits arising in the ordinary course of business. It is not possible at this time to estimate the ultimate outcome of these actions; however, management believes that the resulting liability, if any, will not have a material adverse effect on the Company’s consolidated financial condition or results of operations.

Note 12 -

During the three months ended February 27, 2005, the Company settled litigation with a vendor. In addition to reversing approximately $460,000 of previously accrued cost of shipments, the Company reported in other income, net approximately $680,000 before taxes, representing amounts, net of legal expenses, received from the vendor to settle the litigation.

Note 13 -

The Company recorded tax benefits of $2.8 million and $4.7 million for the second quarter and the first six months of fiscal 2006, respectively, due to our operating losses. Of these tax benefits, $2.6 million and $4.5 million were added to deferred income tax asset, non-current, during the second quarter and six months ended May 28, 2006, respectively.

The Company believes that it is more likely than not that it will be able to fully utilize its $7.6 million of net deferred tax assets (primarily related to federal net operating loss carryforwards and certain state net operating loss carryforwards), at May 28, 2006. In order to fully utilize its net operating loss carryforwards prior to their expiration dates in 2025 and 2026, however, the Company will be required to return to profitability in order to create taxable income.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

~~Income~~The ~~and~~Company ~~expense~~expects ~~items~~to ~~associated~~begin ~~with~~utilizing ~~these~~its ~~properties~~net ~~have~~operating ~~been~~loss ~~classified~~carryforwards aswithin ~~discontinued~~the ~~operations~~next two years, and ~~all~~anticipates ~~prior~~full ~~periods~~utilization ~~have~~within ~~been~~the ~~restated~~next five toyears. ~~conform~~There are significant assumptions underlying the valuation of the Company’s net deferred tax assets that are susceptible to possible change in the ~~current~~near ~~presentation~~term. ~~Included~~In inthe ~~earnings~~event ~~from~~the ~~discontinued~~Company ~~operations~~cannot return to profitability or otherwise create taxable income, the Company may not be able to utilize any of its net operating loss carryforwards prior to their expiration date. In addition, in the event the Company’s ~~consolidated~~does ~~statements~~not generate sufficient levels of ~~operations~~future ~~were~~taxable income, the ~~following~~Company may ~~amounts~~not ~~associated~~be ~~with~~able ~~these~~to ~~investment~~fully ~~properties:~~utilize its net operating loss carryforwards prior to their expiration date or may not be able to realize other net deferred tax assets related to timing difference between reported financial statement income (loss) and taxable income (loss). If the Company determines in the future that it is more likely than not that it cannot fully utilize its net deferred tax assets, it would be required to establish a valuation allowance against that portion of its net deferred tax assets estimated not to be realizable, which would materially adversely affect our earnings.

	Three Months Ended						Nine Months Ended
	August 28,2005			August 29,2004			August 28,2005			August 29,2004
	(in thousands)
Other income, net	$	59		$	278		$	466		$	643
Gain on sale		2,829			—			7,191			—
Interest expense		(80	)		(182	)		(354	)		(548	)
Earnings (loss) before taxes	$	2,808		$	96		$	7,303		$	95
Net earnings (loss) per share	$	0.13		$	0.00		$	0.34		$	0.00
Net earnings (loss) per diluted share	$	0.13		$	0.00		$	0.34		$	0.00

As of the dates indicated, investment properties held for sale and associated long-term debt consisted of the following:

	August 28,2005		November 28,2004
Investment property, net of accumulated amortization	$	—	$	7,248
Mortgage loans	$	—	$	8,968

		During February 2004, the Company recorded certain adjustments relating to workers compensation insurance reserves for policy years 1999 and 2000. These adjustments included amounts associated with prior discontinued operations, totaling $170,000 on a pre-tax basis, or $0.01 per share. These charges have also been included in discontinued operations.
Note 12 -		The Company has been named as a defendant in various lawsuits arising in the ordinary course of business. It is not possible at this time to estimate the ultimate outcome of these actions; however, management believes that the resulting liability, if any, will not have a material adverse effect on the Company’s consolidated financial condition or results of operations.
Note 13 -		During the three months ended February 27, 2005, the Company settled litigation with a vendor. In addition to reversing approximately $460,000 of costs previously included in costs of shipments, the Company reported in other income, net approximately $680,000 before taxes, representing amounts, net of legal expenses, received from the vendor to settle the litigation.
Note 14 -		In December 2004, the FASB released Statement 123R, “Share-Based Payment”. Statement 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements, and provides expanded guidance on measuring the fair value of share-based payment transactions. Statement 123R is effective for the Company’s stock option plans beginning in fiscal 2006, in accordance with rules issued by the SEC.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

~~NOTES~~MANAGEMENT’S TODISCUSSION ~~CONSOLIDATED~~AND ~~FINANCIAL~~ANALYSIS ~~STATEMENTS~~

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

In Management’s ~~May~~Discussion ~~2005, the FASB issued Statement 154, “Accounting Changes~~ and ~~Error~~Analysis ~~Corrections - a replacement~~ of ~~APB~~Financial ~~Opinion~~Condition ~~No. 20~~ and ~~FASB~~Results ~~Statement No. 3.” Statement 154 changes the requirements for the accounting for and reporting~~ of aOperations change in accounting principle. The Statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, as well as redefining “restatement” as the revision of previously issued financial statements to reflect the correction of an error. This statement is effective for the Company beginning with our 2007 fiscal year.

Overview

The Rowe Companies operates through two subsidiaries in the home furnishings industry. Rowe manufactures quality, upholstered furniture serving the middle and upper middle market primarily throughout the United States. Storehouse is a multi-channel lifestyle home furnishings retailer with 71 stores from Texas through the Southeast and Mid-Atlantic markets.

In the fourth quarter of fiscal 2004, Rowe implemented its Enterprise Resource Planning (“ERP”) system, a fully-integrated set of programs and data bases including order processing, payroll, human resources, production planning and scheduling, purchasing, inventory management and accounting. As previously reported by the Company, a number of problems occurred from the ERP implementation and related manufacturing process changes. These problems significantly impacted Rowe’s ability to produce and ship orders in a timely and efficient manner, resulting in downtime in the production facilities; overtime to compensate for the downtime; expedited inbound transportation of critical materials and expedited shipments to customers, both at significant excess cost. The disruption in the orderly flow of products to Rowe’s dealers and their customers resulted in the loss of follow-on orders from some dealers, resulting in lower shipments in the latter months of 2005 and continuing into 2006. During 2005, Rowe focused on identifying, correcting and resolving the various errors and other problems that resulted from the ERP implementation and related manufacturing process changes.

While the first quarter of 2006 generally showed increases over the first quarter of 2005 (consolidated net shipments, gross profit, gross margins and operating losses all improved, while selling and administrative expenses increased due to new retail stores), second quarter 2006’s results were less favorable. Consolidated net shipments decreased as manufacturing segment shipments declined substantially. Gross profit declined largely due to the decline in manufacturing segment net shipments, combined with a $1.0 million charge to write-down the value of excess, obsolete and slow-moving fabric (created from a combination of duplicate fabric orders, quantities ordered in excess of customer needs and a lack of system visibility as to quantities on hand and on order from fabric vendors). Adding back this write-down, gross profit decreased by approximately $0.5 million, less than would be expected in connection with a $12.2 million decrease in quarterly sales. Selling and administrative expenses continued to grow compared to last year, although at a lower rate, reflecting fewer new retail stores, manufacturing segment headcount reductions, and other cost saving efforts initiated since the fall of 2005.

As previously reported and based on incoming order trends over the first six months of fiscal 2006, the Company expects that consolidated net shipments, and in particular manufacturing segment net shipments, will be lower for 2006 than previously expected, and that retail segment net shipments could be less for the full year 2006 compared with 2005 as well. Same store sales declined by 5.8% in the second quarter of fiscal 2006, following the 1.9% decline reported for the first quarter of 2006.

In response to the decline in manufacturing segment sales, the Company, in the second quarter of fiscal 2006, implemented a restructuring plan that included the elimination of approximately 200 manufacturing positions, the renegotiation of certain raw material pricing arrangements and various changes in the manufacturing process to reduce waste and otherwise improve efficiency. These

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

initiatives are expected to result in annualized savings of approximately $9.6 million, net of approximately $222,000 in severance costs incurred in the second quarter ~~Management’s~~of ~~Discussion~~2006. This recent headcount reduction followed the reductions taken in October 2005 and ~~Analysis~~January 2006, which are expected to result in additional annualized savings of ~~Financial~~approximately ~~Condition~~$2.8 million, for total expected annualized savings of approximately $12.4 million. Management of Storehouse has taken steps to improve sales at its locations and ~~Results~~has initiated a number of ~~Operations~~cost saving efforts including a hiring freeze and travel restrictions. The Company plans to explore additional cost reduction initiatives for Storehouse and plans to engage an outside consulting firm to assist in these efforts. In addition, Gerald M. Birnbach, the Company’s Chairman and President, agreed to reduce his salary by 50% until the Company’s performance improves substantially.

~~Overview~~Despite the cost reduction initiatives being undertaken, the Company anticipates that neither the manufacturing segment nor the retail segment will generate sufficient profits from operations to cover its respective share of interest expense, corporate overhead and capital expenditures through the next twelve to eighteen months. Consequently, the Company believes that unless sales improve significantly or the lender increases the Company’s borrowing availability under its revolving credit facility, the Company will need to raise additional equity capital or debt or consider a sale of assets or one of its operating segments (or a significant interest therein) to have sufficient cash for operations. As of May 28, 2006, the Company had $5.8 million available for additional borrowings under its revolving credit facility over and above the current $10.0 million excess availability reserve requirement under the revolving credit facility (i.e., the amount of money otherwise eligible to be borrowed by the Company against its assets that the lender is not required to fund). If the Company is unable to generate sufficient additional cash, whether by raising additional equity capital or debt or by selling assets or one of its operating segments (or a significant interest therein), a number of material adverse effects could be experienced by the Company, including but not limited to, vendors refusing to ship materials to the Company, the need to make further headcount reductions and take additional cost cutting initiatives, loss of customers and cancellation of orders, and other potential adverse impacts, such as the Company or one of its subsidiaries possibly filing a petition under the U.S. Bankruptcy Code. As previously reported, the Company has retained an investment banking firm to assist it in its capital raising efforts. While this firm continues to hold discussions with a number of interested parties, no assurance can be given as to when or whether an agreement will be entered into which would result in cash funds being available to the Company on terms acceptable to the Company. Nor can any assurance be given that the lender under the Company’s revolving credit facility would increase the Company’s borrowing availability.

The Rowe Companies operates through two subsidiaries in the home furnishings industry. Rowe manufactures quality, upholstered furniture serving the middle and upper middle market primarily throughout the United States. Storehouse is a multi-channel lifestyle home furnishings retailer with 67 stores from Texas through the Southeast and Mid-Atlantic markets.

During the third quarter of fiscal 2005, Rowe has made progress in resolving many of the problems that resulted from the implementation of its Enterprise Resource Planning (“ERP”) system in late 2004 and related manufacturing process changes undertaken in conjunction with and following the ERP implementation. An ERP system is a fully-integrated set of programs and data bases. In our case, the suite of application programs includes order processing, payroll, human resources, production planning and scheduling, purchasing, inventory management and accounting. Rowe Furniture has not returned to historical levels of manufacturing gross profit. Storehouse also embarked on its aggressive store opening plan for 2005, with six store openings and three store relocations to date and five more openings in process and expected to be completed by the end of the year. New stores increase selling and administrative expenses and these costs are expected to increase in future periods as these additional openings occur.

The Company has experienced recent price increases on and limits on the availability of certain raw materials used in upholstery production due to the recent Gulf Coast hurricanes following the end of the Company’s fiscal third quarter. Additionally, incoming orders for both the manufacturing and retail segments were below our plan, which will likely reduce fourth quarter shipments compared to the third quarter of fiscal 2005, resulting in a loss from operations in the fourth quarter.

As a result of the Company’s continued losses from operations, the Company was in default of certain operating covenants under the agreement governing its term loan and revolving credit facility and the agreement governing the capital lease of the Company’s Elliston, Virginia manufacturing facility as of August 28, 2005. The Company has not been able to negotiate modifications to these covenants with its existing lenders, nor has it been able to complete negotiations with a potential new lender to replace the existing lenders. The Company’s existing debt under these agreements is subject to acceleration, and accordingly, all $35.3 million of such debt as of August 28, 2005 has been reflected as currently due in the consolidated balance sheet as of that date. To date, the Company’s lenders have not exercised their right to accelerate the debt.

As discussed under “Liquidity and Source of Capital,” the Company is pursuing alternative financing options that may enable the Company to reduce the level of its bank debt. This process will take time to complete, however, and in the interim, material unfavorable impacts may be experienced, including, but not necessarily limited to, reductions in force, replacement of vendors, extensions of payments terms for materials and supplier invoices, loss of customers, cancellation of orders, and other potential adverse impacts. The timing and effects of any such changes are difficult to predict. In addition, there can be no assurance that such alternative financing options will be successfully completed on terms favorable to the Company or in a sufficiently timely manner to avoid material adverse effects on the Company’s financial condition, results of operations and cash flows. The following discussion of operating results does not reflect any such potential effects on future operating results.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

RESULTS OF OPERATIONS

~~Nine~~Six Months Ended ~~August~~May 28, ~~2005~~2006 Versus ~~Nine~~Six Months Ended ~~August~~May 29, ~~2004~~2005

	August 28,2005			August 29,2004			$ Variance			% Variance
	5/28/06			5/29/05			$ Variance			% Variance
	(in thousands)
Net shipments:
Manufacturing, total	$	~~127~~67,~~322~~799		$	~~132~~83,~~691~~136		$	(515,~~369~~337	)	(418.04	)
Sales to retail segment		(159,~~081~~900	)		(149,~~777~~789	)		(~~304~~111	)	21.1
Manufacturing, net of eliminations		~~112~~57,~~241~~899			~~117~~73,~~914~~347			(515,~~673~~448	)	(421.81	)
Retail		~~112~~76,~~651~~897			~~104~~72,~~218~~079			84,~~433~~818		86.17
Consolidated net shipments	$	~~224~~134,~~892~~796		$	~~222~~145,~~132~~426		$	2(10,~~760~~630	)	1(7.23	)
Gross profit:
Manufacturing	$	13,718		$	25,762		$	(12,044	)	(46.8	)
Manufacturing, net of eliminations	$	7,362		$	8,281		$	(919	)	(11.1	)
Retail		5638,~~638~~641			5236,~~625~~173			42,~~013~~468		7.6.8
Consolidated gross profit	$	7046,~~356~~003		$	7844,~~387~~454		$	(81,~~031~~549	)	~~(10~~3.25	)
Gross margin:
Manufacturing		12.27	%		2111.83	%
Retail		50.3	%		50.52	%
Consolidated gross margin		3134.31	%		3530.36	%
Selling and administrative expenses:
Manufacturing	$	1711,~~504~~163		$	1711,~~515~~540		$	(11377	)	(03.13	)
Retail		5842,~~105~~202			5237,~~013~~831			64,~~092~~371		11.76
Other		4,~~989~~046			53,~~156~~357			~~(167~~689	)	(320.25	)
Consolidated selling and administrative expenses	$	8057,~~598~~411		$	7452,~~684~~728		$	54,~~914~~683		78.9
Operating income (loss):
Manufacturing	$	(3,~~786~~801	)	$	8(3,~~247~~259	)	$	(~~12,033~~542	)	~~(145~~16.96	)
Retail		(13,~~467~~561	)		~~612~~(1,658	)		(21,~~079~~903	)	~~(339~~114.78	)
Other		(4,~~989~~046	)		(53,~~156~~357	)		~~167~~(689	)	(320.25	)
Consolidated operating income (loss)	$	(1011,~~242~~408	)	$	3(8,~~703~~274	)	$	(133,~~945~~134	)	~~(376~~37.69	)

Net shipments:

Net shipments ~~increased~~decreased 17.23% in ~~2005~~2006 from ~~2004,~~ ~~due to higher shipments at Storehouse~~2005. ~~Rowe’s~~Manufacturing shipments decreased 18.4% from prior year levels. ~~Shipments~~Retail ~~from~~shipments ~~Rowe to Storehouse~~ increased ~~slightly compared to last year~~6.7%.

As discussed in the Overview, manufacturing segment net shipments decreased in the first half of 2006 compared to 2005. Incoming orders continued to decline compared to prior year periods, declining 19.8% on a piece basis in the first half of 2006 compared to the first half of 2005. A price increase implemented late in 2005 offset, somewhat, the impact of declining orders, as on a dollar basis, incoming orders were down 14.2% from last year. Overall, the number of upholstery pieces shipped declined 24.2% from 2005.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

~~Manufacturing~~Retail segment net shipments ~~decreased~~increased in 2006 over 2005. This growth was due to new stores opened since the beginning of 2005, including four opened during the first half ~~nine~~of ~~months~~2005, four more (net of two closings) during the remainder of 2005, and four openings (net of one closing) during 2006. Same store sales declined by 4.0% in 2006 compared to ~~2004,~~2005. ~~primarily~~Bedroom asfurniture and a ~~result~~ line of ~~disruptions~~wall inunits ~~order~~declined ~~processing,~~the ~~scheduling~~most on a same store basis, and ~~production~~both ~~following~~declined ~~the~~in ~~ERP~~total ~~implementation~~as well. Two additional new stores are slated to open during the ~~fourth~~remainder ~~quarter~~ of ~~2004~~2006. ~~Rowe~~The ~~also~~New ~~recorded~~Orleans ~~additional~~store, ~~costs~~closed ~~relating~~following Hurricane Katrina due to ~~returns~~damage, ~~and~~reopened ~~allowances.~~late ~~Incoming~~in ~~orders~~the ~~declined~~second ~~approximately~~quarter of 5%fiscal on2006, aand ~~dollar~~is ~~basis~~included ~~compared~~in tothe ~~last~~2006 ~~year~~openings referred to above.

Retail segment net shipments increased in 2005 over 2004. The accessories and textiles categories continued to show growth and were the largest dollar growth and percentage growth categories, respectively. Bedroom and tables were also solid performers, with the second and third largest dollar increases. Overall, same store sales increased 1.8% over 2004. The Company opened six new retail stores during the first nine months of 2005, while three stores were relocated and two closed during the same time period. Five additional stores are slated to open during the second half of fiscal 2005, mostly in the September/October time period. The second closed store referred to above was damaged due to flooding associated with Hurricane Katrina in New Orleans.

Gross profit:

Gross profit ~~declined~~improved in the first ~~nine~~six months of ~~2005~~2006 compared to ~~2004~~the first six months of 2005 primarily due to ~~lower~~ higher shipments at ~~Rowe~~Storehouse and ~~the~~improved ~~costs~~labor productivity ofat ~~production~~Rowe. ~~inefficiencies~~Selling price increases in the manufacturing segment, aswere ~~well~~offset asby increases in costs of certain ~~costs~~materials, ~~discussed~~including ~~below~~oil-based foams, plywood and metal components. Gross margin, or gross profit as a percentage of net shipments, ~~declined~~increased from 3530.36% in ~~2004~~2005 to 3134.31% in ~~2005~~ 2006, principally due ~~primarily~~ to the ~~decline~~increase in ~~gross~~higher ~~profit~~margin inretail sales versus the decrease in lower margin manufacturing segment sales.

Manufacturing segment gross profit ~~and~~decreased ~~gross~~despite ~~margin~~an ~~declined~~increase ~~substantially~~in gross margin in ~~2005~~2006 from ~~2004~~2005 levels, ~~caused~~reflecting ~~principally~~the bydecline ~~disruptions~~ in ~~production,~~manufacturing ~~scheduling~~segment ~~and~~net ~~manufacturing~~shipments. ~~productivity~~Labor ~~resulting~~utilization ~~from~~has ~~ERP~~improved ~~implementation and~~significantly ~~manufacturing~~from ~~process~~the ~~changes.~~first ~~The~~half ~~$5.4~~of ~~million~~2005, ~~decrease~~as the disruptions in ~~total~~production ~~manufacturing~~and ~~shipments~~scheduling ~~would~~caused beby ~~expected~~the toERP ~~cause~~implementation aand ~~$2.0~~related ~~million~~manufacturing ~~reduction~~process inchanges ~~gross~~have ~~profit,~~largely ~~compared~~ceased. toOvertime ~~the~~has ~~actual~~been ~~decline~~reduced ofnearly 90% or $121.02 million. Offrom the ~~approximately~~first ~~$10.0~~half ~~million not~~of ~~associated~~last ~~with~~year, ~~the~~while ~~volume~~reductions ~~decrease,~~in ~~higher~~other ~~materials~~overhead ~~costs~~labor ~~and~~categories ~~usage~~have ~~represents~~declined overall by approximately $21.38 million since last year. ~~Direct~~Other ~~labor~~significant ~~costs~~savings ~~increased~~have ~~approximately~~been ~~$2.5~~in ~~million~~third-party ~~due~~transportation tocosts, ~~downtime~~which ~~caused~~decreased by ~~inefficient~~$1.1 ~~scheduling,~~million ~~the~~as ~~periodic~~there ~~shortage of~~has ~~internally~~been ~~manufactured~~less ~~frame~~need ~~parts,~~to ~~and~~expedite ~~out-of~~shipments ~~stock~~to ~~issues~~satisfy ~~with~~customers ~~certain~~over ~~strong~~delayed ~~selling fabrics~~shipments. ~~Factory~~Of ~~overhead~~the ~~costs increased~~ $2.39 million ~~over~~in ~~last~~combined ~~year~~overhead aslabor aand ~~result~~third-party oftransportation ~~overtime~~cost ~~costs~~savings, (approximately $1.09 million) ~~due~~would tobe ~~low~~expected ~~rates~~based ofupon ~~production,~~the ~~increases~~decline in net ~~customer~~shipments, ~~service~~if ~~costs~~nothing ~~(approximately~~else $1had changed.0 ~~million)~~These savings and ~~certain~~the ~~other~~benefit ~~categories~~ of ~~indirect~~the ~~labor~~price ~~(approximately~~increase ~~$0.4~~implemented ~~million).~~late ~~Transportation~~last ~~costs~~year have been offset by the decline in pieces shipped and increased ~~approximately~~materials ~~$1.3~~costs ~~million~~over 2005, ~~largely~~particularly due to ~~increased~~plywood, ~~use~~steel components and ~~cost~~oil-based ofproducts ~~third~~such ~~party~~as ~~services ($1~~poly bags and foam used in cushions.1 ~~million)~~In toaddition, ~~expedite~~gross ~~deliveries~~profit and ~~accommodate~~gross ~~customers.~~margin ~~Increased~~were ~~fuel~~reduced ~~costs~~in ~~within~~2006 ~~our~~by ~~fleet~~a charge of ~~trucks~~$1.0 ~~were~~million ~~largely~~to ~~passed~~write-down ~~through~~excess, toobsolete ~~customers~~and ~~through~~slow-moving ~~automatic~~fabric ~~fuel~~inventory ~~surcharges~~to net realizable value.

~~The~~Retail ~~Company~~gross ~~has~~profit ~~not yet achieved a satisfactory level of scheduling~~ and ~~production,~~gross asmargin ~~labor productivity~~both ~~remains below targeted levels and shortages of fabric unfavorably impacted production schedules~~increased. ~~Staffing~~Shipments ~~has~~from ~~been~~new ~~added~~stores todrove the ~~purchasing~~increase ~~department~~in togross ~~improve~~profit ~~the fabric purchasing~~ and ~~supply~~gross ~~chain management~~margin, ~~but~~as most ~~some level~~ of ~~fabric shortages~~such ~~will~~sales ~~continue~~are ~~through~~at ~~the~~full ~~last~~margin ~~quarter of fiscal 2005~~ and ~~possibly~~very ~~longer.~~little ~~The~~at ~~manufacturing~~clearance segment management plan for the fourth quarter is to improve labor productivity through better in-stock positions in fabric, a new incentive program for hourly workers introduced in September and improved production schedulingmargins.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

Retail gross profit increased reflecting the increase in shipments, while retail gross margin decreased slightly from the prior year period, largely due to sales of clearance items at stores that were closing for relocation at points during the period.

Selling and administrative expenses:

Selling and administrative expenses increased by 78.9% overall in ~~2005~~2006. Retail segment expenses accounted for ~~all~~most of the increase. As a percentage of ~~retail~~ net shipments, ~~retail~~ total selling and administrative expenses increased 16.73% over ~~2004~~2005.

Retail segment selling and administrative expenses increased in virtually all categories, driven by costs at ~~ten~~five net new stores opened since May ~~2004~~ 2005 (~~four~~two in fiscal ~~2004~~2005, ~~six~~three toin ~~date~~the infirst ~~fiscal~~half ~~2005~~of 2006). ~~Storehouse~~In ~~also~~early ~~added~~2005, ~~costs~~Storehouse torealized ~~support~~some ~~direct~~healthcare ~~marketing (catalog~~cost ~~and~~savings ~~internet)~~that ~~since~~were ~~the~~not ~~first~~achieved ~~quarter~~in of2006. ~~fiscal~~Storehouse ~~2004~~anticipates ~~and~~opening intwo ~~mid~~additional ~~2004~~new ~~added~~stores ain ~~cross-dock~~fiscal ~~warehouse~~2006. ~~facility~~As tothese ~~support~~additional stores ~~new~~open, ~~store~~retail ~~openings~~selling inand ~~New~~administrative ~~Jersey~~expenses ~~and~~are ~~Pennsylvania.~~expected ~~Offsetting~~to ~~these~~increase. ~~increases~~Typically, init ~~part,~~takes ~~has~~approximately ~~been~~six ~~favorable~~to ~~healthcare costs.~~nine ~~Storehouse~~months ~~anticipates~~for ~~opening~~these ~~a total of eleven~~ new stores into ~~fiscal~~cover ~~2005.~~their Asfixed ~~these~~expenses ~~additional~~and ~~stores~~achieve ~~open,~~profitability. ~~retail~~In ~~selling~~some ~~and~~cases, ~~administrative~~however, ~~expenses~~this ~~are~~period may ~~expected~~be ~~to increase~~longer.

Manufacturing segment selling and administrative expenses ~~were~~decreased ~~essentially~~3.3% ~~unchanged~~in ~~from~~the ~~2004~~first half of 2006 over 2005. ~~Salary~~Headcount ~~expense~~reductions intaken since the fall of 2005 ~~was~~and ~~higher~~a ~~than~~number ~~2004 principally~~of ~~due~~other toindividually small savings in such items as swatch costs and advertising were offset in part by the ~~capitalization~~absence in 2006 of the reversal of certain accrued costs related to ~~the~~a ~~ERP~~favorable ~~implementation~~settlement of litigation in ~~2004~~early 2005. Rowe also provided an additional $636,000 ~~but~~in ~~was~~provision ~~offset~~for bylosses aon ~~reduction~~receivables in ~~bad~~2006 ~~debt~~compared ~~reserves~~to 2005 based upon actual and expected losses.

The ~~decline~~increase in other selling and administrative expenses largely represents costs of consulting services provided to the ~~absence~~Company ofunder aits ~~provision~~agreement ~~for~~with ~~management~~the ~~bonuses~~Carl inMarks ~~2005~~Advisory Group, LLC (“CMAG”). The ~~2004~~CMAG ~~management~~costs ~~bonus~~(totaling ~~accruals~~$1.2 million) were ~~reversed~~offset, ~~late~~ in ~~2004~~part, by the salary reduction taken by the CEO during the second quarter of 2006.

Operating earnings:

Operating earnings declined by $133.91 million to a loss of $1011.2 4 million in ~~2005~~2006 as a result of lower shipments at Rowe; ~~manufacturing~~and ~~segment~~higher ~~operating~~selling ~~inefficiencies,~~and administrative ~~service~~expenses ~~costs,~~at ~~returns~~Storehouse and ~~other~~corporate, ~~manufacturing-related~~offset ~~costs;~~by ~~and~~higher ~~retail~~shipments ~~segment~~at ~~selling~~Storehouse, ~~and~~improved ~~administrative~~gross ~~expenses~~margin ~~primarily~~at ~~resulting~~Rowe ~~from~~and ~~new stores~~lower selling and ~~related~~administrative costs, asat ~~discussed above~~Rowe.

Interest expense:

Interest expense increased ~~decreased~~ by $93799,000 from ~~2004~~ to 2005 ~~largely~~to 2006 due to ~~the~~higher ~~maturity~~outstanding balances in ~~late~~2006, ~~2004~~higher ofrates ~~the interest rate swap agreement entered into~~ in ~~2000~~2006 incompared ~~conjunction~~to ~~with the original lease agreement for the Elliston manufacturing facility. Interest on increased borrowings in~~ early 2005 ~~under~~ ~~the~~on ~~revolver~~such ~~loan~~outstanding balances, ~~as well as increased rates (both the base rates~~ and the ~~spread~~write-off ~~over~~of ~~base~~approximately ~~rates)~~$260,000 ~~largely~~of ~~offset~~unamortized ~~the~~loan ~~savings~~fees ~~from~~related ~~the~~to ~~swap. The spread over base rates on~~ the ~~Company’s outstanding~~ debt ~~increased by 100 basis points~~ ~~effective~~paid ~~with~~off ~~the~~in ~~beginning~~January, ~~of the second quarter~~2006.

OnOther ~~October 14~~income, ~~2005~~net, ~~the~~ ~~Company’s~~decreased ~~lenders~~$480,000 ~~increased~~in ~~the~~2006 ~~spread~~ over ~~base~~2005, ~~rates~~primarily ~~applicable~~due to ~~the~~a ~~term~~gain ~~and~~recognized ~~revolving~~on ~~bank~~the ~~loans~~settlement byof anlitigation ~~additional~~in the ~~200~~first ~~basis~~quarter ~~points~~of ~~effective immediately~~2005. ~~Based~~The ~~upon~~Company ~~their~~collected ~~outstanding balances at August 28~~$680, ~~2005~~000, ~~interest~~net ~~expense will~~of ~~increase~~certain ~~by approximately $125~~expenses,~~000~~ ~~per quarter~~ as a result of ~~this~~the ~~change~~settlement.

Loss from continuing operations before taxes increased from $(8,635,000) in 2005 to $(13,048,000) in 2006, reflecting the factors discussed above.

The effective tax rate in 2006 was essentially the same as for 2005. The Company believes that it is more likely than not that it will be able to fully utilize its deferred tax assets over the next several years, as discussed in Note 13.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

~~Other~~RESULTS ~~income,~~OF ~~net,~~OPERATIONS increased $537,000 in 2005 over 2004, primarily due to a gain recognized on the settlement of litigation in the first quarter of 2005. The Company collected $725,000, less certain expenses, as a result of the settlement. Offsetting this gain was reduced net rental income, principally due to the absence in 2005 of certain short-term leases in effect during 2004. The Company also recorded a gain of $153,000 based on expected insurance coverage of damage to the New Orleans retail store.

~~Earnings~~Three ~~from~~Months Ended ~~continuing operations before taxes declined from earnings of $2~~May 28,~~104,000~~ in2006 ~~2004~~Versus toThree aMonths ~~loss~~Ended ofMay 29 ~~$(11,211,000) in~~ 2005, ~~reflecting the factors discussed above.~~

Three Months Ended August 28, 2005 Versus Three Months Ended August 29, 2004


	5/28/06			5/29/05			$ Variance			% Variance
	(in thousands)
Net shipments:
Manufacturing, total	$	34,007		$	48,122		$	(14,115	)	(29.3	)
Sales to retail segment		(5,096	)		(5,646	)		550		(9.7	)

Manufacturing, net of eliminations		28,911			42,476			(13,565	)	(31.9	)
Retail		38,836			37,439			1,397		3.7

Consolidated net shipments	$	67,747		$	79,915		$	(12,168	)	(15.2	)

Gross profit:
Manufacturing	$	3,363		$	5,140		$	(1,777	)	(34.6	)
Retail		19,369			19,043			326		1.7

Consolidated gross profit	$	22,732		$	24,183		$	(1,451	)	(6.0	)

Gross margin:
Manufacturing, net of eliminations		11.6	%		12.1	%
Retail		49.9	%		50.9	%
Consolidated gross margin		33.6	%		30.3	%

Selling and administrative expenses:
Manufacturing	$	6,042		$	6,209		$	(167	)	(2.7	)
Retail		21,616			19,705			1,911		9.7
Other		2,097			1,686			411		24.4

Consolidated selling and administrative expenses	$	29,755		$	27,600		$	2,155		7.8

Operating income (loss):
Manufacturing	$	(2,679	)	$	(1,069	)	$	(1,610	)	150.6
Retail		(2,247	)		(662	)		(1,585	)	239.4
Other		(2,097	)		(1,686	)		(411	)	24.4

Consolidated operating income (loss)	$	(7,023	)	$	(3,417	)	$	(3,606	)	105.5

	August 28,2005			August 29,2004			$ Variance			% Variance
	(in thousands)
Net shipments:
Manufacturing, total	$	44,186		$	45,321		$	(1,135	)	(2.5	)
Sales to retail segment		(5,292	)		(4,635	)		(657	)	14.2
Manufacturing, net of eliminations		38,894			40,686			(1,792	)	(4.4	)
Retail		40,572			35,463			5,109		14.4
Consolidated net shipments	$	79,466		$	76,149		$	3,317		4.4
Gross profit:
Manufacturing	$	5,437		$	8,628		$	(3,191	)	(37.0	)
Retail		20,465			17,928			2,537		14.2
Consolidated gross profit	$	25,902		$	26,556		$	(654	)	(2.5	)
Gross margin:
Manufacturing		14.0	%		21.2	%
Retail		50.4	%		50.6	%
Consolidated gross margin		32.6	%		34.9	%
Selling and administrative expenses:
Manufacturing	$	5,963		$	6,079		$	(116	)	(1.9	)
Retail		20,275			17,634			2,641		15.0
Other		1,632			1,667			(35	)	(2.1	)
Consolidated selling and administrative expenses	$	27,870		$	25,380		$	2,490		9.8
Operating income (loss):
Manufacturing	$	(526	)	$	2,549		$	(3,075	)	(120.6	)
Retail		190			294			(104	)	(35.4	)
Other		(1,632	)		(1,667	)		35		(2.1	)
Consolidated operating income (loss)	$	(1,968	)	$	1,176		$	(3,144	)	(267.3	)

Net shipments:

Net shipments decreased 15.2% in the second quarter of 2006 from 2005, as a result of decreased shipments at Rowe.

Manufacturing segment net shipments decreased in the second quarter of 2006 compared to 2005. Incoming orders continued to decline compared to prior year periods, declining more than 25% on a piece basis in the second quarter of 2006 compared to the second quarter of 2005. A price

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

~~Net~~increase ~~shipments:~~implemented late in 2005 offset, somewhat, the impact of declining orders, as on a dollar basis, incoming orders were down approximately 19% from last year’s quarter. Overall, the number of upholstery pieces shipped declined approximately 34% from the second quarter of 2005.

~~Net~~Retail segment net shipments increased 4in 2006 over 2005.4% inThis growth was due to eight new stores opened since May 2005, including four opened during the ~~third~~second ~~quarter~~half of 2005 ~~from~~and ~~the~~four ~~comparable~~during ~~2004~~2006. ~~period~~Three stores (two in 2005 and one in 2006) also closed since May 2005. Same ~~Storehouse’s~~store sales declined by 5.8% in 2006 compared to 2005. Bedroom furniture and a line of wall units declined the most on a same store basis, and both declined in total ~~shipments~~as ~~increased~~well. ~~from~~Two additional new stores are slated to open during the remainder of ~~prior~~2006. ~~year~~The ~~levels~~New Orleans store, ~~while~~closed ~~Rowe’s~~following ~~shipments~~Hurricane ~~decreased~~Katrina due to damage, reopened late in the second quarter of fiscal 2006 and is included in the count above.

Shipments from Rowe to Storehouse increased substantially compared to last year’s third quarter, consistent with the Storehouse shipments increase.

Manufacturing segment net shipments decreased in the third quarter of 2005 compared to 2004, as out-of-stock positions on certain fabrics impacted production and shipping levels, with units shipped down 2.2 percent compared to last year’s third quarter.

Retail segment net shipments increased in the third quarter of 2005 over 2004. The upholstery and bedroom categories were the largest dollar growth categories, while tables and textiles had the largest percentage growth. The remaining categories were a mixture of relatively small dollar increases. Overall, same store sales increased 1.8% for the quarter. The Company opened four new retail stores during the first three months of 2005, and one each during the second and third quarters, for a total of six year to date. Three stores relocated during the first half of 2005, and five more stores are currently slated to open during the fourth quarter of the year.

Gross profit:

Gross profit decreased ~~declined slightly~~ in the ~~third~~second quarter of ~~2005~~2006 compared to ~~2004~~the second quarter of 2005 primarily due to lower shipments and a $1.0 million charge for excess, obsolete and slow-moving fabric in the ~~costs~~manufacturing ofsegment. ~~production~~Selling ~~inefficiencies~~price increases in the manufacturing segment, aswere ~~well~~offset asby ~~some~~ increases in costs of certain ~~costs~~materials, including oil-based foams, plywood and metal components. Gross margin ~~declined~~increased from 3430.93% in ~~2004~~2005 to 3233.6% in ~~2005~~2006, principally due to the ~~decline~~change in ~~gross~~mix ~~profit~~to inhigher ~~the~~margin retail sales versus lower margin manufacturing segment sales.

Manufacturing segment gross profit and gross margin ~~declined~~decreased ~~substantially~~ in ~~2005~~2006 from ~~2004~~ 2005 levels. Fewer ~~Materials~~pieces ~~costs~~shipped ~~were~~(due ~~$1.1~~to ~~million~~a ~~over~~combination ~~the~~of ~~prior~~generally ~~year~~weak ~~period~~consumer ~~with~~spending ~~increases~~on inhousehold ~~most categories~~goods, inas ~~particular~~well ~~petroleum~~as ~~derived~~lost ~~materials,~~space ~~plywood~~on dealer floors and ~~hardwood,~~lost ~~steel~~confidence ~~springs~~amongst ~~and~~dealer ~~bed~~sales ~~frame~~representatives) ~~parts.~~was ~~Direct~~the ~~labor~~primary ~~costs~~cause ~~increased~~of ~~approximately~~declining gross profit, $0combined with the inventory charge for excess, obsolete and slow-moving fabric described earlier.8 ~~million~~The ~~due~~inventory tocharge ~~downtime~~reduced ~~caused~~manufacturing segment gross margins by ~~inefficient~~approximately ~~scheduling~~3.50 ~~and~~percentage ~~the~~points. ~~periodic~~Partially ~~shortage~~offsetting ofthese ~~certain~~negative ~~strong-selling~~factors was ~~fabrics~~improved labor utilization resulting from operating improvements and tothe aheadcount ~~lesser~~reductions ~~extent,~~taken ~~internally~~since ~~manufactured~~the ~~frame~~fall ~~parts~~of 2005. ~~Overhead~~Overtime ~~costs~~has ~~increased~~been ~~$0.3~~reduced ~~million~~nearly ~~over~~90%, ~~last~~or ~~year~~$714,000 asfrom athe ~~result of~~second ~~overtime~~quarter ~~costs~~of 2005; and ~~increases~~reductions in ~~customer~~other ~~service~~overhead ~~costs.~~labor categories ~~Transportation~~have reduced costs ~~increased~~by ~~approximately~~ $01.62 million. ~~principally~~Third ~~due~~party totransportation ~~increased~~costs ~~use~~have ~~and~~declined ~~cost~~by $630,000 compared to the second quarter of ~~third~~2005. ~~party~~The ~~carriers~~benefit ~~utilized~~from tothe ~~expedite~~price ~~deliveries~~increase totaken ~~accommodate~~in ~~customer~~late ~~needs. Increased~~2005 ~~fuel~~was offset by higher costs ~~within~~for ~~our~~certain materials, ~~fleet~~particularly ofplywood, ~~trucks~~steel ~~were~~components ~~largely~~and ~~passed~~oil-based ~~through~~products tosuch ~~customers~~as ~~through~~poly ~~automatic~~bags ~~fuel~~and ~~surcharges~~foam used in cushions.

~~While~~Retail ~~significant~~gross ~~price~~profit ~~increases~~increased ~~are~~while gross ~~being~~margin ~~implemented~~decreased. toShipments ~~offset~~from ~~much,~~new ~~but~~stores ~~not~~drove ~~all, of~~ the ~~impact~~increase ofin ~~material~~gross ~~price increases~~profit, ~~staff~~while ~~and~~incentives ~~resources~~offered ~~have been devoted~~ to ~~correcting~~ ~~out-of-stock~~drive ~~fabric~~up ~~issues,~~same ~~and~~store ~~changes~~sales ~~are~~reduced ~~underway~~gross ~~on the production floor to improve production efficiencies, it is likely that negative effects will continue into at least the fourth quarter of fiscal 2005 and probably longer~~margins.

~~Retail~~Selling ~~gross~~and ~~profit~~administrative ~~increased~~expenses: largely in proportion to increased shipments, while retail gross margin was down slightly from the prior year period, principally due to higher levels of clearance sales associated with relocating stores.

Selling and administrative expenses increased by 7.8% overall in the second quarter of 2006. Retail segment expenses accounted for most of the increase. As a percentage of net shipments, total selling and administrative expenses increased 9.4% over 2005.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

~~Selling~~Retail segment selling and administrative expenses: increased in virtually all categories, driven by costs at five net new stores opened since May 2005 (two in fiscal 2005, two in the first quarter of 2006 and one in the second quarter of 2006). Storehouse anticipates opening two additional new stores in fiscal 2006. As these additional stores open, retail selling and administrative expenses are expected to increase.

~~Selling~~Manufacturing segment selling and administrative expenses ~~increased~~decreased ~~by 9~~2.87% ~~overall~~ in 2006 over 2005. ~~Retail~~Headcount ~~segment expenses~~reductions ~~accounted~~taken ~~for~~since ~~all~~the fall of ~~the~~2005, lower ~~increase.~~swatch Ascosts, aadvertising ~~percentage~~and oflower ~~retail~~commissions ~~net~~on lower shipments, ~~retail~~were ~~selling~~offset in part by severance accruals and ~~administrative~~an ~~expenses~~increase ~~increased~~in ~~0.3%~~the ~~over~~provision ~~2004~~for losses on accounts receivable recorded in the second quarter of 2006.

~~Retail~~The ~~segment~~increase in other selling and administrative expenses ~~increased~~largely inrepresents ~~virtually all categories, driven by~~ costs ~~at ten new stores opened since May 2004 (four in fiscal 2004, five in the first half~~ of ~~fiscal~~consulting ~~2005,~~services ~~and~~provided ~~one in the third quarter of fiscal 2005). Storehouse also added costs~~ to ~~support direct marketing (catalog and internet) in particular since~~ the ~~first~~Company ~~quarter~~under ofits ~~fiscal~~agreement ~~2004~~with ~~and~~CMAG, ~~in mid 2004 added a~~offset ~~cross-dock warehouse facility to support new store openings~~ in ~~New Jersey and Pennsylvania. Offsetting these increases, in~~ part, ~~has~~by ~~been~~lower ~~favorable healthcare costs~~salaries.

Manufacturing segment selling and administrative expenses decreased 1.9% in 2005 over 2004, primarily as a result of reduced spending on advertising, particularly point of sale materials, during the third quarter of 2005 ($110,000).

Operating earnings:

Operating earnings declined by $3.16 million to a loss of $27.0 million in ~~2005~~2006 as a result of ~~manufacturing~~lower ~~segment~~shipments ~~production~~at ~~inefficiencies~~Rowe, ~~and~~lower ~~increased~~gross ~~retail~~margins ~~segment selling~~at ~~and~~both ~~administrative~~Rowe ~~expenses~~and ~~primarily~~Storehouse ~~resulting~~and ~~from~~higher ~~new~~retail ~~stores~~selling ~~and related costs~~expenses, as discussed above.

Interest expense:

Interest expense increased by $~~141~~180,000 from ~~2004~~2005 to ~~2005~~2006 asdue ~~interest~~to onhigher ~~increased~~outstanding ~~borrowings~~balances ~~in early 2005 under the revolver loan, as well as increased rates (both base rates~~ and ~~the~~higher ~~spread over base~~ rates), ~~offset~~in ~~the~~2006 ~~savings~~compared ~~from~~to ~~the swap agreement (associated with the original Elliston lease) that matured in August 2004~~2005.

~~On October 14~~Other income, ~~2005~~net, ~~the Company’s lenders~~ increased ~~the~~$68,000 ~~spread~~in 2006 over ~~base~~2005, ~~rates~~primarily ~~applicable~~due to ~~the~~higher ~~term~~net ~~and~~rental ~~revolving~~income ~~bank loans by an additional 200 basis points effective immediately. Based upon their outstanding balances~~ at ~~August 28,~~the ~~2005,~~Company’s ~~interest~~remaining ~~expense~~investment ~~will~~real ~~increase~~estate ~~by approximately $125,000 per quarter as a result of this change~~properties.

~~Other~~Loss ~~income,~~from ~~net,~~continuing operations before taxes increased from $59(4,045,000) in 2005 ~~from 2004, due~~ to ~~a gain of~~ $~~153~~(7,763,000) ~~recognized on an expected insurance recovery related to Hurricane Katrina~~ in ~~2005~~2006, ~~offset~~reflecting by the ~~loss~~factors ofdiscussed ~~rental income in 2004 from a short-term tenant that did not renew for 2005~~above.

~~Earnings~~The ~~from~~effective ~~continuing~~tax ~~operations~~rate ~~before~~in ~~taxes~~the ~~declined~~second ~~from~~quarter ~~earnings~~ of ~~$650,000~~2006 inwas ~~2004~~essentially the same as for 2005. The Company believes that it is more likely than not that it will be able to afully ~~loss~~utilize ofits ~~$(2,576,000)~~deferred intax ~~2005,~~assets ~~reflecting~~ over the ~~factors~~next several years, as discussed ~~above~~in Note 13.

Critical Accounting Policies:

The Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. Certain estimates and assumptions have been made that affect the amounts and disclosures reported in the consolidated financial statements and the related accompanying notes. Actual results could differ from these estimates and assumptions. Management uses its best judgment in valuing these estimates and may solicit external advice. Estimates are based on current facts and circumstances, prior experience and other assumptions believed to be reasonable. Critical accounting policies that may affect the consolidated financial statements include self-insurance, long-lived asset valuations and impairments, bad debt reserves, inventory reserves and goodwill.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

external advice. Estimates are based on current facts and circumstances, prior experience and other assumptions believed to be reasonable. Critical accounting policies that may affect the consolidated financial statements include self-insurance reserves, long-lived asset valuations and impairments, bad debt reserves, inventory reserves and goodwill.

Self-Insurance Reserves

The Company is self-insured for substantial portions of its health care and workers compensation insurance programs. Reserves are established for such costs based on, among other factors, reported claims to date, prior history, and actuarial projections of claims incurred but not reported and future medical cost increases likely to affect the total cost to settle claims. If actual results in any of these areas change from prior periods, adjustments to recorded reserves may be required.

Long-lived Asset Valuations and Impairments

The Company monitors the economic health of its facilities and operations and makes determinations, using cash flow analyses, of the fair value of its assets, both tangible and intangible. When cash flow analysis indicates that the fair value of an asset is less than its book value, and such shortfall is not believed to be temporary in nature, then an adjustment to reduce the asset to its fair value is made. As conditions change, additional adjustments of fair value may be required.

Bad Debt Reserves

The Company maintains reserves for receivables from retail furniture businesses that become unable to pay their balances due. Management monitors payment status and periodically performs credit evaluations of these customers in determining the appropriate level of reserves. Factors that affect these conditions can change rapidly, and adjustments to the required level of reserves may be required as such changes occur.

Inventory Reserves

The Company maintains its inventories at the lower of cost or market value. Cost is determined on a last-in, first-out (LIFO) basis for inventory held at retail facilities, and on a first-in, first-out (FIFO) basis for inventory held at its manufacturing facilities. When conditions warrant (usually highlighted by slow-moving product, declining vendor prices on incoming product or a change in merchandising), reserves are established to reduce the value of inventory to net realizable values. The Company recorded a $1.0 million charge against fabric inventory in the manufacturing segment during the three months ended May 28, 2006. As conditions warrant, additional adjustments may be required.

Goodwill

In accordance with SFAS 142, “”Goodwill and Other Intangible Assets,” which was adopted by the Company in 2003, goodwill and other intangible assets are to be evaluated for impairment at the reporting unit level on an annual basis and between annual tests whenever events or circumstances indicate that the carrying value of a reporting unit may exceed its fair value. The Company’s goodwill was created upon the acquisition of Storehouse and reflects the value of future shipments from the manufacturing segment to the retail segment. The Company conducts its required annual impairment test during the second quarter of each fiscal year (and repeated the test as of November 27, 2005 in light of the Company’s operating performance issues). The impairment test uses a discounted cash flow and projected profitability model to estimate the fair value of the reporting unit. ~~This model requires the use of long-term planning forecasts and assumptions~~

This model requires the use of long-term planning forecasts and assumptions regarding specific economic conditions that are outside the control of the Company. Based upon the Company’s assessment as of May 28, 2006, goodwill was not impaired.

In determining that its goodwill is not impaired, the Company utilizes the following process:

The fair value of the manufacturing segment (to which all of the Company’s goodwill has been allocated) is determined using a discounted cash flow model based upon the operating projections for the Company and each of its segments. These projections reflect the best estimates of future operating plans and results. Such projections have been used both for internal strategic planning purposes, and for purposes of obtaining credit from banks and other lenders at various points over the past four years, including prior to our adoption of SFAS 142.

The primary relevant assumptions used in making the projections include projected levels of consolidated and individual segment shipments; consideration of changes in the mix of retail segment business; gross profit levels to be attained from such shipment levels and assumptions about selling and administrative expense growth, both particularly within the manufacturing segment.

Once the operating projections are completed and the resulting projected debt free cash flow is determined, a long-term growth rate and discount rate are applied to determine an estimated fair value of the manufacturing segment. The discount rates of 12-14% were obtained from third party sources specific to the furniture and fixtures industry. The discounted cash flow model includes long-term growth rates ranging from 2-4%, which are in line with inflationary projections and industry growth expectations according to such third party sources.

We compare the fair value of the manufacturing segment to the carrying value of the manufacturing segment to determine if goodwill is impaired. In the May 2005 assessment, the fair value of the manufacturing segment was 150% of its carrying value on the low-end and 256% of its carrying value on the high-end. In November 2005, the low-end and high-end amounts were 110% and 189%, respectively. In May 2006, the corresponding amounts were 104% and 183% on the low-end and high-end, respectively. While fair values have declined over the past year, the Company’s current projections anticipate that sales have stabilized. Future sales projections are based on current order rates with minimal increases. The Company expects to return to profitability within the next two years, based on these projected sales and cost reductions currently in place.

While the Company does not anticipate that an impairment is reasonably likely in the near term, it will continue to monitor the reasonableness of its operating projections, multiples and discount rates used therewith to value its manufacturing segment, and will reassess its goodwill for impairment as circumstances warrant. Should the Company’s future goodwill impairment assessments indicate that there has been impairment of goodwill, the excess of carrying value over fair value of goodwill would be written down by a charge to operating income (loss) in the Company’s consolidated statement of earnings as of the date of the assessment. Depending on the amount, such a charge could have a material adverse effect on the Company’s results of operations and financial condition.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

regarding specific economic conditions that are outside the control of the Company. Based upon the results of testing, there was no impairment of goodwill as of May 29, 2005.

Liquidity and Source of Capital:

Cash

from Operations

Net cash provided by (used in) operating activities was $~~(13~~1,~~898~~337,000) and $6(11,~~588~~523,000) in ~~2005~~ the six months ended May 28, 2006 and ~~2004~~May 29, 2005, respectively. Fluctuations in net cash provided by operating activities are primarily the result of changes in operating income and changes in working capital accounts. Substantial changes between ~~2005~~2006 and ~~2004~~2005 included ana ~~increase~~decrease in accounts receivable in ~~2005~~2006 asdue ~~shipments~~to ~~increased~~declining inshipments, ~~2005 (~~compared to ~~lower~~an ~~levels~~increase ofin ~~shipments~~accounts receivable in ~~the~~2005 ~~fourth~~as ~~quarter~~post-ERP ofimplementation ~~2004)~~issues ~~and~~eased; asa decrease ~~customer~~in ~~service~~inventories ~~issues~~in ~~related~~2006, toas the ~~ERP~~Company ~~implementation~~worked ~~impacted~~to ~~the~~bring ~~timely~~down ~~payments~~inventory onlevels ~~accounts~~in ~~receivable invoices;~~anticipation anof ~~increase~~slowing involume, ~~inventories~~compared to ~~support~~an ~~higher~~increase ~~retail~~in ~~sales~~inventory ~~and~~in ~~new~~2005 ~~stores,~~to improve in-stock fabric position in manufacturing, ~~and~~ higher manufacturing work-in-process inventory and for new stores; ~~the~~an ~~receipt~~increase in ~~early~~other ~~2005~~miscellaneous ofassets, alargely ~~refund~~due ofto ~~2004~~an increase in funds held by Storehouse’s ~~estimated tax~~credit ~~payments~~card inprocessor; ~~excess~~a oflarger ~~taxes~~increase ~~due,~~in as2006 ~~well~~in asaccounts ~~the~~payable, ~~funds~~due ~~received~~to slowing payments on outstanding ~~the~~invoices; ~~litigation~~and ~~settlement~~an increase in ~~early~~tax ~~2005.~~net ~~Storehouse~~operating ~~also~~loss ~~received~~carryforwards ~~$2.8~~in ~~million~~deferred oftaxes ~~rent~~(rather ~~incentives~~than ~~from~~in ~~landlords~~taxes recoverable) in ~~2005,~~early ~~compared~~2006 due to ~~$1.4~~the ~~million~~operating ~~received~~losses ~~during~~incurred ~~the~~in ~~prior~~recent ~~year period~~months. Cash flow from operations is highly dependent on order rates and the Company’s operating performance,. ~~and~~To ~~for~~the extent the ~~immediate~~Company ~~future~~is unable to meet its cash requirements through cash flows from operations; it expects to utilize additional borrowings available under its revolving credit facility. As of May 28, ~~reductions~~2006, inthe ~~inventory~~Company ~~levels~~had $5.8 million available for additional borrowings under its revolving credit facility (over and above the $10 million excess reserve requirement).

Cash from Investing Activities

Net cash provided by (used in) investing activities was $7(1,~~581~~900,000) and $(4606,~~008,~~000) in ~~2005~~2006 and ~~2004~~2005, respectively, primarily reflecting proceeds from the ~~sales~~sale of the Sylmar investment real estate property in 2005. ~~Capital expenditures in 2005 largely related to new stores at Storehouse~~ and ~~included~~lower ~~$2.8 million funded by landlord incentives, while 2004~~ capital expenditures ~~were~~in a2006. ~~combination~~Capital ofexpenditures ~~investments~~ in ~~new~~both ~~stores,~~2006 ~~a new distribution center~~ and ~~the ERP system. At August 28,~~ 2005, ~~the~~largely ~~Company’s~~related ~~capital expenditures for the fourth quarter were expected~~ to ~~be approximately $1.5 million, to be used in connection with~~ new stores at Storehouse. ~~These~~ ~~expenditures are expected to be funded primarily through the Company’s available borrowing capacity.~~

~~Cash~~Capital ~~from~~expenditures ~~Financing~~were ~~Activities~~$1,851,000 in the first half of 2006. Capital expenditures for the remainder of 2006 are expected to be slightly higher than the amount incurred in the first half of 2006, as Storehouse completes two planned store openings, one store relocation and other work. Under the terms of its recently restructured long-term debt, the Company’s capital expenditures during 2006 may not exceed $7.9 million.

Net cash provided by (used in) financing activities was $2,072,000 and $(4,049,000) in 2005 and 2004, respectively. In 2005, the Company drew upon its revolving bank loan to fund operating losses, capital expenditures, and inventory purchases, while the repayments of long-term debt in 2005 include both scheduled payments and the pay-off of the mortgage loans securing the investment properties with proceeds from the sales of the properties. In 2004, draws, net of repayments on the revolving loan, reflected more normal business activities, while the payments on long-term debt included a payment in conjunction with the extension of the lease for the Elliston facility in December 2003, in addition to scheduled debt payments.

As of August 28, 2005, the Company’s cash and cash equivalents were $1.3 million, compared to $5.6 million as of November 28, 2004. As explained above, this decrease was mainly attributable to negative net cash flows from operations, offset by net increases in cash from investment activities and cash from financing activities. As of October 14, 2005, the Company’s availability under its revolving bank loan was $1.2 million; however, because the Company is currently in default under the revolving loan (see below), the Company’s lenders are not obligated to make any additional advances to the Company under the revolving loan.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

AsCash ~~discussed~~from ~~elsewhere~~Financing inActivities this report (see Note 5 of Notes to Consolidated Financial Statements and “Overview”), the Company is currently in default of certain operating covenants under the agreement governing its term loan and revolving credit facility and the agreement governing the capital lease of the Company’s Elliston, Virginia manufacturing facility. The Company’s existing debt under these agreements is now subject to acceleration at the option of the lenders, and, accordingly, all $35.3 million of such debt as of August 28, 2005 has been reflected as currently due in the consolidated balance sheet as of that date. To date, the lenders have not exercised such right.

InNet ~~light~~cash ofprovided ~~the~~by ~~Company’s~~financing activities ~~inability~~was to$1,015,000 ~~negotiate~~and ~~modifications~~$9,746,000 ~~to the covenants~~ in ~~its~~2006 ~~existing bank agreements~~ and to2005, ~~remain~~respectively. inIn ~~compliance with those covenants~~2006, ~~there~~ ~~can~~the beCompany nopaid-off ~~assurance that amounts currently available under~~ its ~~bank~~old ~~agreements~~debt ~~will~~with ~~continue~~proceeds tofrom benew ~~available~~debt onentered ~~existing~~into ~~terms,~~in ~~or,~~January ~~should~~2006. ~~circumstances~~In ~~require additional borrowing~~2005, ~~that~~the ~~such~~Company ~~borrowing~~incurred ~~capacity~~significant ~~would~~draws beupon ~~available~~its inrevolving ~~the~~bank ~~future.~~loan ~~If the Company’s lenders exercise their rights~~ to ~~limit~~fund ~~borrowing~~operating ~~availability~~losses, ~~decline~~capital toexpenditures, ~~make~~and ~~excess~~inventory ~~borrowing~~purchases, ~~capacity~~while ~~available should~~ the ~~Company~~repayments ~~run out~~ of ~~availability~~long-term ~~or accelerate the maturity of the~~ debt, itin is2005 ~~highly~~include ~~unlikely that~~both ~~the~~scheduled ~~Company~~payments ~~would~~and ~~be able to meets its obligations in~~ the ~~ordinary~~pay-off ~~course~~ of ~~business.~~the ~~Under~~mortgage ~~these~~loan ~~circumstances,~~securing ~~a number of material adverse effects would likely be experienced by~~ the ~~Company,~~Sylmar ~~including~~investment ~~but~~property ~~not~~with ~~limited to vendors refusing to~~proceeds ~~ship~~from ~~materials to~~ the ~~Company,~~sale ~~the Requirement to make reductions in head count and to take other cost cutting initiatives, changes in vendors, loss~~ of ~~customers and cancellation of orders; and~~ the ~~Company might seek reorganization under Chapter 11 of the U~~property.S. ~~Bankruptcy Code.~~

~~The~~As of May 28, 2006, the Company’s iscash ~~pursuing~~and ~~alternative~~cash ~~financing~~equivalents were $1.5 million, compared to $1.0 million at November ~~options~~27, ~~including~~2005. ~~raising~~The Company projects that unless sales improve significantly or the lender under the revolving credit facility increases the Company’s borrowing availability, the Company will need to raise additional equity capital, ~~and~~or ~~may~~debt or consider ~~selling~~a sale of assets or one of its operating segments (or a significant interest therein) to have sufficient cash for operations. ~~The~~If the Company’s ~~Board~~is unable to generate sufficient additional cash, whether by raising additional equity capital or debt or by selling assets or one of ~~Directors~~its ~~has~~operating ~~appointed~~segments (or a ~~special~~significant ~~committee~~interest therein), a number of material adverse effects could be experienced by the ~~Board~~Company, ~~comprised~~including ofbut ~~Directors~~not ~~Rosen,~~limited ~~Ptashek~~to, ~~Silver,~~vendors ~~and~~refusing ~~Woodlief~~to ship materials to the Company, the need to ~~lead~~make ~~this effort~~further headcount reductions and ~~provide~~take ~~recommendations~~additional tocost ~~the~~cutting ~~full~~initiatives, ~~Board.~~loss Asof customers and cancellation of ~~October 17~~orders, ~~2005~~and other potential adverse impacts, such as the Company isor ~~negotiating~~one toof ~~obtain~~its asubsidiaries ~~commitment~~possibly ~~letter~~filing ~~from~~a petition ~~another~~under ~~lender~~the toU.S. ~~refinance~~Bankruptcy ~~its~~Code. ~~existing~~While ~~bank~~the ~~debt~~investment ~~and~~banking ~~give~~firm retained by the Company continues to hold discussions with a ~~higher~~number ~~borrowing~~of ~~availability. There~~prospective ~~can~~interested beparties, no assurance can be given as to when or ifwhether ~~the~~an ~~Company~~agreement will be entered ~~able~~into which would result in cash funds being available to ~~successfully~~the ~~negotiate~~Company ~~acceptable~~on terms ~~with~~acceptable to the ~~new~~Company. Nor can any assurance be given that the lender under the Company’s revolving credit facility would increase the Company’s borrowing availability. For additional discussion regarding these matters and the related risks facing the Company, see the paragraphs below under “Additional Risks Include” captioned: “We are projecting a substantial decline in manufacturing segment net shipments as well as a decline in retail segment net shipments, and no assurance can be given that we will be successful in our efforts to obtain the additional cash that may be needed to conduct our operations” and “Operating in bankruptcy would impose significant additional risks on our operations.”

Forward-Looking Statements:

When used in this quarterly report and in filings with the Securities and Exchange Commission, in press releases or other public shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “believe,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “plans,” or similar expressions, as well as the use of future dates, are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date made. These statements may relate to our future financial performance, strategic plans or objectives, revenues or earnings projections, or other financial items. By their nature, these statements are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the statements. Important factors that could cause actual results to differ materially from the results anticipated or projected include, but are not limited to, the following: changes from anticipated levels of sales, whether due to future national or regional economic and competitive conditions, customer

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

~~acceptance~~anticipated or projected include, but are not limited to, the following: the possibility that the costs of ~~existing~~the Company’s restructuring efforts described in this report will be greater than anticipated and ~~new~~that ~~products,~~the orCompany ~~otherwise~~will not realize its anticipated cost savings; the ~~price~~possibility atthat ~~which~~the anCompany’s ~~investment~~other ~~property~~cost isreduction ~~sold,~~initiatives ~~cash~~will ~~and~~prove ~~non-cash~~unsuccessful; ~~charges~~the ~~incurred~~possibility inthat ~~connection~~the Company will be ~~therewith~~unable to obtain additional debt or equity financing on terms acceptable to it within the time frames needed; changes from anticipated levels of sales, whether due to future national or regional economic and ~~the~~competitive ~~timing~~conditions, customer acceptance of ~~any~~existing ~~such~~and ~~sale~~new products, or otherwise; pending or future litigation; pricing pressures due to excess capacity; raw material cost increases; transportation cost increases; the inability of a major customer to meet its obligations; loss of significant customers in connection with a merger, acquisition, redisposition, bankruptcy or otherwise; actions of current or new competitors; increased advertising costs associated with promotional efforts; change of tax rates; change of ~~interest~~ interest rates; future business decisions and other uncertainties, all of which are difficult to predict and many of which are beyond the control of the Company.

Additional risks include:

• We are ~~currently~~projecting a substantial decline in ~~default~~manufacturing ofsegment ~~certain~~net ~~operating~~shipments ~~covenants~~as ~~under~~well ~~the~~as ~~terms~~lower ofthan ~~out~~previously ~~outstanding~~anticipated ~~debt~~retail segment net shipments, ~~which~~and ~~gives~~no ~~our~~assurance ~~lenders~~can ~~the~~be ~~right~~given that we will be successful in our efforts to ~~accelerate~~obtain the ~~maturity~~additional ofcash ~~the~~that ~~debt~~may be needed to conduct our operations.

WeThe ~~are~~Company currently inprojects ~~default~~that ofmanufacturing ~~certain operating~~segment ~~covenants~~net ~~under~~shipments for the ~~agreement~~full ~~governing~~year ~~our~~2006 ~~term~~will ~~loan~~be substantially less than for 2005 and believes that retail segment net shipments for the full year 2006 may be less than for 2005 on a same store basis. Consequently, the Company currently expects that, unless sales improve significantly or the lender under its revolving credit facility ~~and~~increases the ~~agreement~~Company’s ~~governing~~borrowing availability, the Company will need to raise additional equity capital ~~lease~~or debt or consider a sale of ~~our~~assets ~~Elliston,~~or ~~Virginia~~one ~~manufacturing~~of ~~facility~~its operating units (or a significant interest therein) to have sufficient cash for operations. ~~Out~~If ~~existing~~the ~~debt~~Company ~~under~~is ~~these~~unable ~~agreements~~to generate sufficient additional cash, ~~which~~whether ~~totaled~~by raising ~~$35.3~~additional ~~million~~equity ascapital or debt or by selling assets or one of ~~August 28,~~its ~~2005,~~operating issegments ~~now~~(or ~~subject~~a tosignificant ~~acceleration~~interest attherein), ~~the~~a ~~option~~number of ~~the~~material ~~lenders.~~adverse Ifeffects ~~the~~could ~~lenders~~be ~~exercise~~experienced ~~this~~by ~~right~~the Company, itincluding isbut ~~highly~~not ~~unlikely~~limited ~~that~~to, wevendors ~~would~~refusing beto ship ~~able~~materials to ~~repay~~the Company, the ~~debt~~need ~~from~~to ~~existing~~make ~~resources.~~further ~~Under~~headcount ~~these circumstances~~reductions and take additional cost cutting initiatives, weloss ~~might~~of ~~seek~~customers ~~reorganization~~and ~~under~~cancellation ~~Chapter~~of 11orders, and other potential adverse impacts, such as the Company or one of its subsidiaries possibly filing a petition under the U.S. Bankruptcy Code. AsAlthough ~~discussed~~the ~~under~~investment ~~“liquidity~~banking ~~and~~firm ~~Source~~retained ofby ~~Capital,”~~the ~~while~~Company wecontinues ~~are~~to ~~pursuing~~hold ~~alternative~~discussions ~~financing~~with ~~arrangements~~a ~~that~~number ~~would~~of ~~enable~~prospective usinterested ~~to repay the debt~~parties, no assurance can be given as to when or whether wean agreement will be ~~able~~entered tointo ~~complete~~which ~~such~~would anresult ~~arrangement~~in cash funds being available to the Company on terms acceptable to usthe Company. Nor can any assurance be given that the lender under the Company’s revolving credit facility would increase the Company’s borrowing availability. In addition, the raising of additional equity capital would be dilutive to the interests of existing shareholders.

• ~~Our~~Operating ~~available~~in ~~cash~~bankruptcy ~~has~~would ~~decreased~~impose ~~substantially,~~significant ~~and~~additional werisks ~~may~~on ~~be unable to obtain financing for~~ our operations ~~on acceptable terms~~.

AsIf ofthe ~~August 28,~~Company ~~2005,~~or ~~our~~one ~~cash and cash equivalents totaled $1.3 million. Until we are able to again generate positive net cash flows from operations, we will depend primarily on bank borrowings to fund our operations. As~~ of ~~August 28,~~its ~~2005~~subsidiaries ~~our~~initiates ~~remaining~~a ~~availability~~proceeding ~~for additional borrowings~~ under ~~our revolving~~the ~~bank loan was $2~~U.~~1 million and had declined to $1~~S.2 ~~million~~Bankruptcy ~~as of October 14~~Code, ~~2005. As noted under “Liquidity and Source of Capital,” as of October 17, 2005,~~ the Company iswould ~~negotiating~~face ~~to obtain~~ a ~~commitment~~number ~~letter~~of ~~from another~~additional ~~lender~~risks tothat ~~refinance~~could ~~its~~have ~~existing debt and give the Company~~ a ~~higher~~material ~~borrowing~~adverse ~~availability.~~effect ~~There~~on ~~can be no assurance as to when or if we will be able to successfully negotiate acceptable terms with the new lender.~~

As part of our pursuit of financing alternatives, we may seek to raise additional equity capital. No assurance can be given that we will be successful in our efforts to do so. The raising of additional equity capital would be dilutive to the interests of existing shareholders, and the holders of any such additional equity securities could have rights, preferences and privileges that are superior to the holders of our common stock.

• The furniture industry is highly competitive at both the manufacturing and the retail levels; loss of market share could adversely impact sales, earnings and cash flow.

Our manufacturing and retailing subsidiaries face significant competition from numerous competitors, many of which are larger and better capitalized. Our subsidiaries may be at a competitive disadvantage as a result. If our subsidiaries lose market share to competitors, our financial performance could be adversely affected.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

•its Weoperations. ~~have~~The ~~had~~Company’s ~~difficulties,~~competitive position could be harmed because of the taint and ~~continue~~stigma toassociated ~~experience~~with ~~difficulties~~a bankruptcy filing, ~~with~~as customers may be reluctant to place orders out of fear that the ~~implementation~~Company or its subsidiary may go out of ~~our~~business. ~~Enterprise~~The ~~Resource~~Company’s ~~Planning~~suppliers and vendors might stop providing the goods and services needed to conduct the Company’s operations due to heightened concerns about the Company’s credit worthiness. It may also be more difficult for the Company to obtain financing (~~“ERP”~~whether debt or equity) ~~software~~needed ~~and~~to ~~related~~fund ~~manufacturing~~operations ~~process~~and ~~changes~~future growth.

~~Our~~• ~~manufacturing~~The ~~operations recently~~furniture ~~implemented~~industry ais ~~new~~highly ~~ERP~~competitive ~~system~~at ~~that~~both includes accounting, order processing, materials purchasing and inventory management, human resources and payroll management and certain other functions. This was a complex, multi-step implementation. Various parts of the ~~system~~manufacturing ~~have not performed as planned, which has created problems in entering~~ and processing customer orders, procuring and managing inventory, scheduling orders for production, shipping and invoicing finished product to customers. In addition, several changes in production processes were made concurrently with the ~~system~~retail ~~changes.~~levels; ~~Individually~~loss ~~and~~of inmarket ~~combination,~~share ~~these~~could ~~changes~~adversely ~~have~~impact ~~resulted in significant downtime in the plant~~sales, ~~inefficient~~earnings ~~production, delays in filling orders,~~ and ~~shortfalls~~cash ~~in operating results~~flow.

Our ~~production~~ ~~management~~manufacturing ~~personnel,~~and ~~assisted~~retailing bysubsidiaries ~~experts~~face ~~provided~~significant bycompetition ~~the~~from ~~software~~numerous ~~vendor~~competitors, ~~have~~many ~~been~~of ~~intensely~~which ~~focused~~are ~~on identifying the specific problems~~ larger and ~~solutions~~better ~~to them~~capitalized. ~~While~~Our ~~progress~~subsidiaries ~~has~~may ~~been~~be ~~made,~~at ~~problems~~a ~~continue~~competitive todisadvantage ~~persist~~as ~~and~~a ~~there~~result. ~~can~~If ~~be no~~our ~~assurance~~subsidiaries aslose market share to ~~when~~competitors, ~~operations~~our ~~and~~financial ~~profitability~~performance ~~will~~could ~~improve~~be ~~significantly~~adversely affected.

•	We have had difficulties, and may continue to experience difficulties, with our Enterprise Resource Planning (“ERP”) software and related manufacturing process changes.

Our manufacturing operations implemented a new ERP system in late 2004 that includes accounting, order processing, materials purchasing and inventory management, human resources and payroll management and certain other functions. This was a complex, multi-step implementation. Various parts of the system have not performed as planned, which has created problems in entering and processing customer orders, procuring and managing inventory, scheduling orders for production, shipping and invoicing finished product to customers. In addition, several changes in production processes were made concurrently with the system changes. Individually and in combination, these changes have resulted in significant downtime in the plant, inefficient production, delays in filling orders, and shortfalls in operating results.

Our production management personnel, assisted by experts provided by the software vendor, have been intensely focused on identifying the specific problems and solutions to them. At this point in time, such problems have been resolved to the extent that we are able to utilize the system to schedule production and order materials. While we expect to continue to make revisions to the system to better utilize its capabilities, problems may continue to arise and there can be no assurance that these problems, if they occur, would not have an adverse effect on operations and/or profitability.

•	While we have hired a consultant to help us improve our manufacturing operations and return to profitability, no assurance can be given that we will be successful in these efforts.

In November 2005, the Company engaged CMAG to review the Company’s operations and help the Company return to profitability. We began implementing some of their recommendations during January 2006 and a number of other initiatives are currently under consideration. While these initiatives are intended to improve operations and ultimately reduce costs and return the Company to profitability, no assurance can be given that these initiatives will be successful and such changes and their associated costs may have an adverse effect, particularly in the short-term, on the Company’s business, results of operations and cash flows.

We are currently seeking to raise additional debt or equity, which could be dilutive to the interests of existing stockholders.

•	Our retail operations may not become profitable.

Our retail operations are currently unprofitable, and there can be no assurance that profitability will be achieved. Although we have recently begun several cost savings initiatives at Storehouse and plan to hire a consultant to assist us in our efforts to reduce the expenses of our retail operations, no assurance can be given that these efforts will prove successful.

• Our retail operations are ~~opening~~continuing to open new stores, atwhich aentails ~~higher~~certain ~~rate~~risks ~~than~~at ina ~~recent~~higher ~~years~~.

Storehouse opened ~~six~~eight new stores in ~~the first nine months of~~ 2005 and anticipates opening ~~five~~six ~~additional~~ stores during ~~the remainder of fiscal 2005~~2006. There are numerous risks inherent in new store development which could result in unprofitable locations. Risk exposure areas include site selection, contractual commitment to rent expense, and successful execution of store selling and operations activities. There can be no assurance that these new stores will achieve adequate levels of shipments or profitability.

•	The Company imports a substantial portion of its retail merchandise, and some of its raw materials, from foreign sources. Changes in exchange rates could impact the price the Company pays for these goods, resulting in potentially higher retail prices and/or lower gross profit on these goods.

~~During~~Nearly half ~~fiscal 2004, nearly 40%~~ of the Company’s purchases of retail merchandise originated overseas, and the Company also ~~purchased~~purchases some raw materials, particularly wood components, fabric, and leather chairs for re-sale, from overseas sources. Most of these purchases have ~~were~~been denominated in USU.S. dollars. As exchange rates between the U.S. dollar and certain other currencies ~~have~~ become unfavorable, the likelihood of price increases from our foreign vendors ~~has increased~~increases. Such price increases, if they occur, could have one or more of the following impacts:

•

We could be forced to raise retail prices so high that we are unable to sell the products at current unit volumes;

26• If we are unable to raise retail prices commensurately with the cost increases, gross profit could be negatively impacted; or

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

• If we are unable to raise retail prices commensurately with the cost increases, gross profit could be negatively impacted; or

•

We may be forced to find alternative sources of comparable product, which may be more expensive than the current products, of lower quality, or the vendors may be unable to meet our requirements for quantities, delivery schedules or other key terms.

Similar impacts could be experienced in our manufacturing segment.

•	We may not be able to pay-off or refinance our debt obligations that mature in fiscal 2009.

The Company’s new long-term debt obligations mature in 2009. At that time, the Company will be required to pay off or refinance these obligations. There can be no assurance that the Company will have sufficient cash to satisfy these obligations or that the Company will be successful in obtaining new financing, or that, if obtained, the financing would be on favorable terms and conditions.

The terms of our revolving credit facility and Tranche B loan contain various financial and other covenants. If we do not adhere to these covenants and our lender does not agree to amend such covenants or waive such a default, the lender will have the right to accelerate the maturity of the debt which could have a material adverse affect on our results of operations and liquidity.

•	Our bad debts experience may differ materially from our estimates.

Substantially all of the Company’s trade accounts receivable are from retail furniture businesses. Management monitors payment status and periodically performs credit evaluations of these customers. However, changes in creditworthiness can occur rapidly and unanticipated losses from trade accounts receivable could occur in excess of the outstanding allowance for losses. Therefore, there can be no assurance that total losses from uncollectible accounts will not exceed the allowance.

•	Our revenue could be adversely affected by low-cost imported merchandise.

In certain merchandise categories, there has been a rapid expansion of imported home furnishings at lower manufacturing costs, resulting in lower retail selling prices. This trend has reached the upholstery segment of the home furnishings market, resulting in our manufacturing operations facing low-cost foreign competition. This in turn could require us to reduce our selling prices or could diminish demand for our products.

•	Our revenue could be adversely affected by a disruption in our supply chain.

We are an importer of ~~finished~~merchandise ~~goods~~ for our retail operations and components for our manufacturing operations. WeDisruptions also utilize a significant quantity of petroleum-based materials, such as poly bags and foam for seat cushions, much of which is produced in or transported through the Gulf Coast areas affected by recent hurricanes. In addition, if our liquidity situation further deteriorates to ~~the point we are unable to meet~~ our ~~obligations in the ordinary course of business, suppliers may refuse to ship materials to us. Any such disruptions to our~~ supply chain could result in late arrival or unavailability of components or finished goods for resale, causing manufacturing delays or negatively affecting retail sales due to increased out-of-stock merchandise~~, and/or higher costs for certain materials~~.

We28 ~~do not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date on which the forward-looking statement is made.~~

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk and Foreign Currency Exchange Rate Risk

Because the Company’s obligations under its ~~term~~Tranche ~~loan,~~B and revolving loan ~~and~~obligations ~~capital lease obligation~~ bear interest at variable rates, the Company is sensitive to changes in prevailing interest rates. Based upon the balances of ~~the~~these ~~above~~ loans as of ~~August~~May 28, ~~2005~~2006, an increase of 100 basis points in market interest rates would increase quarterly interest expense by approximately $7086,000.

The Company currently manages its interest rate risk under the capital lease for its Elliston, Virginia manufacturing facility through an interest rate swap entered into with a third party in December 2003 for a notional principal amount of $9 million, declining by $50,000 per month, through November 2008. While 30 day LIBOR is below 3.65%, the Company pays the counterparty the difference in interest between 3.65% and actual LIBOR. If and when 30 day LIBOR exceeds 3.65%, then the counterparty will pay the Company the difference. At August 28, 2005, 30 day LIBOR was 3.67%.

The Company is exposed to market risk from changes in the value of foreign currencies because it imports a substantial portion of retail inventory, and some of its raw materials, from foreign sources. See “Forward-Looking Statements” above.

Item 4. Controls and Procedures.

AnThe Company carried out an evaluation, under the supervision and with the participation of ~~our~~the Company’s management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, (as defined in ~~Rule~~ Rules 13a-15(ae) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). ~~was~~Based ~~carried~~upon ~~out~~that ~~as of August 28~~evaluation, ~~2005 under~~ the ~~supervision~~Company’s ~~and~~principal ~~with~~executive ~~the~~officer ~~participation~~and ofprincipal ~~our~~financial ~~Chief~~officer ~~Executive~~concluded ~~Officer,~~that ~~Chief~~the ~~Financial~~Company’s ~~Officer~~disclosure controls and ~~several~~procedures ~~other~~were ~~members~~effective, as of the ~~our~~end ~~senior~~of ~~management.~~the ~~Our~~period ~~Chief~~covered ~~Executive~~by ~~Officer~~this ~~and~~Report ~~Chief~~(May ~~Financial Officer concluded that as of August~~ 28, ~~2005~~2006), ~~our disclosure controls and procedures were effective~~ in ensuring that ~~the~~ information ~~we are~~ required to ~~disclose~~be disclosed by the Company in the reports wethat ~~file~~it files or ~~submit~~submits under the Exchange Act is (i) accumulated and communicated to ~~our~~the Company’s management, (including the ~~Chief~~Company’s ~~Executive~~principal ~~Officer~~executive and ~~Chief~~principal ~~Financial~~financial ~~Officer)~~officers, inas aappropriate to allow timely ~~manner,~~decisions regarding required disclosure and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

28During the second quarter of fiscal 2006, there were no changes in the Company’s internal control over financial reporting that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all errors and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure; misstatements due to error or fraud may occur and not be detected.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

~~There~~At ~~were~~the noend ~~changes~~of infiscal 2007, Section 404 of the Sarbanes-Oxley Act may require the Company’s management to provide an assessment of the effectiveness of the Company’s internal control over financial reporting, ~~that~~and ~~materially~~the ~~affected~~Company’s orindependent ~~are reasonably~~registered ~~likely~~public accounting firm will be required to ~~materially~~audit ~~affect~~management’s assessment. The Company is in the process of performing the system and process documentation, evaluation and testing required for management to make this assessment and for its independent registered public accountants to provide its attestation report. The Company’s ~~internal~~has ~~control~~not ~~over~~completed ~~financial~~this ~~reporting~~process or its assessment, and this process will require significant amounts of management time and resources. In the course of evaluation and testing, management may identify deficiencies that will need to be addressed and remediated.

~~The~~30 Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all errors and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

At the end of fiscal 2007, Section 404 of the Sarbanes-Oxley Act will require the Company’s management to provide an assessment of the effectiveness of the Company’s internal control over financial reporting, and the Company’s independent registered public accounting firm will be required to audit management’s assessment. The Company is in the process of performing the system and process documentation, evaluation and testing required for management to make this assessment and for its independent registered public accountants to provide its attestation report. The Company has not completed this process or its assessment, and this process will require significant amounts of management time and resources. In the course of evaluation and testing, management may identify deficiencies that will need to be addressed and remediated.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

None

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table sets forth information with respect to shares of common stock of the Company purchased by the Company during the three months ended ~~August~~May 28, ~~2005~~ 2006.

Purchases of Equity Securities

Period	(a) TotalNumber ofSharesPurchased	(b) AveragePrice PaidPer Share		(c) Total Number ofShares Purchasedas Part of PubliclyAnnounced Plansor Programs	(d) Maximum Number (orApproximate Dollar Value)of Shares That May Yet BePurchased Under the Plansor Programs
5/30/05 through 7/3/05	481	$	3.85	—	—
2/27/06-4/2/06	2,403	$	1.62	—	—
7/4/05 through 7/31/05	89		3.80	—	—
4/3/06-4/30/06	3,145		1.54	—	—
8/1/05 through 8/28/05	450		3.60	—	—
5/1/06-5/28/06	847		1.51	—	—
Total	16,~~020~~395	$	31.7457	—	—

The shares shown above have been purchased by the Company in accordance with the terms of the Company’s ESOP/PAYSOP, which grants participants the right to sell their shares back to the company under certain conditions. Except for such purchases of its shares, the Company is prohibited by the terms of its bank lending agreements from purchasing its shares. As of ~~August~~May 28, ~~2005~~2006, there were ~~133~~119,~~346~~735 shares in the Company’s ESOP/PAYSOP.

Item 3. Defaults Upon Senior Securities.

As disclosed and discussed in Note 5 of the consolidated financial statements as well as the “Overview” and “Liquidity and Source of Capital” sections of Management’s Discussion and Analysis, the Company was in default of certain operating covenants governing the bank lending agreements.

Item 4. Submission of Matters to a Vote of Security Holders.

None

Item 4. Submission of Matters to a Vote of Security Holders.

The annual meeting of shareholders for The Rowe Companies was held on April 11, 2006, in McLean, Virginia. The shareholders approved the re-election of two individuals to the Board of Directors; Woodlief and Ptashek. Voting results are shown below:


	For	Withheld
Election of directors:

Gerald O. Woodlief	9,991,329.693	2,073,861.8681
Harvey I. Ptashek	9,991,854.693	2,073,336.8681

Additionally, the shareholders did not approve the amendments to the Company’s Articles of Incorporation to authorize 25,000,000 shares of preferred stock. Voting results are shown below:


For:		5,122,594.3427
Against:		3,401,317.2562
Abstain:		237,238.9622
Broker No-Vote:		3,304,041.0000

Item 5. Other Information.

None

Item 6. Exhibits.

The following exhibits are furnished as part of this report.

Exhibit		Description
31.1		Certification of CEO under Section 302 of the Sarbanes-Oxley Act of 2002
3.1		Articles of Incorporation of the Company, as amended (filed as an exhibit to the Company’s Registration Statement on Form S-8 No. 333-108542 filed with the Securities and Exchange Commission on September 5, 2003 and incorporated herein by reference)
31.2		Certification of CFO under Section 302 of the Sarbanes-Oxley Act of 2002
3.2		By-laws of the Company, as amended (filed as an exhibit to the Company’s Current Report on Form 8-K (File No. 1-10226) filed with the Securities and Exchange Commission on March 3, 2006 and incorporated herein by reference)
32.1		Certification of CEO under Section 906 of the Sarbanes-Oxley Act of 2002
10.1		Current Executive Officer Salary and Bonus Arrangements
32.2		Certification of CFO under Section 906 of the Sarbanes-Oxley Act of 2002
31.1		Certification of Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Principal Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002

3132

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		THE ROWE COMPANIES Registrant
	THE ROWE COMPANIES
Date: October 17, 2005		/s/ Gene S. Morphis
	Registrant
		Gene S. Morphis
Date: July 12, 2006	/s/ Garry W. Angle
		Chief Financial Officer
	Garry W. Angle
	Vice President-Treasurer

3233

EXHIBIT INDEX

Exhibit No.		Description
31.1		Certification of the CEO under Section 302 of the Sarbanes-Oxley Act of 2002
10.1		Current Executive Officer Salary and Bonus Arrangements
31.2		Certification of the CFO under Section 302 of the Sarbanes-Oxley Act of 2002
31.1		Certification of the Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of the CEO under Section 906 of the Sarbanes-Oxley Act of 2002
31.2		Certification of the Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
32.2		Certification of the CFO under Section 906 of the Sarbanes-Oxley Act of 2002
32.1		Certification of the Principal Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of the Principal Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002

3334

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