TheTable Company was in compliance with all loan covenants at August 31, 2011 and February 28, 2011. However, subsequent to the amendment execution, the Company has determined it will likely not be able to comply with all provisions of the amendment to the credit facility, which would cause an event of default. As discussed in Notes 1 and 6, the Company has resolved to file for reorganization under Chapter 11. The Company is currently negotiating with lenders to provide DIP financing that will allow the Company to execute a plan of reorganization. Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~August~~November 3130, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-54019

ROOMSTORE, INC.

(Exact name of registrant as specified in its charter)

Virginia

54-1832498

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

12501 Patterson Avenue, Richmond, Virginia 23238

(Address of principal executive offices, including zip code)

(804) 784-7600

(Registrant’s telephone number, including area code)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

As of ~~November~~May 3024, ~~2011~~2012, 9,762,846 shares of the registrant’s common stock, $0.01 par value, were outstanding.

ROOMSTORE, INC.

FORM 10-Q

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets		1
	Condensed Consolidated Statements of Operations		2
	Condensed Consolidated Statements of Cash Flows		3
	Condensed Consolidated Statements of Changes in Equity		4
	Notes to Condensed Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		1115
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		2027
Item 4.	Controls and Procedures		2027
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		2128
Item 1A.	Risk Factors		2128
Item 6.	Exhibits		22
Item 3.	Defaults Upon Senior Securities		30
	Signatures		23
Item 6.	Exhibits		30
	Signatures		31

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements ~~(Unaudited)~~

ROOMSTORE, INC.

Condensed Consolidated Balance Sheets

As of ~~August~~November 3130, 2011 and February 28, 2011

(In thousands, except share and per share amounts)

	August 31,			February 28,
	2011			2011
	(Unaudited)
Assets
Current Assets
Cash and cash equivalents	$	2,002		$	2,365
Inventories		33,371			44,106
Receivables (net of allowance for doubtful accounts: 08/31/11—$137; 02/28/11—$126)		2,069			4,161
Prepaid expenses		4,141			4,201
Deferred income taxes		1,015			1,364
Total current assets		42,598			56,197
Property, plant and equipment, net		21,507			23,037
Other assets		6,293			5,844
Total Assets	$	70,398		$	85,078
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable	$	14,463		$	14,701
Bank overdrafts		2,132			1,224
Accrued expenses		20,233			17,495
Accrued income taxes		380			495
Mortgage note payable—current portion		86			83
Deferred revenue		4,904			7,448
Total current liabilities		42,198			41,446
Deferred rent		4,781			4,954
Deferred income taxes		1,015			1,364
Note payable—credit facility		9,962			17,115
Mortgage note payable		2,294			2,338
Total Liabilities		60,250			67,217
Commitments and Contingencies
Equity
RoomStore, Inc. stockholders’ equity:
Common stock, $.01 par value, 20,000,000 shares authorized, shares issued and outstanding: 08/31/11—9,762,846; 02/28/11—9,762,846		98			98
Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued and outstanding		—			—
Additional paid-in capital		46,791			46,791
Accumulated deficit		(37,593	)		(29,717	)
Total RoomStore, Inc. Stockholders’ Equity		9,296			17,172
Noncontrolling interest		852			689
Total Equity		10,148			17,861
Total Liabilities and Equity	$	70,398		$	85,078

(Unaudited)


	November 30, 2011			February 28, 2011
Assets

Current Assets
Cash and cash equivalents	$	2,160		$	2,365
Inventories		23,933			44,106
Receivables (net of allowance for doubtful accounts: 11/30/11 - $139; 02/28/11 - $126)		2,068			4,161
Prepaid expenses		2,949			4,201
Deferred income taxes		794			1,364

Total current assets		31,904			56,197


Property, plant and equipment, net		20,497			23,037
Service deposits		3,885			2,413
Other assets		3,280			3,431

Total Assets	$	59,566		$	85,078


Liabilities and Stockholders’ Equity

Current Liabilities
Accounts payable	$	17,683		$	14,701
Bank overdrafts		347			1,224
Accrued expenses		23,889			17,495
Accrued income taxes		424			495
Note payable - credit facility - current portion		4,100			—
Mortgage note payable - current portion		88			83
Deferred revenue		3,412			7,448

Total current liabilities		49,943			41,446


Deferred rent		4,738			4,954
Deferred income taxes		794			1,364
Note payable - credit facility		—			17,115
Mortgage note payable		2,271			2,338

Total Liabilities		57,746			67,217


Commitments and Contingencies

Equity
RoomStore, Inc. stockholders’ equity:
Common stock, $.01 par value, 20,000,000 shares authorized, shares issued and outstanding: 11/30/11- 9,762,846; 02/28/11- 9,762,846		98			98
Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued and outstanding		—			—
Additional paid-in capital		46,791			46,791
Accumulated deficit		(45,699	)		(29,717	)

Total RoomStore, Inc. Stockholders’ Equity		1,190			17,172
Noncontrolling interest		630			689

Total Equity		1,820			17,861


Total Liabilities and Equity	$	59,566		$	85,078

The accompanying notes are an integral part of these condensed consolidated financial statements.

ROOMSTORE, INC.

Condensed Consolidated Statements of Operations

Three and ~~Six~~Nine Months Ended ~~August~~November 3130, 2011 and 2010

(In thousands, except share and per share amounts)

(Unaudited)

	Three Months Ended						Six Months Ended
	Three Months EndedNovember 30,						Nine Months EndedNovember 30,
	August 31,						August 31,
	2011			2010			2011			2010
Net sales	$	7055,~~660~~386		$	9179,~~982~~953		$	~~138~~193,~~033~~419		$	~~170~~250,~~591~~544
Cost of sales		4032,~~520~~653			5146,~~759~~264			78111,~~929~~582			96142,~~507~~771
Gross profit		3022,~~140~~733			4033,~~223~~689			5981,~~104~~837			74107,~~084~~773
Selling, general and administrative		3330,~~120~~443			3940,~~910~~552			6696,~~469~~912			76116,~~170~~722
Total operating expenses		3330,~~120~~443			3940,~~910~~552			6696,~~469~~912			76116,~~170~~722
Income (loss) from operations		(2,980	)		313			(7,365	)		(2,086	)
Loss from operations		(7,710	)		(6,863	)		(15,075	)		(8,949	)
Interest expense		(~~181~~140	)		(~~200~~278	)		(~~379~~519	)		(~~343~~621	)
Other income, net		98			110			197			179
Other (expense) income, net		(77	)		334			120			513
Total non-operating expense		(83	)		(90	)		(182	)		(164	)
Total non-operating (expense) income		(217	)		56			(399	)		(108	)
Income (loss) before income taxes		(3,063	)		223			(7,547	)		(2,250	)
Loss before income taxes		(7,927	)		(6,807	)		(15,474	)		(9,057	)
Income tax expense		6237			~~112~~312			~~157~~194			~~232~~544
Net income (loss)		(3,125	)		111			(7,704	)		(2,482	)
Net loss		(7,964	)		(7,119	)		(15,668	)		(9,601	)
Less: Net income attributable to the noncontrolling interest		(~~296~~142	)		(~~176~~59	)		(~~172~~314	)		(~~142~~201	)
Net loss attributable to RoomStore, Inc.	$	(38,~~421~~106	)	$	(657,178	)	$	(715,~~876~~982	)	$	(29,~~624~~802	)
Basic and diluted loss per share attributable to RoomStore, Inc. stockholders	$	(0.35	)	$	(0.01	)	$	(0.81	)	$	(0.27	)
Basic and diluted loss per share attributable to
RoomStore, Inc. stockholders	$	(0.83	)	$	(0.73	)	$	(1.64	)	$	(1.00	)
Weighted average number of shares outstanding		9,762,846			9,767,555			9,762,846			9,767,556

The accompanying notes are an integral part of these condensed consolidated financial statements.

ROOMSTORE, INC.

Condensed Consolidated Statements of Cash Flows

~~Six~~Nine Months Ended ~~August~~November 3130, 2011 and 2010

(In thousands)

(Unaudited)

	2011			2010
Cash flows from operating activities:
Net loss	$	(715,~~704~~668	)	$	(29,~~482~~601	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Depreciation and amortization		23,~~036~~006			23,~~308~~411
Gain on disposal of property and equipment		(35	)		(116	)
Loss (gain) on disposal of property and equipment		24			(106	)
Equity in earnings of investee		(152	)		(169	)
Stock option compensation		—			65
Equity in earnings of investee		(221	)		(250	)
Change in operating assets and liabilities:
Accounts receivable		2,~~082~~083			1,~~670~~215
Inventories		1020,~~735~~173			(28,~~971~~238	)
Prepaid expenses		601,252			(~~255~~612	)
Other assets		(~~297~~1,100	)		(1,~~761~~670	)
Deferred revenue		(23,~~514~~991	)		~~(133~~2,934	)
Accounts payable		~~(238~~2,982	)		~~2,581~~635
Accrued expenses		26,~~565~~178			~~(729~~883	)
Income taxes receivable/Accrued income taxes		(~~115~~71	)		~~(589~~1,360	)
Net cash provided by (used in) operating activities		614,~~423~~647			(29,~~646~~974	)
Cash flows from investing activities:
Additions to property, plant and equipment		(~~502~~553	)		(~~544~~868	)
Proceeds from disposals of property, plant and equipment		1128			2,~~007~~026
Non-controlling interest capital distribution		(9	)		—
Net cash (used in) provided by investing activities		(525	)		1,158
Net cash (used in) provided by investing activities		(500	)		1,463
Cash flows from financing activities:
Bank overdrafts		908			1,539
Change in bank overdrafts		(877	)		1,978
Proceeds from credit facility note		108,069			107,846
Non-controlling interest capital distribution		(373	)		(41	)
Payments of credit facility note		(115,222	)		(104,069	)
Proceeds from credit facility note		145,617			185,436
Payments of mortgage payable		(41	)		(38	)
Payments of credit facility note		(158,632	)		(175,879	)
Net cash (used in) provided by financing activities		(6,286	)		5,278
Payments of mortgage payable		(62	)		(57	)
Net (decrease) increase in cash and cash equivalents		(363	)		4,095
Net cash (used in) provided by financing activities		(14,327	)		11,437
Net (decrease) increase in cash and cash equivalents		(205	)		2,621
Cash and cash equivalents at beginning of period		2,365			733
Cash and cash equivalents at end of period	$	2,~~002~~160		$	43,~~828~~354
Supplemental disclosure of cash flow information:
Taxes paid	$	~~260~~268		$	~~791~~939
Interest paid		~~323~~435			~~315~~565
Non-cash item: recognition of deferred gain on sale of building		3045			2035

The accompanying notes are an integral part of these condensed consolidated financial statements.

ROOMSTORE, INC.

Condensed Consolidated Statements of Changes in Equity

~~Six~~Nine Months Ended ~~August~~November 3130, 2011

(In thousands, except share amounts)

(Unaudited)

	RoomStore, Inc. Stockholders’ Equity
					Additional
	Common Stock				AdditionalPaid-in		Accumulated			Noncontrolling			Total
	Common Stock				Paid-in		Accumulated			Noncontrolling			Total
	Shares		Amounts		Capital		Deficit			Interest			Equity
Balance—March 1, 2011		9,762,846	$	98	$	46,791	$	(29,717	)	$	689		$	17,861
Balance - March 1, 2011		9,762,846	$	98	$	46,791	$	(29,717	)	$	689		$	17,861
Net income (loss)		—		—		—		(715,~~876~~982	)		~~172~~314			(715,~~704~~668	)
Capital distribution		—		—		—		—			(9373	)		(9373	)
Balance—August 31, 2011		9,762,846	$	98	$	46,791	$	(37,593	)	$	852		$	10,148
Balance - November 30, 2011		9,762,846	$	98	$	46,791	$	(45,699	)	$	630		$	1,820

The accompanying notes are an integral part of these condensed consolidated financial statements.

ROOMSTORE, INC.

Notes to Condensed Consolidated Financial Statements

Three and ~~Six~~Nine Months Ended ~~August 31~~November 30, 2011 and 2010

(Unaudited)

(In thousands, except share and per share amounts)

Note 1, ~~Summary~~Organization ofand ~~Significant~~Basis ~~Accounting~~of ~~Policies~~Presentation

~~Organization~~RoomStore, Inc. (“RoomStore” or the “Company”) is a home furnishings and bedding retailer in the United States which operates 64 stores (as of November 30, 2011) located in the states of Pennsylvania, Maryland, Virginia, North Carolina, South Carolina, Alabama, Florida and Texas. The Company also offers its home furnishings through Furniture.com, a provider of internet-based sales opportunities for regional furniture retailers. The Company owns 65% of Mattress Discounters Group, LLC (“MDG”) which operates 80 mattress stores (as of November 30, 2011) in the states of Delaware, Maryland and Virginia and in the District of Columbia.

~~RoomStore~~The consolidated financial statements include all accounts of the Company and its majority-owned subsidiary, ~~Inc~~MDG. ~~(“RoomStore”~~All orsignificant ~~the~~inter-division “and intercompany accounts and transactions have been eliminated. The Company”)’s isfiscal ayear ~~home~~ends ~~furnishings~~on the last day of February. The accompanying unaudited financial statements have been prepared in accordance with the regulations of the Securities and ~~bedding~~Exchange ~~retailer~~Commission in regard to interim reporting and accounting principles generally accepted in the United States ~~which~~of ~~operates~~America ~~66 stores~~consistent ~~(as~~in ofall ~~August 31,~~material ~~2011)~~respects ~~located~~with those applied in the ~~states~~Company’s ofAnnual ~~Pennsylvania,~~Report ~~Maryland,~~on ~~Virginia,~~Form ~~North~~10-K ~~Carolina,~~for ~~South~~the ~~Carolina,~~year ~~Alabama~~ended February 28, ~~Florida~~2011 ~~and~~(the ~~Texas~~“Form 10-K”). ~~The~~In ~~Company~~the ~~also~~opinion ~~offers~~of ~~its~~management, ~~home~~the ~~furnishings~~financial ~~through~~information ~~Furniture.com,~~reflects all normal recurring adjustments necessary for a ~~provider~~fair presentation of ~~internet-based~~ ~~sales~~the ~~opportunities~~results for ~~regional~~the ~~furniture~~interim ~~retailers~~periods. ~~The~~These ~~Company~~statements ~~owns~~do ~~65%~~not ofinclude ~~Mattress~~all ~~Discounters~~information ~~Group,~~and ~~LLC~~notes required by generally accepted accounting principles (“~~MDG~~GAAP”) ~~which~~for ~~operates~~complete 83financial ~~mattress~~statements ~~stores~~and ~~(as~~should ofbe ~~August~~read in conjunction with the Audited Consolidated Financial Statements and notes thereto for the year ended February 3128, 2011) included in the ~~states~~Form 10-K. The balance sheet as of ~~Delaware~~February 28, ~~Maryland~~2011 ~~and~~has been derived from the audited consolidated ~~Virginia~~financial ~~and~~statements included in the ~~District~~Form 10-K. Due to the seasonal nature of ~~Columbia~~the Company’s business, operating results for the interim periods are not necessarily indicative of results for a full year. Certain prior year amounts have been reclassified to conform to the current year presentation.

~~Basis~~Note of2, ~~Presentation~~Voluntary Reorganization under Chapter 11

~~The~~On ~~consolidated~~December 12, ~~financial~~2011(the ~~statements~~“Petition ~~include~~Date”), ~~all accounts of~~ the Company ~~and~~filed ~~its~~a ~~majority-owned~~voluntary ~~subsidiary,~~petition ~~MDG.~~for ~~All~~relief ~~significant~~under ~~inter-division~~Chapter ~~and~~11 ~~intercompany~~of ~~accounts and transactions have been~~the ~~eliminated.~~United ~~The~~States ~~Company’s~~Bankruptcy ~~fiscal~~Code ~~year~~(“Chapter ~~ends~~11”) ~~on the last day of February. The accompanying unaudited financial statements have been prepared~~ in ~~accordance with accounting principles generally accepted in~~ the United States ofBankruptcy ~~America~~Court ~~consistent~~of ~~in all~~the ~~material~~Eastern ~~respects~~District ~~with~~of ~~those~~Virginia ~~applied in~~ (the ~~Company’s~~“Bankruptcy ~~Annual~~Court”), ~~Report~~Case ~~on Form 10~~No.11-K37790-DOT ~~for~~ (the ~~year~~“Chapter ~~ended~~11 ~~February 28, 2011~~Case”). ~~These~~The ~~statements~~Company docontinues ~~not~~to operate ~~include~~the ~~all~~business ~~information~~as ~~and~~a ~~notes required by generally accepted accounting principles (~~“~~GAAP~~debtor-in-possession”) ~~for~~under ~~complete~~the ~~financial~~jurisdiction ~~statements~~of ~~and~~the ~~should~~Bankruptcy beCourt ~~read~~and in ~~conjunction~~accordance with the ~~Audited~~applicable ~~Consolidated~~provisions ~~Financial~~of ~~Statements~~Chapter 11 and ~~notes~~orders ~~thereto~~of ~~for~~ the ~~year~~Bankruptcy ~~ended February 28, 2011 included in Form 10-K~~Court. ~~The~~MDG ~~balance~~is ~~sheet~~not aspart of ~~February 28,~~ ~~2011 has been derived from~~ the ~~audited consolidated financial statements included in the~~ Company’s bankruptcy ~~Annual~~filing ~~Report~~and onhas ~~Form~~had ~~10-K~~no ~~for~~changes ~~the year ended February 28, 2011. Due~~ to ~~the~~its ~~seasonal nature of our~~ business, ~~operating results for the interim periods are not necessarily indicative of results for a full year~~operations. ~~Certain prior year amounts have been reclassified to conform to the current year presentation.~~

OnThe ~~December 8,~~Bankruptcy ~~2011,~~Case ~~the~~was ~~Company’s~~filed ~~Board~~because ~~of Directors resolved to voluntarily file for reorganization under Chapter 11 of~~ the ~~United States Bankruptcy Code (“Chapter 11”). The~~ Company’s Condensed Consolidated Financial Statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities and commitments in the ordinary course of business. The working capital position and the losses from operations ~~have~~ raised substantial doubt about the Company’s ability to continue as a going concern. ~~The~~without ~~appropriateness of reporting on~~ the ~~going~~relief ~~concern basis is dependent upon, among other things, confirmation of a plan of reorganization by the Bankruptcy Court under Chapter 11, future profitable operations,~~ and the ability to generate sufficient cash from operations and financing sources to meet obligations. While under the protection of Chapter 11, the Debtors may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the accompanying Consolidated Financial Statements. The Consolidated Financial Statements do not include any adjustments relating to the recoverability of the value of recorded asset amounts and reclassifications of liabilities that might be necessary as a consequence of a plan of reorganization. Atoptions ~~this~~provided ~~time~~by ~~it is not possible to predict~~ the ~~outcome, or the financial impact of the Company of a Chapter 11~~ filing ~~however the Company believes it has developed a plan that will enable it to reorganize around a core base of stores~~. ~~Unsecured claims may be settled at less than their carrying amount and the equity of the Company’s stockholders may have no value.~~

~~The~~Operation ~~Company~~and isImplication ~~in the process~~ of ~~evaluating and securing debtor-in-possession (“DIP”) financing in connection with~~ the ~~intended~~ Chapter 11 ~~filing.~~Case The reorganization of the Company is expected to result in the closing of a significant number of stores and reductions in staffing and overhead expenses. There are no assurances that the Company will be successful in securing satisfactory DIP financing, obtaining Bankruptcy Court approval of an implementing a plan for reorganization although the Company expects to sign a DIP financing loan within the next several days and is in serious discussions with multiple lenders.

Under Section 362 of the Bankruptcy Code, the filing of a bankruptcy petition automatically stays most actions against a debtor, including most actions to collect indebtedness incurred prior to the Petition Date or to exercise control over property of the debtor. Accordingly, although commencement of the Chapter 11 Case triggered defaults on substantially all of the Company’s debt obligations, creditors are stayed from taking any actions as a result of such defaults. Absent an order of the Bankruptcy Court, substantially all pre-petition liabilities are subject to settlement under a plan of reorganization. As a result of the Chapter 11 Case, the realization of assets and the satisfaction of liabilities are subject to uncertainty. Further, a confirmed plan of reorganization or other arrangement may materially change the amounts and classifications in a debtor’s unaudited condensed financial statements.

ROOMSTORE, INC.

Notes to Condensed Consolidated Financial Statements

Three and ~~Six~~Nine Months Ended ~~August~~November 3130, 2011 and 2010

(Unaudited)

(In thousands, except share and per share amounts)

~~Note~~The 2Company requested and received approval from the Bankruptcy Court to pay or otherwise honor certain pre-petition obligations generally designed to stabilize the Company’s operations including certain employee wage and benefit obligations, ~~Accrued~~cash ~~Liabilities~~management, tax matters, certain customer programs and payment of pre-petition claims of certain vendors deemed critical to the Company’s ongoing business. The Company intends to continue paying claims arising after the Petition Date in the ordinary course of business. The Company has retained legal and financial professionals to advise the Company on the Chapter 11 Case and certain other professionals to provide services and advice to the Company in the ordinary course of business. The fees of these legal and financial professionals are subject to Bankruptcy Court approval.

~~Accrued~~The ~~liabilities~~Company ~~consists~~has ofincurred and expects to continue to incur significant costs associated with the ~~following~~reorganization atand ~~August 31,~~the ~~2011~~Chapter 11 Case. The amount of these expenses is expected to significantly affect the Company’s financial position and ~~February 28,~~results ~~2011:~~of operations. The Company cannot accurately predict the affect the Chapter 11 Case will have on its business at this time.

	August 31,		February 28,
	2011		2011
Accrued compensation and benefits	$	1,951	$	1,217
Accrued advertising		3,995		2,370
Deferred warranty revenue		4,057		3,261
Mattress warranty reserve		615		602
Customer deposits		4,006		3,883
Sales tax payable		1,495		2,039
Other accrued liabilities		4,114		4,123
	$	20,233	$	17,495

Plan of Reorganization

~~Note~~For 3the Company to successfully emerge from the Chapter 11 Case, ~~Credit~~the ~~Arrangements~~Company must obtain the Bankruptcy Court’s approval of a plan of reorganization, which will enable the Company to transition from the Chapter 11 Case into ordinary course operations. In connection with the plan of reorganization, the Company must also obtain a new credit facility, or “exit financing.” The ability to obtain such approval and financing will depend on, among other things, the timing and outcome of various ongoing matters in the Chapter 11 Case. A plan of reorganization determines the rights and satisfaction of claims of various creditors and security holders, and is subject to the ultimate outcome of negotiations with the Company’s stakeholders and Bankruptcy Court decisions ongoing through the date on which the plan of reorganization is confirmed. The Company has not yet filed a plan of reorganization or a related disclosure statement with the Bankruptcy Court.

OnThe ~~May 27, 2010, the~~ Company ~~entered~~expects ~~into~~to ahave ~~four-year,~~ongoing ~~$30~~discussions ~~million~~with ~~revolving~~its ~~credit~~creditors ~~facility~~regarding ~~(“Revolver”)~~a ~~with~~plan ~~Wells Fargo~~of ~~Retail~~reorganization ~~Bank,~~until ~~N.A.~~the ~~secured~~proposed byplan ~~all~~is ~~assets~~filed ofwith the Bankruptcy ~~Company~~Court. ~~The~~There ~~agreement~~can ~~allows~~be ~~the~~no ~~Company~~assurance tothat ~~increase~~ the ~~Revolver~~Company towill ~~$35~~be ~~million~~able ifto ~~needed.~~secure ~~Amounts~~approval ~~available~~of ~~for~~a ~~borrowing~~proposed ~~under~~plan by the ~~Revolver~~Bankruptcy ~~are~~Court, ~~based~~or onthat the ~~valuation~~proposed ofplan ~~several~~will ~~different asset~~be ~~categories.~~accepted ~~The~~by ~~value of~~ the Company’s ~~inventory~~lenders isor ~~the~~secured ~~largest asset category~~ and ~~therefore~~unsecured ~~the bank requires that an independent company perform an inventory valuation three times a year~~creditors. ~~This valuation is based on an estimate of the~~ ~~value that could be realized from an orderly liquidation sale.~~

~~Interest~~Confirmation ~~rates~~of ~~under~~a ~~the~~plan ~~Revolver are variable based on the higher~~ of ~~the Federal~~reorganization ~~Funds~~could ~~rate~~materially ~~plus~~alter ~~0.5%, LIBOR rate plus 1% or~~ the ~~Wells~~classifications ~~Fargo~~and ~~prime~~amounts ~~rate.~~reported Anin ~~additional 2% is then added to~~ the ~~highest~~unaudited ~~rate~~condensed ~~to get the total interest rate on the borrowing. Within the credit facility~~financial statements, ~~the~~which ~~Company~~do ~~has~~not ~~the~~give ~~option~~effect to ~~enter~~any ~~into up~~adjustments to ~~five fixed maturity loans with interest calculated at LIBOR plus 3.0%. The fixed maturity LIBOR loans generally have a 30-day maturity and a lower interest rate than~~ the ~~variable~~carrying ~~portion~~values of ~~the~~assets ~~facility.~~or Atamounts ~~August 31, 2011, there were $9,962~~ of ~~outstanding~~liabilities ~~borrowings~~that ~~under~~might ~~the~~be ~~credit~~necessary ~~facility.~~as ~~The portion under~~ a ~~fixed~~consequence ~~maturity LIBOR loan was at an interest rate~~ of ~~3.21%~~confirmation ~~and a maturity date~~ of ~~September 11,~~such ~~2011. At maturity~~plan, ~~the~~or ~~LIBOR loan rolled over two more times into a new loan with a current maturity date of November 11, 2011. As~~ the ~~LIBOR~~effect ~~loan matures each month, the Company decides on the amount to leave under the LIBOR portion~~ of ~~the~~any ~~facility~~operational ~~and~~changes ~~the amount~~ that will flow to the variable portion of the facility. The Company will use this facility based on fluctuating operating needs and pay off the borrowings as quickly as possible. All amounts borrowed under the credit facility are due no later than April 30, 2014 but may be ~~repaid earlier.~~ ~~Remaining borrowing availability was approximately $1,660 and $3,000 at August 31, 2011 and February 28, 2011, respectively~~implemented.

~~On September~~Financing ~~23,~~During ~~2011,~~Pendency the Company entered into an amendment to the revolver agreement. Among other things, the amendment modified minimum excess availability on the revolver for certain periods through January 2012 and added an event of ~~default if~~ the ~~Company~~ ~~failed~~Chapter to11 ~~provide~~Case net cash payments to the lender of at least $5,800,000 by December 9, 2011 from a capital event consummated by the Company. The amendment also requires the Company to provide certain cash reports on a weekly basis.

~~The~~See ~~Company~~Note ~~was~~4 ~~in compliance with all loan covenants at August 31, 2011 and February 28, 2011. However, subsequent~~ to the ~~amendment execution,~~Condensed ~~the~~Consolidated ~~Company~~Financial ~~has~~Statements ~~determined~~below itfor ~~will~~information ~~likely~~regarding ~~not be able to comply with all provisions of~~ the ~~amendment~~Company’s toarrangement ~~the~~for ~~credit~~debtor-in-possession ~~facility,~~financing ~~which~~during ~~would~~pendency ~~cause an event~~ of ~~default. As discussed in Notes 1 and 6,~~ the ~~Company has resolved to file for reorganization under~~ Chapter 11. Case.

InGoing ~~connection~~Concern ~~with the planned Chapter 11 filing, the Company is currently negotiating with lenders to provide DIP financing that will allow the Company to execute a plan of reorganization.~~

The Company’s Condensed Consolidated Financial Statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities and commitments in the ordinary course of business. The working capital position, losses from operations and commencement of the Chapter 11 Case have raised substantial doubt about the Company’s ability to continue as a going concern. The appropriateness of reporting on the going concern basis is dependent upon, among other things, the Company’s ability to comply with the financial and other covenants contained in the debtor-in-possession

ROOMSTORE, INC.

Notes to Condensed Consolidated Financial Statements

Three and ~~Six~~Nine Months Ended ~~August~~November 3130, 2011 and 2010

(Unaudited)

(In thousands, except share and per share amounts)

~~Note~~ financing 4agreement, ~~Stockholders~~confirmation of a plan of reorganization by the Bankruptcy Court under Chapter 11, the Company’s ~~Equity~~ability to successfully implement such plan, future profitable operations, the ability to generate sufficient cash from operations and financing sources to meet obligations and the Company’s ability to obtain exit financing. While under the protection of Chapter 11, the Company may, subject to approval of the Bankruptcy Court, sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the accompanying Condensed Consolidated Financial Statements. The Condensed Consolidated Financial Statements do not include any adjustments relating to the recoverability of the value of recorded asset amounts and reclassifications of liabilities that might be necessary as a consequence of a plan of reorganization. At this time, it is not possible to predict the outcome or the financial impact of the Company of a Chapter 11 Case or the going concern uncertainty. Unsecured claims, and even secured claims, may be settled at less than their carrying amount and the equity of the Company’s stockholders may have no value. The reorganization of the Company is expected to result in the closing of a significant number of stores and reductions in staffing and overhead expenses, and there are no assurances that the Company will be successful in obtaining Bankruptcy Court approval or of implementing a plan for reorganization. As of the date of this filing, the Company has closed 20 stores and a distribution center as a result of the Chapter 11 Case and is in the process of closing an additional 13 stores and a distribution center. See Note 8 to the Condensed Consolidated Financial Statements below.

~~Management~~Since ~~Incentive~~the ~~Program~~Petition Date, subsequent to November 30, 2011, the Company has operated its business as a debtor-in-possession under the Bankruptcy Code. The American Institute of Certified Public Accountants Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” (“SOP 90-7”) provides guidance for financial reporting by entities that have filed petitions with the Bankruptcy Court and expect to reorganize under Chapter 11. Under SOP 90-7, the financial statements of an entity in a Chapter 11 reorganization proceeding should distinguish transactions and events that are directly associated with the reorganization from those of operations of the ongoing business as it evolves. Accordingly, SOP 90-7 requires that the balance sheet separately classify pre-petition liabilities as those subject to compromise. Pre-petition liabilities are reported on the basis of the expected amount of such allowed claims, as opposed to the amount for which those allowed claims may be settled. Revenues and expenses, realized gains and losses, and provisions for losses resulting from the reorganization and restructuring of the business are reported in the Consolidated Statement of Operations separately as reorganization items. SOP 90-7 accounting and presentation will be applied in future financial statement filings while the Company is still a debtor-in-possession under the Bankruptcy Code.

~~The~~Upon ~~Company~~emergence ~~has~~from abankruptcy, ~~Stock~~the ~~Incentive~~amounts ~~Plan~~reported ~~(“Incentive~~in ~~Plan”).~~the ~~Under~~Company’s ~~the~~subsequent ~~Incentive~~financial ~~Plan,~~statements ~~awards~~may ~~can~~change bematerially. ~~made~~As inof the ~~form~~effective date of ~~restricted~~a ~~stock,~~plan ~~stock~~of ~~options~~reorganization, ~~stock~~the ~~appreciation~~Company ~~rights~~anticipates orbeing ~~other stock-based~~required ~~awards.~~to Ifapply ~~restricted~~the ~~stock~~“fresh isstart” ~~awarded,~~provisions upof toSOP ~~983~~90-7,~~500~~ ~~shares~~which ~~are~~requires ~~available.~~that Ifall ~~stock~~assets ~~options~~and ~~are~~liabilities ~~awarded,~~be uprestated to ~~1,800,000~~their ~~options~~fair ~~are~~values ~~available.~~as ~~The~~of ~~Board~~such ofeffective ~~Directors~~date. Certain of these fair values will differ materially from the values recorded on the Company’s ~~(or~~Condensed aConsolidated ~~committee~~Balance ~~designated~~Sheet byas of November 30, 2011. Additionally, the ~~Board)~~results ~~is responsible~~of ~~for~~operations ~~administering~~after the ~~Incentive~~application ~~Plan~~of fresh start accounting will not be comparable to previous periods. ~~Eligible~~Changes ~~participants~~in accounting principles required under ~~the~~generally ~~Incentive~~accepted ~~Plan~~accounting ~~are~~principles ~~directors,~~within ~~employees~~12 ~~and~~months ~~consultants~~of ~~who~~emerging from bankruptcy are ~~expected~~required to ~~contribute~~be toadopted at the ~~growth~~date of emergence. Additionally, the Company may opt to make other changes in accounting practices and ~~profits~~policies as of the plan’s effective date. For all of these reasons, the Company’s financial statements for periods subsequent to emergence from Chapter 11 will not be comparable with those of prior periods.

Stock options to purchase a total of 370,000 shares of common stock were granted on October 14, 2010 at an option price of $0.81 per share and a weighted average fair value per share of $0.52. The options vested on March 1, 2011. The options expire ten years from the date of grant. The weighted average fair value for these options was estimated at the time of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 1.18%, expected life in years of 5 years, expected volatility of 80% and expected dividend yield of 0%. The Company had no stock compensation expense for the three or six months ended August 31, 2011 or 2010. There were 123,915 shares available for future grant at August 31, 2011.

ROOMSTORE, INC.

Notes to Condensed Consolidated Financial Statements

Three and ~~Six~~Nine Months Ended ~~August~~November 3130, 2011 and 2010

(Unaudited)

(In thousands, except share and per share amounts)

Note 3, Accrued Expenses

Accrued expenses consist of the following at November 30, 2011 and February 28, 2011:


	November 30, 2011		February 28, 2011
Accrued compensation and benefits	$	2,220	$	1,217
Accrued advertising		5,263		2,370
Deferred warranty revenue		4,075		3,261
Mattress warranty reserve		633		602
Customer deposits		6,230		3,883
Sales tax payable		1,015		2,039
Other accrued liabilities		4,453		4,123

	$	23,889	$	17,495

Note 4, Credit Arrangements

On May 27, 2010, the Company entered into a four-year, $30,000 revolving credit facility (the “Revolver”) with Wells Fargo Retail Bank, N.A. (“Wells Fargo”) secured by all assets of the Company. Amounts available for borrowing under the Revolver are based on the valuation of several different asset categories. The value of the Company’s inventory is the largest asset category and therefore the bank requires that an independent company perform an inventory valuation three times a year. This valuation is based on an estimate of the value that could be realized from an orderly liquidation sale.

Interest rates under the Revolver are variable based on the highest of the Federal Funds rate plus 0.5%, LIBOR rate plus 1% or the Wells Fargo prime rate. An additional 2% is then added to the highest rate to obtain the total interest rate on the borrowing. Within the Revolver, the Company has the option to enter into up to five fixed maturity loans with interest calculated at LIBOR plus 3.0%. The fixed maturity LIBOR loans generally have a 30-day maturity and a lower interest rate than the variable portion of the facility. At November 30, 2011, there was $4,100 of outstanding borrowings under the Revolver. Remaining borrowing availability was approximately $2,040 and $3,000 at November 30, 2011 and February 28, 2011, respectively. At November 30, 2011, the Company was in default of certain financial covenants of its credit facility agreement with Wells Fargo. These defaults were waived pursuant to the Company entering into the post-petition Debtor-in-Possession financing with Wells Fargo described below.

On December 13, 2011, the Bankruptcy Court entered an interim order authorizing the Company to execute all documents necessary to obtain post-petition, Debtor-in-Possession financing up to a maximum amount of $14,000, subject to (a) carve out for professional fees in an amount increasing over time to $500, and (b) certain other borrowing restrictions (the “DIP Facility”) from Wells Fargo, the Company’s existing lender. On December 15, 2011, the Company executed a Ratification and Amendment Agreement (the “Ratification Agreement”) to obtain and secure the DIP Facility. Under the terms of the Ratification Agreement, Wells Fargo has the discretion to apply the Company’s post-petition payments and proceeds first to amounts owed pre-petition to Wells Fargo before applying payments and proceeds against post-petition advances. At the time of the filing of the Chapter 11 Case, the Company owed Wells Fargo approximately $5,700 under the Revolver. The Bankruptcy Court entered a final order on January 5, 2012 (the “Final Order”) authorizing the DIP Facility. The Company paid financing fees of $150 on December 15, 2011 for the DIP Facility.

ROOMSTORE, INC.

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended November 30, 2011 and 2010

(Unaudited)

(In thousands, except share and per share amounts)

On January 20, 2012, Wells Fargo assigned all of its interests and obligations under the Revolver and DIP Facility to Salus Capital Partners, LLC (“Salus”). Subsequent to this assignment, the Company and Salus have agreed to revise certain terms of the DIP Facility (the revised DIP Facility hereinafter referred to as the “New DIP Facility”). The Bankruptcy Court approved these revisions by court order entered on February 8, 2012. The New DIP Facility increased the maximum amount of the facility to $15,000. The Company paid financing fees of $150 on February 8, 2012 for the New DIP Facility and, upon the assignment of the DIP Facility to Salus, received a waiver from Wells Fargo of an additional $130 fee due to Wells Fargo. The Company entered into the New DIP Facility because the borrowing base formula in the New DIP Facility initially provided substantial incremental liquidity, including (i) up to $3,000 of borrowing availability in respect of certain pledged equity, and (ii) increased advance rates on eligible inventory and real estate. The Company has missed certain performance targets of the New DIP Facility and has entered into subsequent amendments with Salus to obtain waivers of these events of default. The Company and Salus entered into a Fourth Amendment to the Revolver (the “Fourth Amendment”) on April 11, 2012, pursuant to which Salus waived certain technical events of default under the New DIP Facility and decreased the revolving credit loan ceiling to $10,000 from $15,000, which was offset in part by amending the formula for funds available under the New DIP Facility such that the funds available to the Company decreased by an aggregate of $3,850 rather than $5,000. In consideration for entering into the Fourth Amendment, the Company paid Salus a portion of the termination fee for the New DIP Facility in the amount of $38. The Bankruptcy Court entered an order approving the Fourth Amendment on April 19, 2012. The Company and Salus entered into a Fifth Amendment to the Revolver (the “Fifth Amendment”) on April 19, 2012 to replace line item expense budget variance covenants with less rigorous liquidity and aggregate disbursement covenants and to extend the time for the Company to file a plan of reorganization from April 15, 2012 to June 15, 2012. The Fifth Amendment also added a more stringent minimum sales requirement, whereby the Company will be required to achieve sales (a) for each week ending during the first three weeks after the Bankruptcy Court issues an order approving the Fifth Amendment of not less than 80% of the projected sales for such week as set forth in a budget agreed to by the Company and Salus, and (b) for each test period thereafter, of not less than 85% of the projected sales for such period. The Fifth Amendment also resulted in the base margin interest rate charged to the Company increasing from 3.0% to 3.5% and requires that the Company begin closing by June 4, 2012 the retail stores for which the Company has not received landlord consents by that date to extend the Company’s time to assume or reject such leases, as permitted by the Bankruptcy Code. In consideration for entering into the Fifth Amendment, the Company paid Salus a fee of $75 on May 4, 2012.

Loans made under the New DIP Facility (as adjusted by the Fifth Amendment) bear interest at a rate equal to 3.5% plus the highest of (a) the federal funds rate plus 0.5%, (b) three month LIBOR plus 1.0%, or (c) the JP Morgan Chase Bank N.A. “prime rate” as announced from time to time at its principal office in New York, New York. The Company is required to pay an unused line fee of 0.75% per annum, paid monthly in arrears, and fees of 3.0% per annum on the stated amount of outstanding documentary letters of credit and 3.0% per annum on the principal balance of outstanding letters of credit. In addition, the Company is required to pay collateral monitoring fees of $5 per month, fully earned and payable in advance each month that the New DIP Facility is outstanding. The interest rate applicable to advances against the pledged equity components added to the borrowing base is 13.0% until 90 days after February 8, 2012, subject to reduction thereafter. The New DIP Facility matures on the earliest to occur of (a) June 12, 2013, (b) the effective date of a plan of reorganization of the Company, (c) the consummation of a sale or sales of all or substantially all of the Company’s assets and properties or of all equity interests in the Company, (d) the last termination date set forth in the Final Order of the Bankruptcy Court, and (e) the payment in full of all of the Company’s obligations under the New DIP Facility after notice by the Company to Salus of the Company’s intent to terminate the New DIP Facility. Under the New

ROOMSTORE, INC.

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended November 30, 2011 and 2010

(Unaudited)

(In thousands, except share and per share amounts)

DIP Facility as amended by the Fifth Amendment, in the event that the Company has not, on or before the close of business on June 15, 2012, repaid the New DIP Facility in full or filed a Chapter 11 plan in form and substance reasonably satisfactory to Salus, the Company is required, by June 29, 2012, to commence the sale of all of its assets, other than leases and fixtures, and by July 10, 2012, commence an auction for the sale of all of its leases and fixtures. This financing should enable the Company to meet its post filing obligations in the ordinary course of business, fund its operations and pay for merchandise, and finance the costs associated with the Chapter 11 Case. The Company continues to pursue additional sources of capital to allow it to purchase additional inventory.

To secure repayment of all pre-petition and post-petition obligations, Salus was granted a first priority and perfected security interest and lien on all assets of the Company, except for the Company’s real property located at 1008 Highway 501 in Myrtle Beach, South Carolina.

The Company also has a real estate mortgage note payable bearing interest at 7.25% per year with a final balloon payment due on July 1, 2016. The principal unpaid balance at November 30, 2011 and February 28, 2011 was $2,359 and $2,421, respectively, and is secured by the underlying property in Myrtle Beach, South Carolina.

Note 5, Stockholders’ Equity

Management Incentive Program

The Company has a Stock Incentive Plan (“Incentive Plan”). Under the Incentive Plan, awards can be made in the form of restricted stock, stock options, stock appreciation rights or other stock-based awards. If restricted stock is awarded, up to 983,500 shares are available. If stock options are awarded, up to 1,800,000 options are available. The Board of Directors of the Company (or a committee designated by the Board) is responsible for administering the Incentive Plan. Eligible participants under the Incentive Plan are directors, employees and consultants who are expected to contribute to the growth and profits of the Company. There were 237,956 shares available for future grant at November 30, 2011.

Stock options to purchase a total of 370,000 shares of common stock were granted on October 14, 2010 at an option price of $0.81 per share and a weighted average fair value per share of $0.52. The options vested on March 1, 2011. The options expire ten years from the date of grant. The weighted average fair value for these options was estimated at the time of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 1.18%, expected life in years of 5 years, expected volatility of 80% and expected dividend yield of 0%. The Company had no stock compensation expense for the nine months ended November 30, 2011 and $65 of stock compensation expense for the nine months ended November 30, 2010.

ROOMSTORE, INC.

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended November 30, 2011 and 2010

(Unaudited)

(In thousands, except share and per share amounts)

Earnings per Share

The following table sets forth the computation of basic and diluted loss per share for the three months and ~~six~~nine ended ~~August~~November 3130, 2011 and 2010:

	Three Months Ended						Six Months Ended
	Three Months EndedNovember 30,						Nine Months EndedNovember 30,
	August 31,						August 31,
	2011			2010			2011			2010
Numerator:
Net loss attributable to RoomStore, Inc. for basic and diluted earnings per share	$	(38,~~421~~106	)	$	(657,178	)	$	(715,~~876~~982	)	$	(29,~~624~~802	)
Denominator:
Weighted average shares for basic earnings per share		9,762,846			9,767,555			9,762,846			9,767,556
Effect of dilutive securities for employee stock options		—			—			—			—
		9,762,846			9,767,555			9,762,846			9,767,556
Basic and diluted loss per share attributable to RoomStore, Inc. stockholders	$	(0.3583	)	$	(0.0173	)	$	(01.8164	)	$	(01.2700	)

For the three and ~~six~~nine months ended ~~August~~November 3130, 2011, 1,~~676~~562,~~085~~044 common ~~shares~~share equivalents related to outstanding stock options were excluded from the diluted earnings per share calculation because their impact was anti-dilutive. For the three and ~~six~~nine months ended ~~August~~November 3130, 2010, 1,~~420~~790,126 common ~~shares~~share equivalents related to outstanding stock operations were excluded.

Note 56, Segment Information

The Company’s operations are classified into two ~~operating~~reportable segments: RoomStore (“RS”) and Mattress Discounters Group (“MDG”). These ~~operating~~reportable segments represent strategic business areas which operate as stand-alone companies and offer two types of home furnishings to its customers.

The RS segment is primarily involved in the sale of furniture and accessories to the consumer and also sells mattress and bedding products. RS profitability is generated through profit margin on the products and related fees for product warranties and delivery, less the cost of providing products and services and the operating costs of the RS operations. The profit margin is the sales price less the cost of the product plus the ~~transportation costs~~delivery costs to ~~get~~transport the product to the Company’s warehouses.

The MDG segment is primarily involved in the sale of mattresses and related bedding products only. MDG profitability is generated from the profit margin of the bedding products and delivery fees less the cost of providing products and services and the operating costs of the MDG segment.

Inter-segment eliminations result primarily from charges from RS to MDG for providing accounting, human resources, information technology services and distribution and delivery services. The Company evaluates the performance of the segments based on net sales and income (loss) before taxes.

811

ROOMSTORE, INC.

Notes to Condensed Consolidated Financial Statements

Three and ~~Six~~Nine Months Ended ~~August~~November 3130, 2011 and 2010

(Unaudited)

(In thousands, except share and per share amounts)

The following table sets forth selected financial information for the two segments for the three and ~~six~~ nine months ended ~~August~~November 3130, 2011 and 2010.

$000,000

Three Months Ended November 30, 2011

Three Months Ended August 31, 2011

RoomStore

MattressDiscounters

Consolidated

Net sales

5339,~~850~~449

1615,~~810~~937

7055,~~660~~386

Interest expense

~~181~~140

—

~~181~~140

Depreciation and amortization

~~955~~923

4847

~~1,003~~970

Income (loss) before income taxes

(38,~~911~~335

)

~~848~~408

(37,~~063~~927

)

Capital expenditures

~~206~~24

~~136~~17

~~342~~41

$000,000

Three Months Ended November 30, 2010

Three Months Ended August 31, 2010

RoomStore

MattressDiscounters

Consolidated

Net sales

7364,~~977~~051

1815,~~005~~902

9179,~~982~~953

Interest expense

~~200~~278

—

~~200~~278

Depreciation and amortization

1,~~095~~057

4746

1,~~142~~103

Income (loss) before income taxes

(~~311~~6,997

)

~~534~~190

~~223~~(6,807

)

Capital expenditures

~~224~~278

7347

~~297~~325

$000,000

Nine Months Ended November 30, 2011

Six Months Ended August 31, 2011

RoomStore

MattressDiscounters

Consolidated

Net sales

~~107~~147,~~970~~419

3046,~~063~~000

~~138~~193,~~033~~419

Interest expense

~~379~~519

—

~~379~~519

Depreciation and amortization

12,~~946~~869

90137

23,~~036~~006

Income (loss) before income taxes

(816,~~041~~376

)

~~494~~902

(715,~~547~~474

)

Capital expenditures

~~311~~335

~~201~~218

~~512~~553

$000,000

Nine Months Ended November 30, 2010

Six Months Ended August 31, 2010

RoomStore

MattressDiscounters

Consolidated

Net sales

~~138~~202,~~535~~586

3247,~~056~~958

~~170~~250,~~591~~544

Interest expense

~~343~~621

—

~~343~~621

Depreciation and amortization

23,~~213~~270

95141

23,~~308~~411

Income (loss) before income taxes

(29,~~686~~683

)

~~436~~626

(29,~~250~~057

)

Capital expenditures

~~390~~667

~~154~~201

~~544~~868

912

ROOMSTORE, INC.

Notes to Condensed Consolidated Financial Statements

Three and ~~Six~~Nine Months Ended ~~August~~November 3130, 2011 and 2010

(Unaudited)

(In thousands, except share and per share amounts)

The following table represents segment identifiable assets:

	August 31,2011			February 28,2011
	November 30,2011			February 28,2011
RoomStore	$	6251,~~067~~164		$	76,878
Mattress Discounters		98,~~147~~559			9,033
Consolidating adjustments		(~~816~~157	)		(833	)
Consolidated	$	7059,~~398~~566		$	85,078

Note 67, ~~Subsequent~~Commitments ~~Events~~and Contingencies

~~The~~On December 12, 2011, the Company ~~has~~filed ~~evaluated~~a ~~all~~voluntary ~~events~~petition ~~that~~for ~~occur~~relief asunder Chapter 11 of ~~and~~the ~~through~~Bankruptcy Code in the ~~date~~Bankruptcy Court. ~~this~~Under ~~Quarterly~~Section 362 ~~Report~~of onthe ~~Form~~Bankruptcy ~~10-Q~~Code, ~~was~~the ~~filed~~filing ~~with~~of a bankruptcy petition automatically stays most actions against a debtor, including most actions to collect indebtedness incurred prior to the Petition Date or to exercise control ~~Securities~~over ~~and~~property ~~Exchange~~of ~~Commission~~the ~~and~~debtor. ~~made~~Unless ~~available~~the Bankruptcy Court orders otherwise, substantially all pre-petition liabilities are subject to ~~the~~settlement ~~public~~under a plan of reorganization.

OnSection 365 ~~September~~of 23the Bankruptcy Code provides a process by which the Company may assume, ~~2011~~assume and assign or reject certain pre-petition executory contracts (contracts that are not fully performed by either party) subject to the approval of the Bankruptcy Court and certain other conditions. Essentially, a rejection of a contract by the Company ~~amended~~is ~~its~~a ~~revolving~~court-authorized ~~credit~~breach of contract and, subject to certain exceptions, relieves the Company of ~~facility~~further obligations under that contract, but creates a deemed pre-petition claim for damages by the party whose contract is rejected. ~~See~~Such ~~further~~parties ~~discussion~~may atfile ~~Note~~claims 3in the Bankruptcy Court for damages. Generally, the assumption, or assumption and assignment, of an executory contract requires a debtor to cure all prior defaults under that contract and to provide the other party with adequate assurance of the debtor’s future performance under the contract. A plan of reorganization determines the rights and satisfaction of claims of various creditors and security holders, and is subject to the ultimate outcome of negotiations and Bankruptcy Court decisions ongoing through the date the plan of reorganization is confirmed. At this time, it is not possible to accurately predict the effect the Chapter 11 Case will have on our business or executory contracts.

OnAs noted above, the Company owns a 65% membership interest in MDG. An individual owns the remaining 35% membership interest. In connection with entering into the DIP Facility, and as expressly authorized under the Operating Agreement for MDG, on December 811, 2011, the Company’s ~~Board~~voted its 65% membership interest in favor of ~~Directors~~pledging ~~resolved~~all toof ~~file~~the assets of MDG as collateral for ~~reorganization~~ ~~under~~the ~~Chapter~~DIP 11Facility. After the Company filed for bankruptcy on December 12, 2011, the minority owner of MDG asserted that pursuant to Virginia law the ~~United~~Company ~~States~~became ~~Bankruptcy~~disassociated ~~Code~~from MDG and thereby lost its management interests (but not its economic interests) in MDG. The ~~Chapter~~minority 11owner ~~filing~~then issought ~~dependent~~to onreverse ~~several~~some ~~factors~~of ~~including~~the ~~securing~~votes ~~DIP~~and ~~financing~~actions from the December 1, ~~obtaining~~2011 ~~approval~~meeting ~~from~~of MDG members and managers. On December 14, 2011, the ~~Bankruptcy~~Company ~~Court~~and ~~for~~the minority owner entered into a unanimous, written consent whereby the parties agreed to preserve all arguments and ~~successfully~~remedies ~~implementing~~regarding pledging MDG’s assets and disassociation, and take no further action on behalf of MDG without the unanimous consent of the members and managers of MDG, as appropriate. This “standstill” agreement is in effect until the earlier of December 31, 2012, the effective date of a plan of reorganization., ~~There~~or ~~are~~the notermination ~~assurances~~of ~~that~~the DIP Facility pursuant to certain rights of the ~~Company~~DIP ~~will~~lender beas ~~successful~~set forth in ~~these~~the ~~efforts~~DIP Facility loan documents. On December 15, 2011, the Company, the minority owner, and all three Managers of MDG executed various binding documents, including unanimous resolutions and a General Security Agreement, which affirmed the pledge of MDG’s assets as collateral for the DIP Facility.

1013

ROOMSTORE, INC.

Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended November 30, 2011 and 2010

(Unaudited)

(In thousands, except share and per share amounts)

Note 8, Subsequent Events

On December 12, 2011, the Company filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. There are no assurances that the Company will be successful in obtaining Bankruptcy Court approval for implementing a plan of reorganization.

On December 15, 2011, the Company executed the Ratification Agreement to obtain and secure the DIP Facility. On January 20, 2012, Wells Fargo assigned all of its interests and obligations under the Revolver and DIP Facility to Salus. On February 8, 2012, the Company and Salus agreed to revise certain terms of the New DIP Facility. The Company has missed certain performance targets of the New DIP Facility and has entered into subsequent amendments with Salus to obtain waivers of these events of default. The Company and Salus entered into the Fourth Amendment on April 11, 2012 and the Fifth Amendment on April 19, 2012. See Note 4 to the Company’s Condensed Consolidated Financial Statements.

On January 5, 2012, the Bankruptcy Court approved an order allowing the Company to enter into an Agency Agreement (the “Agency Agreement”) between the Company and a joint venture comprised of Hilco Merchant Resources, LLC, SB Capital Group, LLC, Planned Furniture Promotions, Inc., and Tiger Capital Group, Inc. (collectively, the “Agent”), pursuant to which the Agent was given the right to liquidate all of the merchandise in eighteen of the Company’s furniture retail stores (the “Closed Stores”) in exchange for payments from the Agent to the Company of an aggregate of $4,400 subject to an inventory count during which an evaluation of the salability of the inventory would be made. This amount includes a guaranteed amount of $100 pursuant to the terms of the Agency Agreement, as well as an augmented recovery amount of $250. The Company received payment of approximately $4,000 on January 6, 2012. The book value of the merchandise in the Closed Stores conveyed pursuant to the Agency Agreement was approximately $3,800 on January 6, 2012, and accordingly, there were no charges incurred in connection with entering into the Agency Agreement.

The Company has retained Feinblum Real Estate, Inc. (“Feinblum”) to market the surplus leases for the Closed Stores. Pursuant to this agreement, Feinblum will receive customary fees for marketing the Closed Stores. In addition to the Closed Stores, the Bankruptcy Court approved the Company liquidating the merchandise in an additional seven stores through its own efforts, although the Company subsequently decided to close only six of these stores (the “Additional Stores”). The book value of the merchandise in the Additional Stores on January 6, 2012 was approximately $1,200. The Company closed five of the Additional Stores and rejected the leases for those five locations during January 2012. The leases for the Closed Stores and the Additional Stores will either be rejected or sold.

On April 12, 2012, the Bankruptcy Court approved an order allowing the Company to enter into an Agency Agreement with Furniture Asset Acquisition LLC (“FAA”) to transfer to FAA (i) the lease disposition rights of all ten stores in the North Texas market, subject to FAA’s payment of all cure amounts then owed, (ii) all of the inventory of all of such stores and the going out of business rights in the North Texas market, (iii) the rights to the “RoomStore” name in the state of Texas, and (iv) all of the customer lists and other customer data of the Company’s customers in Texas. Pursuant to this agreement, the Company will receive $1,700 for the lease disposition rights, 100% of the cost of its inventory, estimated at approximately $2,200, and $300 for the rights to the “RoomStore” name and for the customer lists. A final payment will be made subject to the reconciliation of the inventory counts and the inventory status evaluation.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q and our audited financial statements for the year ended February 28, 2011 included in our Form 10-K filed with the Securities and ~~Exchange~~ Exchange Commission (“SEC”) on May 31, 2011. This discussion contains certain forward-looking statements, which are based on management’s current expectations, estimates and projections about our business. These statements can be identified by the use of forward-looking terminology such as “believes,” “estimates,” “expects,” “may,” “will,” “should,” or “anticipates,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Forward-looking information is based on information available at the time and management’s good faith belief with respect to future events, and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements.

~~Such~~On December 12, 2011, RoomStore, Inc. (the “Company” or “we”) filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”) in the United States Bankruptcy Court of the Eastern District of Virginia (the “Bankruptcy Court”), Case No.11-37790-DOT (the “Chapter 11 Case”). Without limitation, our risks and uncertainties include the difficult current retail environment and changing economic conditions that may further adversely affect consumer demand and spending and adversely affect our financial condition;, competition in the home furnishings industry that limits our ability to adjust our product prices;, ~~our~~changes ~~loan~~in ~~agreement~~foreign ~~covenants~~countries from ~~triggered~~which ~~when~~we ~~borrowings~~obtain ~~exceed~~70% aof ~~specified~~our ~~level~~merchandise that may ~~make~~affect itour ~~more~~operations, ~~difficult~~as towell ~~operate~~as risks and uncertainties pertaining to our ~~business;~~Chapter ~~tightening~~11 orCase, ~~other~~including ~~modification~~(i) potential adverse impact of ~~terms~~the bybankruptcy case on our ~~vendors~~business, financial condition or ~~suppliers~~results ~~may~~of ~~negatively~~operations, ~~impact~~including our ~~liquidity;~~ability ~~actions~~to ~~that~~maintain ~~may~~contracts beand ~~required~~other customary and vendor relationships that are critical to ~~satisfy~~our business and the actions and decisions of our ~~obligations~~creditors toand other third parties with interests in our bankruptcy ~~asset-based~~case; ~~lender~~(ii) our ~~relating~~ability to maintain adequate liquidity to fund our ~~outstanding~~operations ~~indebtedness;~~during ~~changes~~the inbankruptcy ~~freight~~case ~~rates~~and to fund a plan of reorganization and ~~consumer~~thereafter, ~~discount~~including ~~fees~~maintaining ~~that~~normal ~~may~~terms ~~increase~~with our vendors and service providers ~~costs;~~during the bankruptcy case and ~~changes~~complying with the covenants and other terms of our financing agreements; (iii) our ability to obtain court approval with respect to motions in ~~foreign~~the ~~countries~~bankruptcy case prosecuted from ~~which~~time weto ~~obtain~~time ~~70%~~and to develop, prosecute, confirm and consummate a plan of ~~our~~reorganization ~~merchandise~~with ~~that~~respect ~~may~~to ~~affect~~the ~~our~~bankruptcy ~~operations~~case and to consummate all of the transactions contemplated by such plan of reorganization; (iv) risks associated with third parties seeking and obtaining court approval to terminate or shorten the exclusivity period for the Company to propose and confirm a plan of reorganization, asfor ~~well~~the asappointment of a Chapter 11 trustee or to convert the ~~other~~Chapter 11 Case to a Chapter 7 case; and (v) those factors ~~discussed~~identified ~~under~~in our filings with the ~~“Risk~~Securities ~~Factors”~~and ~~section~~Exchange Commission as may be accessed at www.sec.gov.

~~Any~~The ~~forward~~risks and uncertainties and the terms of any reorganization plan ultimately confirmed can affect the value and classification of our various pre-~~looking~~petition ~~statement~~liabilities ~~that~~and wecommon ~~make~~stock. ~~speaks~~No ~~only~~assurance can be given as to what values, if any, will be ascribed in the bankruptcy proceedings to each of these constituencies. A plan of reorganization could result in holders of our liabilities and/or securities receiving no value for their interests. Because of such possibilities, the ~~date~~value of ~~this~~these ~~report~~liabilities and/or securities is highly speculative and will pose substantial risks. WeTrading ~~undertake~~prices for the Company’s common stock may bear little or no ~~obligation~~relationship to ~~publicly~~the ~~update~~actual orrecovery, ~~revise~~if any, by holders thereof in the Chapter 11 Case. Accordingly, we urge extreme caution with respect to existing future investments in its common stock. Caution should be taken not to place undue reliance on our forward-looking statements, orwhich ~~cautionary~~represent ~~factors~~our view only as of the date of this Form 10-Q, and which we assume no obligation to update or revise as a result of new information, future events or otherwise, except as required by law.

OnAn additional ~~December 8,~~description ~~2011,~~of ~~the~~our ~~Company’s~~risk ~~Board~~factors ofis ~~Directors~~described ~~resolved~~in toPart ~~file~~1 ~~for~~– ~~reorganization~~Item 1A. ~~under~~“Risk ~~Chapter~~Factors” 11 of the ~~United~~Form ~~States Bankruptcy Code~~10-K. ~~The~~In ~~Chapter~~addition 11to ~~filing~~those isrisk ~~dependent~~factors onfiled ~~several~~within ~~factors~~Form ~~including~~10-K, ~~securing~~there ~~DIP~~are ~~financing,~~additional ~~obtaining approval~~risk ~~from~~factors ~~the~~filed ~~Bankruptcy~~within ~~Court~~this ~~for~~Form ~~and~~10-Q ~~successfully~~as described ~~implementing~~in aPart ~~plan~~II of– ~~reorganization~~Item 1A. ~~The~~“Risk ~~reorganization~~Factors”. ofWe ~~the~~undertake ~~Company~~no isobligation ~~expected~~ to ~~result~~update inor ~~the~~revise ~~closing~~publicly ofany aforward-looking ~~significant~~statements, ~~number~~whether ofas ~~stores~~a ~~and~~result ~~reductions~~of innew ~~staffing~~information, ~~and~~future ~~overhead~~events ~~expenses. There~~or ~~are no assurances that the Company will be successful in these efforts~~otherwise.

~~The~~Our ~~Company’s~~ Condensed Consolidated Financial Statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities and commitments in the ordinary course of business. The working capital position, ~~and~~ the losses from ~~operations~~ have raised substantial doubt about the Company’s ability to continue as a going concern. The appropriateness of reporting on the going concern basis is dependent upon, among other things, confirmation of a plan of reorganization by the Bankruptcy Court under Chapter 11 (“Chapter 11”) Title 11 of the United States Bankruptcy Code, future profitable operations, and ~~the~~commencement ~~ability to generate sufficient cash from operations and financing sources to meet obligations. While under the protection~~ of ~~Chapter 11,~~ the Debtors may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the accompanying Consolidated Financial Statements. Further, a plan of reorganization could materially change the amounts reported in the accompanying Consolidated Financial Statements. The Consolidated Financial Statements do not include any adjustments relating to the recoverability of the value of recorded asset amounts and reclassifications of liabilities that might be necessary as a consequence of a plan of reorganization.

At15 this time it is not possible to predict the outcome, or the financial impact of the Company of a Chapter 11 filing. Unsecured claims may be settled at less than their carrying amount and the equity of the Company’s stockholders may have no value.

Chapter 11 Case have raised substantial doubt about the Company’s ability to continue as a going concern. The appropriateness of reporting on the going concern basis is dependent upon, among other things, confirmation of a plan of reorganization by the Bankruptcy Court under Chapter 11, future profitable operations, and the ability to generate sufficient cash from operations and financing sources to meet obligations. While under the protection of Chapter 11, we may, subject to approval of the Bankruptcy Court, sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the accompanying Condensed Consolidated Financial Statements. As part of the Chapter 11 Case, we anticipate the development and implementation of a plan of reorganization to restructure our capital structure and business operations. Please refer to Note 2 and Note 8 to our Condensed Consolidated Financial Statements for more information regarding the Chapter 11 Case. The Condensed Consolidated Financial Statements do not include any adjustments relating to the recoverability of the value of recorded asset amounts and reclassifications of liabilities that might be necessary as a consequence of a plan of reorganization. At this time it is not possible to predict the outcome or the financial impact of a Chapter 11 filing. Unsecured and even secured claims may be settled at less than their carrying amount and the equity of our stockholders may have no value. The reorganization has resulted in the closing of a significant number of stores and reductions in staffing and overhead expenses and there are no assurances that we will be successful in obtaining Bankruptcy Court approval for implementing a plan of reorganization. As of the date of this filing, the Company has closed 20 stores and a distribution center as a result of the Chapter 11 Case and is in the process of closing an additional 13 stores and a distribution center. See “Liquidity and Financial Position – Financial Position” below.

Overview

WePrior ~~are~~to the Chapter 11 filing, we were among the top 30 furniture retailers in the United States, based on annual revenues. See 2010 Survey of Top 100 Furniture Stores, published on May 23, 2011 by Furniture Today. We currently operate 6026 regular stores using the trade name “RoomStore Furniture,” ~~two~~ one large format ~~stores~~store using the trade name “RoomStore World” and ~~four~~one clearance ~~centers~~center using the trade ~~names~~name of “~~RoomStore~~Bargain ~~Furniture~~Depot.” orThere are 14 stores that have closed and an additional nine stores in the process of closing through ~~“Bargain~~going-out-of-business ~~Depot~~sales. These closings are being handled by certain liquidators who won a bid at an auction held under the supervision of the Bankruptcy Court on January 5, 2012. In addition, ten stores in our North Texas market were sold on April 12, 2012 to Furniture Asset Acquisition LLC (“FAA”). Four of those locations are still open and are currently being operated under the RoomStore name. FAA was given the right to liquidate all of the merchandise in these stores and is the process of conducting going-out-of-business sales. At November 30, 2011, we operated a total of 64 stores. We are also athe owner of 65% ~~owner~~ of Mattress Discounters Group, LLC (“MDG”), which currently operates 80 Mattress Discounters stores in Delaware, Maryland, Virginia and the District of Columbia.

Since the acquisition of certain Mattress Discounters’ assets on December 5, 2008 by MDG, we conduct our business as two ~~operating~~reportable segments: the RoomStore segment ~~(“RS”)~~ and the Mattress Discounters segment (“MDG”). The RSRoomStore segment sells home furnishings and accessories through RoomStore retail stores and internet operations. The MDG segment sells mattresses and bedding products through Mattress Discounters retail stores and internet operations. RSRoomStore and MDG do not sell merchandise in the same retail locations but do share some office and distribution and delivery facilities. Expenses in these shared areas are segregated based on a services agreement.

~~Our~~The Company continues to be significantly impacted by current economic conditions as sales volumes continue to be below historical levels. Sales volumes have also been and continue to be negatively affected by the customers’ difficulty in obtaining third party financing in the current credit market environment. ~~Management~~In ~~has continued~~conjunction towith ~~evaluate~~the ~~operating~~Chapter ~~strategies~~11 filing, ~~costs~~management performed an analysis of current and ~~infrastructure~~expected future profitability of each of the Company’s stores, and ~~has~~based ~~made~~upon ~~adjustments~~this ~~where~~analysis, initially ~~warranted~~determined to ~~lower~~close ~~fixed~~twenty-five ~~costs~~of the stores. In March 2012, after discussions with Salus Capital Partners LLC, the Company’s lender in the Chapter 11 Case, and the creditors committee, the Company determined that it needed additional liquidity and decided to ~~help~~sell usall ~~through~~or ~~this~~substantially ~~period;~~all ~~however~~of the physical assets (including inventory) associated with its North Texas market, ~~there~~which ~~can~~will beresult noin ~~assurance~~the closing of all ten of the Company’s stores and the distribution center in that ~~these~~market. ~~efforts~~With this sale, the Company will ~~improve~~no ~~operating~~longer ~~results~~have operations in the state of Texas. See “Liquidity and Financial Position – Financial Position” below.

Critical Accounting Policies

There have been no material changes with respect to the Company’s critical accounting policies at November 30, 2011 from those disclosed in its Form 10-K filed with the SEC on May 31, 2011.

~~Results~~Since the Petition Date, subsequent to November 30, 2011, the Company has operated its business as a debtor-in-possession under the Bankruptcy Code. The American Institute of Certified Public Accountants Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” (“SOP 90-7”) provides guidance for financial reporting by entities that have filed petitions with the Bankruptcy Court and expect to reorganize under Chapter 11. Under SOP 90-7, the financial statements of an entity in a Chapter 11 reorganization proceeding should distinguish transactions and events that are directly associated with the reorganization from those of operations of the ongoing business as it evolves. Accordingly, SOP 90-7 requires that the balance sheet separately classify pre-petition liabilities as those subject to compromise. Pre-petition liabilities are reported on the basis of the expected amount of such allowed claims, as opposed to the amount for which those allowed claims may be settled. Revenues and expenses, realized gains and losses, and provisions for losses resulting from the reorganization and restructuring of the business are reported in the Consolidated Statement of Operations separately as reorganization items. SOP 90-7 accounting and presentation will be applied in future financial statement filings while the Company is still a debtor-in-possession under the Bankruptcy Code.

~~Three~~Upon ~~Months~~emergence ~~Ended~~from ~~August 31~~bankruptcy, ~~2011~~the ~~Compared~~amounts reported in the Company’s subsequent financial statements may change materially. As of the effective date of a plan of reorganization, the Company anticipates being required to ~~Three~~apply ~~Months~~the ~~Ended~~“fresh ~~August~~start” provisions of SOP 90-7, which requires that all assets and liabilities be restated to their fair values as of such effective date. Certain of these fair values will differ materially from the values recorded on the Company’s Condensed Consolidated Balance Sheet as of November 3130, ~~2010~~2012. Additionally, the results of operations after the application of fresh start accounting will not be comparable to previous periods. Changes in accounting principles required under generally accepted accounting principles within 12 months of emerging from bankruptcy are required to be adopted at the date of emergence. Additionally, the Company may opt to make other changes in accounting practices and policies as of the plan’s effective date. For all of these reasons, the Company’s financial statements for periods subsequent to emergence from Chapter 11 will not be comparable with those of prior periods.

As17 ~~an aid to understanding our results of operations on a comparative basis, the following table has been included for the three months ended August 31, 2011 and 2010:~~

		$000,000		$000,000			$000,000		$000,000
	2011					2010
			% of					% of
	Dollars		Net sales			Dollars		Net sales
	(In thousands except share amounts)
Net sales	$	70,660		100.0	%	$	91,982		100.0	%
Cost of sales		40,520		57.3	%		51,759		56.3	%
Gross profit		30,140		42.7	%		40,223		43.7	%
Selling, general and administrative		33,120		46.9	%		39,910		43.4	%
Total operating expenses		33,120		46.9	%		39,910		43.4	%

	2011						2010
				% of						% of
	Dollars			Net sales			Dollars			Net sales
	(In thousands except share amounts)
Income (loss) from operations		(2,980	)		-4.2	%		313			0.3	%
Interest expense		(181	)		-0.2	%		(200	)		-0.2	%
Other income, net		98			0.1	%		110			0.1	%
Total non-operating expense		(83	)		-0.1	%		(90	)		-0.1	%
Income (loss) before income taxes		(3,063	)		-4.3	%		223			0.2	%
Income tax expense		62			0.1	%		112			0.1	%
Net income (loss)		(3,125	)		-4.4	%		111			0.1	%
Less: Net income attributable to the noncontrolling interest		(296	)		-0.4	%		(176	)		-0.2	%
Net loss attributable to RoomStore, Inc.	$	(3,421	)		-4.8	%	$	(65	)		-0.1	%
Diluted loss per share attributable to RoomStore, Inc. stockholders	$	(0.35	)				$	(0.01	)
Weighted average number of diluted shares outstanding		9,762,846						9,767,555

Results of Operations

Three Months Ended November 30, 2011 Compared to Three Months Ended November 30, 2010

As an aid to understanding our results of operations on a comparative basis, the following table has been included for the three months ended November 30, 2011 and 2010:


	2011						2010
	Dollars			% of Net sales			Dollars			% of Net sales
	(In thousands except share amounts)
Net sales	$	55,386			100.0	%	$	79,953			100.0	%
Cost of sales		32,653			58.9	%		46,264			57.9	%

Gross profit		22,733			41.1	%		33,689			42.1	%


Selling, general and administrative		30,443			55.0	%		40,552			50.7	%

Total operating expenses		30,443			55.0	%		40,552			50.7	%


Loss from operations		(7,710	)		-13.9	%		(6,863	)		-8.6	%

Interest expense		(140	)		-0.3	%		(278	)		-0.3	%
Other (expense) income, net		(77	)		-0.1	%		334			0.4	%

Total non-operating (expense) income		(217	)		-0.4	%		56			0.1	%


Loss before income taxes		(7,927	)		-14.3	%		(6,807	)		-8.5	%
Income tax expense		37			0.1	%		312			0.4	%


Net loss		(7,964	)		-14.4	%		(7,119	)		-8.9	%
Less: Net income attributable to the noncontrolling interest		(142	)		-0.2	%		(59	)		-0.1	%

Net loss attributable to RoomStore, Inc.	$	(8,106	)		-14.6	%	$	(7,178	)		-9.0	%


Diluted loss per share attributable to RoomStore, Inc. stockholders	$	(0.83	)				$	(0.73	)
Weighted average number of diluted shares outstanding		9,762,846						9,767,555

Net Sales

Net sales for the three months ended ~~August~~November 3130, 2011 were $7055.74 million compared to $9280.0 million for the three months ended ~~August~~November 3130, 2010, a decrease of $2124.36 million, or 2330.27%. ~~Comparable~~ Comparable RoomStore segment store merchandise sales for the three months ended ~~August~~November 3130, 2011 decreased approximately $1622.12 million, or 2438.74%, compared to the three months ended ~~August~~November 3130, 2010, and add-on sales (delivery fees and ~~merchandise~~ merchandise protection products) decreased approximately $2.01 million, or 3140.36%, for the same periods. The decrease in add-on sales is partially due to the change in the mix of product protection warranty products offered by the Company. In the second half of FY fiscal year 2011, the Company introduced new warranty products with the related revenue being deferred and recognized over five years. The revenue from some of the Company’s previous warranty products was recognized ~~immediately~~on a more accelerated basis in the ~~statement~~statements of operations based on the warranty terms. Revenue reflected in the ~~statement~~statements of operations related to the warranty products was $1.52 million and $21.69 million for the three months ended ~~August~~November 3130, 2011 and 2010, respectively.

~~Comparable~~18 MDG segment store sales for the three months ended August 31, 2011 decreased approximately $1.4 million or 8.2% compared to the three months ended August 31, 2010. MDG delivery fees decreased 11.5% during the same period. We believe the MDG sales decrease was a result of consumer tightening of discretionary spending as well as increased competition.

The Company’s sales are being negatively affected by the continuing weakness in the national economy and a significantly weaker furniture retail industry. We continue to work on new strategies to help draw new customers into the stores and new ways to attract customers via the internet. We expect that the furniture industry will continue to be negatively impacted by the economy and the availability of credit to the consumer. RoomStore had 66 stores at August 31, 2011 and 66 stores at August 31, 2010. MDG had 83 stores at August 31, 2011 and 79 stores at August 31, 2010.

Gross Profit

Gross profit for the three months ended August 31, 2011 was $30.1 million compared to $40.2 million for the three months ended August 31, 2010 and the Company gross profit margin was 42.7% and 43.7%, respectively. The gross profit margin calculation takes into account all merchandise, delivery and warranty product sales and the related merchandise and distribution and delivery costs. The RoomStore segment gross margin was 40.5% for

Comparable MDG segment store sales for the three months ended ~~August~~November 3130, 2011 ~~compared~~decreased toapproximately $230,000, 42or 1.26%, ~~for~~compared to the three months ended ~~August~~November 3130, 2010. ~~The~~MDG ~~decrease~~delivery infees ~~the~~decreased ~~margin~~3.3% ~~was~~during athe ~~result~~same ofperiod. ~~increased~~We ~~merchandise~~believe ~~costs mainly due to an increase in ocean freight and fuel costs as well as sales price discounting to draw customers into~~ the ~~stores and encourage them to buy.~~ MDG ~~gross~~sales ~~profit~~decrease ~~margins~~was ~~were~~a ~~49.7%~~result ~~for~~of ~~the~~consumer ~~three~~tightening ~~months~~of ~~ended~~discretionary ~~August 31,~~spending ~~2011~~as ~~compared~~well ~~to 49.9% for the~~as ~~three~~increased ~~months ended August 31, 2010~~competition.

The ~~RoomStore~~Company’s ~~segment~~sales ~~furniture~~are ~~margin~~being ~~increased~~negatively ~~slightly~~affected toby ~~47.9%~~the ~~for~~continuing weakness in the ~~three~~national ~~months~~economy ~~ended~~and a ~~August 31,~~significantly ~~2011~~weaker ~~from~~furniture 47retail industry.0% ~~for~~RoomStore sales have also been negatively affected by the ~~same~~lack ~~period~~of inavailability of inventory to fill customer orders due to the ~~previous~~decrease ~~year.~~in ~~MDG~~funds ~~bedding~~available ~~margins~~to ~~were~~purchase 52inventory.8% ~~for~~We ~~the~~continue ~~three~~to ~~months~~work ~~ended~~on new ~~August 31,~~strategies ~~2011~~to ~~and~~help ~~were~~draw ~~52.6%~~new ~~for~~customers into the ~~three~~stores ~~months~~and ~~ended~~new ~~August 31,~~ways ~~2010~~to attract customers via the internet. ~~The~~We ~~RoomStore~~expect ~~segment~~that the furniture ~~margin~~ industry will continue to be negatively impacted by the economy and the ~~MDG~~availability ~~bedding~~of ~~margin~~credit ~~calculations~~to ~~take~~the consumer. ~~into~~RoomStore ~~account~~had ~~only~~64 ~~the~~stores ~~merchandise~~at ~~sales~~November 30, 2011 and ~~the~~65 ~~true~~stores ~~cost~~at ofNovember 30, ~~sales~~2010. ~~for~~MDG ~~that~~had ~~merchandise~~80 stores at November 30, 2011 and 82 stores at November 30, 2010.

Gross Profit

Gross profit for the three months ended November 30, 2011 was $22.7 million compared to $33.7 million for the three months ended November 30, 2010, and the Company gross profit margin was 41.1% and 42.1%, respectively. The gross profit margin calculation takes into account all merchandise, delivery and warranty product sales and the related merchandise and distribution and delivery costs. The RoomStore segment gross margin was 37.4% for the three months ended November 30, 2011 compared to 40.3% for the three months ended November 30, 2010. The decrease in the margin was a result of increased merchandise costs mainly due to an increase in ocean freight and fuel costs as well as sales price discounting to draw customers into the stores and encourage them to buy. MDG gross profit margins were 50.1% for the three months ended November 30, 2011, compared to 49.4% for the three months ended November 30, 2010.

The RoomStore segment furniture margin decreased slightly to 45.6% for the three months ended November 30, 2011 from 46.0% for the same period in the previous year. MDG bedding margins were 52.5% for the three months ended November 30, 2011 and were 51.5% for the three months ended November 30, 2010. The RoomStore segment furniture margin and the MDG bedding margin calculations take into account only the merchandise sales and the true cost of sales for that merchandise.

Selling, General and Administrative

Selling, general and administrative costs decreased to $3330.14 million for the three months ended ~~August~~November 3130, 2011 from $3940.9 6 million for the three months ended ~~August~~November 3130, 2010, and as a percentage of sales increased to 4655.90% from 4350.47% as a result of the loss of sales leverage on certain fixed expenses.

Efforts have been made to cut costs at all levels of operations where possible. RoomStore segment costs were down approximately $510.90 million, or 1830.65%, for the three months ended ~~August~~November 3130, 2011 versus the same period last year. This net decrease was a result of several factors including a decrease of $~~790,000~~4.3 million in advertising expenses, a $2.03 million decrease in salaries, a decrease of $1.4 million in consumer financing discount costs, ~~and~~ a decrease of approximately $~~425~~335,000 in ~~self~~real ~~insurance~~estate ~~costs.~~taxes ~~Selling, general~~ and ~~administrative~~a ~~expenses~~decrease ~~also decreased in the second quarter~~ of FY 12approximately ~~from~~$165,000 ~~the prior year period due to closing three store locations~~ in ~~Texas~~self ~~when~~insurance ~~their leases expired in the second and third quarters of FY 11~~costs. There was ~~also~~ an overall decrease in expenses in the three months ended ~~August~~November 3130, 2011 over the same period in the prior year due to a FYconversion 11during ~~conversion~~the prior fiscal year of the Company’s Texas operations onto the computer system used by the remainder of the RoomStore operations. It is anticipated that the conversion of the Texas operations will result in cost savings in FYfiscal 12year 2012 to more than offset the costs incurred for the conversion in FYthe 11prior fiscal year. Cost savings related to the conversion include reduced salary costs for office personnel and decreased software license and maintenance expenses.

Discount fees paid by the Company for third party customer financing were $1.52 million for the three months ended ~~August~~ November 3130, 2011 and $2.85 million for the three months ended ~~August~~November 3130, 2010. Various financial institutions provide the Company with private label non-recourse credit agreements that are offered to the customer and those that qualify under the primary or secondary programs are offered different interest rate or repayment options. The Company pays discount fees to the financial institutions based on the promotional program offered (i.e.g., “no interest for two years”) and the credit-worthiness of the customer. ~~Discount~~ ~~fees~~Due ~~paid~~ to ~~the~~a ~~financing~~federal ~~companies~~regulatory ~~for~~change ~~the different programs have increased from the prior year mainly due to the credit rules changes~~ in February 2010, ~~which~~retailers ~~limits the fees that the credit companies~~ can ~~pass on to the customer and the types of credit plans that can be offered. Retailers can~~ no longer offer plans without monthly payments (i.e., “no interest, no payments”), and to make the plans appealing to customers, the retailers are having to offer longer terms (36 and 48 months) which are at higher rates. The increase in the fees paid related to the new programs is offset by the decrease in sales between the two fiscal quarters. Discount fees paid by the RoomStore segment decreased approximately $1.4 million and the fees paid by the MDG segment increased approximately $70,000.

~~Total~~19 RoomStore segment salaries were down approximately $2.0 million for the three months ended August 31, 2011 compared to the three months ended August 31, 2010. Commissions paid to sales personnel decreased approximately $1.0 million for the three months ended August 31, 2011 compared to the prior year quarter due to decreased sales. The decrease in fixed salaries of approximately $930,000 is mainly related to the ongoing efforts to streamline operations and evaluate the infrastructure and as a result, back office operations and customer service departments have been consolidated which resulted in lower salaries costs. Self insurance costs were approximately $1.1 million for the three months ended August 31, 2011 and $1.5 million for the three months

ended August 31, 2010. There was a decrease in both health insurance claims costs and workers compensation claims for the year-over-year period.

~~MDG~~ interest, ~~segment~~no ~~costs~~payments”), ~~were~~and ~~down~~to ~~approximately~~make ~~$930~~the plans appealing to customers,~~000~~ retailers are having to ~~$7.5~~offer ~~million~~longer ~~for~~terms ~~the~~(36 ~~three~~and 48 months) ~~ended August 31,~~which ~~2011~~are ~~compared~~at tohigher rates. The increase in the ~~three~~fees ~~months~~paid related ~~ended~~to ~~August 31,~~the ~~2010.~~new ~~This~~programs ~~net~~is ~~decrease~~offset ~~was~~by athe ~~result~~fee ofdecrease ~~several~~related ~~factors~~to ~~including~~the ~~decreases~~decrease in ~~advertising~~sales ~~($845,000)~~between ~~and~~the ~~salaries~~two ~~($95,000)~~fiscal ~~offset~~quarters. Discount fees paid by ~~increases~~the inRoomStore ~~customer~~segment ~~financing~~decreased (approximately $~~70,000) and~~1.4 ~~rent~~million and ~~real~~the ~~estate~~fees ~~taxes~~paid (by the MDG segment increased approximately $3595,000).

Total RoomStore segment salaries were down approximately $2.3 million for the three months ended November 30, 2011 compared to the three months ended November 30, 2010. Commissions paid to sales personnel decreased approximately $1.7 million for the three months ended November 30, 2011 compared to the prior year quarter due to decreased sales. The decrease in fixed salaries of approximately $595,000 is mainly related to the ongoing efforts to streamline operations and evaluate infrastructure and as a result, back office operations and customer service departments have been consolidated, which resulted in lower salaries costs. Self insurance costs were approximately $1.2 million for the three months ended November 30, 2011 and $1.4 million for the three months ended November, 2010. There was a decrease in the cost of health insurance claims offset by an increase in the cost of workers’ compensation claims for the year-over-year period.

MDG segment costs were down approximately $85,000 to $7.6 million for the three months ended November 30, 2011 compared to the three months ended November 30, 2010. This net decrease was a result of several factors including decreases in advertising expenses ($160,000) and salaries ($75,000) offset by increases in customer financing ($95,000), self-insurance costs ($110,000) and rent and real estate taxes ($80,000).

Non-Operating Income and Expense

Interest expense decreased 949.56% to $~~181~~140,000 for the three months ended ~~August~~November 3130, 2011 from $~~200~~278,000 for the prior year period. Total borrowings were lower for the three months ended ~~August~~November 3130, 2011 compared to the three months ended ~~August~~November 3130, 2010 due to lower borrowing base availability, but interest rates were higher in the current year period. MDG operations had no effect on the interest expense for the three months ended ~~August~~ November 3130, 2011 or 2010. There was other expense of $77,000 for the three months ended November 30, 2011 compared to other income of $334,000 for the three months ended November 30, 2010. The fiscal 2012 quarter included a write-off of our equity investment in a sourcing company of approximately $160,000.

Income Tax Expense

There was income tax expense of $6237,000 and $~~112~~312,000 for the three months ended ~~August~~November 3130, 2011 and 2010, respectively. The tax expense represents franchise tax expense, mainly for the state of Texas. A valuation allowance was recorded to completely reserve the federal income tax benefit for both fiscal years, which will be carried forward into future years.

Net Loss and Loss per Share

Diluted loss per share attributable to RoomStore, Inc. stockholders was $(0.3583) for the three months ended ~~August~~November 3130, 2011 and $(0.0173) for the same period of fiscal 2011. For the three months ended ~~August~~November 3130, 2011, there was a pre- tax loss of $38.93 million for the RoomStore segment and pre-tax income of $~~848~~408,000 for the MDG segment. For the three months ended ~~August~~November 3130, 2010, there was a pre- tax loss of $~~311,000~~7.0 million for the RoomStore segment and pre-tax income of $~~534~~190,000 for the MDG segment. Weighted average shares outstanding used in the calculation of earnings per common share on a diluted basis were approximately 9.8 million for the three months ended ~~August~~November 3130, 2011 and 2010.

~~Six~~20 ~~Months Ended August 31, 2011 Compared to Six Months Ended August 31, 2010~~

As an aid to understanding our results of operations on a comparative basis, the following table has been included for the six months ended August 31, 2011 and 2010:

	2011						2010
				% of						% of
	Dollars			Net sales			Dollars			Net sales
	(In thousands except share amounts)
Net sales	$	138,033			100.0	%	$	170,591			100.0	%
Cost of sales		78,929			57.2	%		96,507			56.6	%
Gross profit		59,104			42.8	%		74,084			43.4	%
Selling, general and administrative		66,469			48.1	%		76,170			44.6	%
Total operating expenses		66,469			48.1	%		76,170			44.6	%
Loss from operations		(7,365	)		-5.3	%		(2,086	)		-1.2	%

	2011						2010
				% of						% of
	Dollars			Net sales			Dollars			Net sales
	(In thousands except share amounts)
Interest expense		(379	)		-0.3	%		(343	)		-0.2	%
Other income, net		197			0.1	%		179			0.1	%
Total non-operating income		(182	)		-0.2	%		(164	)		-0.1	%
Loss before income taxes		(7,547	)		-5.5	%		(2,250	)		-1.3	%
Income tax expense		157			0.1	%		232			0.1	%
Net loss		(7,704	)		-5.6	%		(2,482	)		-1.4	%
Less: Net income attributable to the noncontrolling interest		(172	)		-0.1	%		(142	)		-0.1	%
Net loss attributable to RoomStore, Inc.	$	(7,876	)		-5.7	%	$	(2,624	)		-1.5	%
Diluted loss per share attributable to RoomStore, Inc. stockholders	$	(0.81	)				$	(0.27	)
Weighted average number of diluted shares outstanding		9,762,846						9,767,556

Nine Months Ended November 30, 2011 Compared to Nine Months Ended November 30, 2010

As an aid to understanding our results of operations on a comparative basis, the following table has been included for the nine months ended November 30, 2011 and 2010:


	2011						2010
	Dollars			% of Net sales			Dollars			% of Net sales
	(In thousands except share amounts)
Net sales	$	193,419			100.0	%	$	250,544			100.0	%
Cost of sales		111,582			57.7	%		142,771			57.0	%

Gross profit		81,837			42.3	%		107,773			43.0	%


Selling, general and administrative		96,912			50.1	%		116,722			46.6	%

Total operating expenses		96,912			50.1	%		116,722			46.6	%


Loss from operations		(15,075	)		-7.8	%		(8,949	)		-3.6	%

Interest expense		(519	)		-0.3	%		(621	)		-0.2	%
Other income, net		120			0.1	%		513			0.2	%

Total non-operating expense		(399	)		-0.2	%		(108	)		0.0	%


Loss before income taxes		(15,474	)		-8.0	%		(9,057	)		-3.6	%
Income tax expense		194			0.1	%		544			0.2	%


Net loss		(15,668	)		-8.1	%		(9,601	)		-3.8	%
Less: Net income attributable to the noncontrolling interest		(314	)		-0.2	%		(201	)		-0.1	%

Net loss attributable to RoomStore, Inc.	$	(15,982	)		-8.3	%	$	(9,802	)		-3.9	%


Diluted loss per share attributable to RoomStore, Inc. stockholders	$	(1.64	)				$	(1.00	)
Weighted average number of diluted shares outstanding		9,762,846						9,767,556

Net Sales

Net sales for the ~~six~~nine months ended ~~August~~November 3130, 2011 were $~~138~~193.04 million compared to $~~170~~250.65 million for the ~~six~~nine months ended ~~August~~November 3130, 2010, a decrease of $3257.61 million, or 1922.18%. ~~Comparable~~ Comparable RoomStore segment store merchandise sales for the ~~six~~nine months ended ~~August~~November 3130, 2011 decreased approximately $2345.36 million, or 1925.24%, compared to the ~~six~~nine months ended ~~August~~November 3130, 2010, and add-on sales (delivery fees and merchandise protection products) decreased approximately $35.46 million, or 2832.41%, for the same periods. The decrease in add-on sales is partially due to the change in the mix of product protection warranty products offered by the Company. In the second half of FYfiscal year 2011, the Company introduced new warranty products with the related revenue being deferred and recognized over five years. The revenue from some of the Company’s previous warranty products was recognized ~~immediately~~on a more accelerated basis in the ~~statement~~statements of operations based on the warranty terms. Revenue reflected in the ~~statement~~statements of operations related to the warranty products was $34.02 million and $56.09 million for the ~~six~~nine months ended ~~August~~November 3130, 2011 and 2010, respectively.

Comparable MDG segment store sales for the ~~six~~nine months ended ~~August~~November 3130, 2011 decreased approximately $12.92 million , or 64.58%, compared to the ~~six~~nine months ended ~~August~~November 3130, 2010. MDG delivery fees decreased 1511.01% during the same period. We believe the MDG sales decrease was a result of consumer tightening of discretionary spending as well as increased competition.

~~The~~21 Company’s sales are being negatively affected by the continuing weakness in the national economy and a significantly weaker furniture retail industry. We continue to work on new strategies to help draw new customers into the stores and new ways to attract customers via the internet. We expect that the furniture industry will continue to be negatively impacted by the economy and the availability of credit to the consumer. RoomStore had 66 stores at August 31, 2011 and 66 stores at August 31, 2010. MDG had 83 stores at August 31, 2011 and 79 stores at August 31, 2010.

Gross Profit

Gross profit for the six months ended August 31, 2011 was $59.1 million compared to $74.1 million for the six months ended August 31, 2010 and the Company gross profit margin was 42.8% and 43.4%, respectively. The gross profit margin calculation takes into account all merchandise, delivery and warranty product sales and the related merchandise and distribution and delivery costs. The RoomStore segment gross margin was 40.7% for the six months ended August 31, 2011 compared to 42.0% for the six months ended August 31, 2010. The decrease in the margin was a result of increased merchandise costs mainly due to an increase in ocean freight and fuel costs

asThe ~~well~~Company’s as sales ~~price~~are ~~discounting~~being tonegatively ~~draw~~affected ~~customers~~by ~~into~~the continuing weakness in the ~~stores~~national economy and ~~encourage~~a ~~them~~significantly toweaker ~~buy~~furniture retail industry. ~~MDG~~RoomStore ~~gross~~sales ~~profit~~have ~~margins~~also ~~were~~been ~~50.5%~~negatively ~~for~~affected by the ~~six~~lack ~~months~~of ~~ended~~availability ~~August 31,~~of ~~2011~~inventory ~~compared~~to fill customer orders due to 49the decrease in funds available to purchase inventory.6% We continue to ~~for~~work on new strategies to help draw new customers into the ~~six~~stores ~~months~~and ~~ended~~new ~~August 31,~~ways ~~2010.~~to ~~The~~attract ~~lower~~customers ~~margin~~via ~~for~~the ~~MDG~~internet. inWe expect that the ~~2010~~furniture ~~period~~industry iswill ~~related~~continue ~~selling~~to ~~floor~~be ~~samples~~negatively impacted by the economy and ~~other~~the ~~discontinued~~availability ~~items~~of ~~purchased~~credit to the consumer. RoomStore had 64 stores at ~~acquisition~~November 30, 2011 and 65 stores at aNovember 30, ~~lower~~2010. ~~sales~~MDG ~~price~~had to80 ~~clear~~stores ~~out~~at ~~the~~November 30, ~~merchandise~~2011 and 82 stores at November 30, 2010.

~~The~~Gross ~~RoomStore~~Profit segment furniture margin increased slightly to 47.9% for the six months ended August 31, 2011 from 47.2% for the same period in the previous year. MDG bedding margins were 53.5% for the six months ended August 31, 2011 and were 52.3% for the six months ended August 31, 2010. The RoomStore segment furniture margin and the MDG bedding margin calculations take into account only the merchandise sales and the true cost of sales for that merchandise.

Gross profit for the nine months ended November 30, 2011 was $81.8 million compared to $107.8 million for the nine months ended November 30, 2010 and the Company gross profit margin was 42.3% and 43.0%, respectively. The gross profit margin calculation takes into account all merchandise, delivery and warranty product sales and the related merchandise and distribution and delivery costs. The RoomStore segment gross margin was 39.8% for the nine months ended November 30, 2011, compared to 41.5% for the nine months ended November 30, 2010. The decrease in the margin was a result of increased merchandise costs mainly due to an increase in ocean freight and fuel costs as well as sales price discounting to draw customers into the stores and encourage them to buy. MDG gross profit margins were 50.4% for the nine months ended November 30, 2011 compared to 49.5% for the nine months ended November 30, 2010. The lower margin for MDG in the 2010 period is related to selling floor samples and other discontinued items purchased at acquisition at a lower sales price to clear out the merchandise.

The RoomStore segment furniture margin increased slightly to 47.3% for the nine months ended November 30, 2011 from 46.8% for the same period in the previous year. MDG bedding margins were 53.2% for the nine months ended November 30, 2011 and were 52.0% for the nine months ended November 30, 2010. The RoomStore segment furniture margin and the MDG bedding margin calculations take into account only the merchandise sales and the true cost of sales for that merchandise.

Selling, General and Administrative

Selling, general and administrative costs decreased to $6696.59 million for the ~~six~~nine months ended ~~August~~November 3130, 2011 from $76116.27 million for the ~~six~~nine months ended ~~August~~November 3130, 2010, and as a percentage of sales increased to 4850.1% from 4446.6% as a result of the loss of sales leverage on certain fixed expenses.

Efforts have been made to cut costs at all levels of operations where possible. RoomStore segment costs were down approximately $919.0 million, or 1420.83%, for the ~~six~~nine months ended ~~August~~November 3130, 2011 versus the same period last year. This net decrease was a result of several factors including a decrease of $2.6.9 million in advertising expenses, a $2.4.7 million decrease in salaries, a decrease of $13.61 million in consumer financing discount costs and a decrease of approximately $~~575~~740,000 in self insurance costs. Selling, general and administrative expenses also decreased in the first half of FY 12 from the prior year period due to closing three store locations in Texas when their leases expired in the second and third quarters of FY 11. There was ~~also~~ an overall decrease in expenses in the ~~six~~nine months ended ~~August~~November 3130, 2011 over the same period in the prior year due to a FYconversion 11during ~~conversion~~the prior fiscal year of the Company’s Texas operations onto the computer system used by the remainder of the RoomStore operations. It is anticipated that the conversion of the Texas operations will result in cost savings in FYfiscal 12year 2012 to more than offset the costs incurred for the conversion in FYfiscal 11year 2011. Cost savings include reduced salary costs for office personnel and decreased software license and ~~maintenance~~ maintenance expenses.

Discount fees paid by the Company for third party customer financing were $34.13 million for the ~~six~~nine months ended ~~August~~ November 3130, 2011 and $47.61 million for the ~~six~~nine months ended ~~August~~November 3130, 2010. Various financial institutions provide the Company with private label non-recourse credit agreements that are offered to the customer and those that qualify under the primary or secondary programs are offered different interest rate or repayment options. The Company pays discount fees to the financial institutions based on the promotional program offered (i.e.g., “no interest for two years”) and the credit-worthiness of the customer. ~~The~~Due ~~increase in the discount fees is mainly due~~ to ~~the~~a ~~credit~~regulatory ~~rules~~change ~~changes~~ in February 2010, ~~which~~retailers ~~limits the fees that the credit companies~~ can ~~pass on to the customer and the types of credit plans that can be offered. Retailers can~~ no longer offer plans without monthly payments (i.e. “no interest, no payments”), and to make the plans appealing to customers, ~~the~~ retailers are having to offer longer terms (36 and 48 months) which are at higher rates. The increase in the fees paid related to the new programs is offset by the decrease in sales between the two fiscal periods. Discount fees paid by the RoomStore segment decreased approximately $1.6 million and the fees paid by the MDG segment increased approximately $190,000.

~~Total~~22 RoomStore segment salaries were down approximately $2.4 million for the six months ended August 31, 2011 compared to the six months ended August 31, 2010. Commissions paid to sales personnel were down approximately $1.1 million due to decreased sales. Fixed salaries decreased approximately $1.3 million mainly as a result of ongoing efforts to streamline operations and evaluate the infrastructure and as a result, back office operations and customer service departments have been consolidated which resulted in lower salaries costs. Self insurance costs were approximately $1.9 million for the six months ended August 31, 2011 and $2.4 million for the six months ended August 31, 2010. There was a decrease in both health insurance claims costs and workers compensation claims for the year-over-year period.

~~MDG~~ months) ~~segment~~which ~~costs~~are ~~were~~at ~~down~~higher ~~approximately $710,000 to $14~~rates.7 ~~million~~The ~~for~~increase in the ~~six~~fees ~~months~~paid ~~ended~~related ~~August 31, 2011 compared~~ to the ~~six~~new ~~months~~programs ~~ended~~is ~~August 31,~~offset ~~2010.~~by ~~This~~the ~~net~~fee decrease ~~was~~related ato ~~result~~the ofin ~~several~~sales ~~factors~~between ~~including~~the atwo ~~decrease~~fiscal inperiods. ~~advertising~~Discount ~~($830,000)~~fees paid ~~offset~~ by ~~increases~~the inRoomStore ~~customer~~segment ~~financing~~decreased (approximately $~~190,000)~~3.1 million and ~~self~~the ~~insurance~~fees ~~costs~~paid (by the MDG segment increased approximately $80290,000).

Total RoomStore segment salaries were down approximately $4.7 million for the nine months ended November 30, 2011 compared to the nine months ended November 30, 2010. Commissions paid to sales personnel were down approximately $2.8 million due to decreased sales. Fixed salaries decreased approximately $1.9 million, mainly as a result of ongoing efforts to streamline operations and evaluate infrastructure and as a result, back office operations and customer service departments have been consolidated, which resulted in lower salaries costs. Self insurance costs were approximately $3.1 million for the nine months ended November 30, 2011 and $3.8 million for the nine months ended November 30, 2010. There was a decrease in both costs of health insurance claims and workers’ compensation claims for the year-over-year period.

MDG segment costs were down approximately $795,000 to $22.3 million for the nine months ended November 30, 2011 compared to the nine months ended November 30, 2010. This net decrease was a result of several factors including a decrease in advertising expenses ($995,000) and salaries ($105,000), offset by increases in customer financing ($290,000) and self insurance costs ($190,000).

Non-Operating Income and Expense

Interest expense ~~increased~~decreased 1016.54% to $~~379~~519,000 for the ~~six~~nine months ended ~~August~~November 3130, 2011 from $~~343~~621,000 for the prior year period, mainly as a result of ~~increased~~decreased ~~interest~~borrowings, ~~rates~~offset ~~related~~by ~~to the new credit~~increased ~~facility~~interest rates. MDG operations had no effect on the interest expense for the ~~six~~nine months ended ~~August~~November 3130, 2011 or 2010. Other income was $120,000 for the nine months ended November 30, 2011 compared to $513,000 for the prior year period. The decrease in the current year included a write-off of the Company’s equity investment in a sourcing company of approximately $160,000.

Income Tax Expense

There was income tax expense of $~~157~~194,000 and $~~232~~544,000 for the ~~six~~nine months ended ~~August~~November 3130, 2011 and 2010, respectively. The tax expense represents franchise tax expense, mainly for the state of Texas. A valuation allowance was recorded to completely reserve the federal income tax benefit for both fiscal years which will be carried forward into future years.

Net Loss and Loss per Share

Diluted loss per share attributable to RoomStore, Inc. stockholders was $(01.8164) for the ~~six~~nine months ended ~~August~~November 3130, 2011 and $(01.2700) for the same period of fiscal 2011. For the ~~six~~nine months ended ~~August~~ November 3130, 2011, there was a pre- tax loss of $816.04 million for the RoomStore segment and pre-tax income of $~~494~~902,000 for the MDG segment. For the ~~six~~nine months ended ~~August~~ November 3130, 2010, there was a pre- tax loss of $29.7 million for the RoomStore segment and pre-tax income of $~~436~~626,000 for the MDG segment. Weighted average shares outstanding used in the calculation of earnings per common share on a diluted basis were approximately 9.8 million for the ~~six~~nine months ended ~~August~~November 3130, 2011 and 2010.

Liquidity and Financial Position

Liquidity

Continued declining sales due to the weak furniture retail economy have negatively affected our cash flow. Current sources of liquidity are revenues from operations, and our credit facility with Wells Fargo. At present, these sources of liquidity are insufficient to fund the Company’s operations. The Company has looked at raising additional capital through private equity investment, strategic combinations and transactions, revisions to contractual obligations and disposition of assets. To date, these efforts have not been successful. As discussed in Note 1, 2 to the ~~condensed~~Condensed ~~consolidated~~Consolidated ~~financial~~Financial ~~statements and above~~Statements, the Company’s ~~Board~~filed ofa ~~Directors~~voluntary ~~resolved~~petition ~~to file~~ for ~~reorganization~~relief under Chapter 11 of the ~~United States~~ Bankruptcy Code. ~~The Chapter 11 filing is dependent~~ on ~~several~~December 12, ~~factors including successfully obtaining DIP financing and successfully implementing a plan of reorganization that has been approved by the Bankruptcy Court~~2011. ~~The~~See ~~Company~~Financing ~~is in the process of evaluating~~ and ~~securing~~Debt ~~DIP~~below ~~financing.~~for ~~The reorganization of the~~information ~~Company~~regarding ~~is expected to result in~~ the ~~closing of a significant number of stores and reductions in staffing and overhead expenses. There are no assurances that the~~ Company’s ~~will be successful~~ Debtor-in-Possession ~~securing DIP~~ financing~~, obtaining Bankruptcy Court approval of and implementing a plan for reorganization although the Company does expect to be able to secure DIP financing~~.

Cash and cash equivalents at ~~August~~November 3130, 2011 was $2.02 million compared to $2.4 million at February 28, 2011. Net cash provided by operating activities was $614.46 million for the ~~six~~nine months ended ~~August~~November 3130, 2011 and net cash used in operating activities was $210.60 million for the prior year period. MDG operating activities used approximately $157,000 net cash for the six months ended August 31, 2011 and provided approximately $1.8 million for the prior year period. The six months ended August 31, 2011 and 2010 were negatively impacted by the net losses in those periods of $7.7 million and $2.5 million, respectively. The loss for the six months ended

1823

~~August~~provided approximately $1.1 million net cash for the nine months ended November 3130, 2011 and provided approximately $450,000 for the prior year period. The nine months ended November 30, 2011 and 2010 were negatively impacted by the net losses in those periods of $15.7 million and $9.6 million, respectively. The loss for the nine months ended November 30, 2011 and 2010 is a result of the continued weak retail economy in the United States and particularly in the furniture industry. Inventory, receivables, prepaid expenses and deferred revenue balances decreased $1020.72 million, $2.1 million, $1.3 million and $24.50 million, respectively, from the levels at February 28, 2011 and accounts payable and accrued expenses increased $23.0 million and $6.2 million, respectively. The amount of cash and cash equivalents on the balance sheet changes based on the level of cash held at the different financial institutions by RoomStore and MDG and the amount of bank overdrafts at the end of each reporting report. At ~~August~~November 3130, 2011 and February 28, 2011, $~~2.1~~347,000 ~~million~~ and $1.2 million, respectively, of RoomStore’s corporate bank accounts were in a net overdraft position and the balances were reclassified to current liabilities on the balance sheet.

Net cash used in investing activities was $~~501~~525,000 for the ~~six~~nine months ended ~~August~~November 3130, 2011 and net cash provided by investing activities was $1.52 million for the prior year period. In April 2010, the Company sold the building that housed its Lanham, Maryland retail store ~~building~~ to Creative Distribution Services, LLC for $2.6 million in a sale-leaseback transaction, of which $2.0 million was paid in cash and is reflected in the ~~August~~November 3130, 2010 cash provided by investing activities. The remaining $600,000 was recorded as a note receivable and a deferred gain. The note receivable was payable over two years but was paid off in full in December 2010. Net cash used in investing activities ~~was~~reflects ~~for~~ the purchase of property, plant and equipment as the Company continues to ~~add new stores and~~ maintain existing stores and distribution facilities. Additions to property, plant and equipment were $~~512~~553,000 and $~~544~~868,000 for the ~~six~~nine months ended ~~August~~November 3130, 2011 and 2010, respectively.

The Company’s credit facility with Bank of America, N.A. was terminated on May 27, 2010 and a new credit facility agreement was entered into with Wells Fargo Retail Bank, N.A. (“Wells Fargo”). On May 27, 2010, Bank of America was paid off with respect to any outstanding borrowings, and the payoff amount then became outstanding borrowings under the Wells Fargo facility. ~~The Company continues to carefully manage its credit facility with Wells Fargo to assist with cash flow.~~ Under the new credit facility with Wells Fargo, both borrowings and repayments of the credit facility loan are higher than what previously was shown in the statement of cash flows under the Bank of America credit facility. Under the new facility, Wells Fargo drafts the Company’s accounts each day for repayments and then the Company requests new borrowings as needed for each day. There was a net repayment under the facility of $713.20 million for the ~~six~~nine months ended ~~August~~November 3130, 2011 and a net borrowing of $39.86 million for the ~~six~~nine months ended ~~August~~November 3130, 2010. ~~All amounts borrowed under the credit facility are due no later than April 30, 2014 but may be repaid earlier. See Financing and Debt.~~

On December 13, 2011, the Bankruptcy Court entered an interim order authorizing the Company to execute all documents necessary to obtain post-petition, Debtor-in-Possession financing up to a maximum amount of $14.0 million subject to (a) carve out for professional fees in an amount increasing over time to $500,000, and (b) certain other borrowing restrictions (the “DIP Facility”) from Wells Fargo. On December 15, 2011, the Company executed a Ratification and Amendment Agreement (the “Ratification Agreement”) to obtain and secure the DIP Facility. Under the terms of the Ratification Agreement, Wells Fargo has the discretion to apply the Company’s post-petition payments and proceeds first to amounts owed pre-petition to Wells Fargo before applying payments and proceeds against post-petition advances. At the time of the filing of the Chapter 11 Case, the Company owed Wells Fargo approximately $5.7 million. The Bankruptcy Court entered a final order on January 5, 2012 (the “Final Order”) authorizing the DIP Facility. On January 20, 2012, Wells Fargo assigned all of its interests and obligations under the loan agreements to Salus Capital Partners, LLC (“Salus”). See “Financing and Debt” below.

As discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations” above, RoomStore sales have been negatively affected by the lack of availability of inventory to fill customer orders due to the decrease in funds available to purchase inventory. This negative impact has been exacerbated during the Company’s Chapter 11 proceeding, as fees of professionals and other costs incurred in the Chapter 11 Case have made it increasingly more difficult for the Company to have sufficient inventory on hand to fulfill customers’ orders. The Company continues to pursue additional sources of capital to cover this shortfall. Without additional capital, the Company will continue to struggle with meeting customer sales needs.

Financial Position

Inventories decreased by $1020.72 million, or 2445.37%, to a total of $3323.49 million at ~~August~~November 3130, 2011 from the balance at February 28, 2011, mainly as a result of ~~improved~~not ~~inventory~~being ~~ordering~~able ~~and~~to ~~order~~maintain ~~fulfillment processes. This is partially a result of~~ the necessary ~~conversion~~inventory oflevels ~~our~~due ~~Texas~~to ~~stores onto~~ the ~~same~~decreased ~~sales~~borrowing ~~and~~base ~~inventory~~availability ~~system~~with as the ~~remainder~~credit offacility ~~the RoomStore stores in the third quarter of fiscal 2011.~~

Receivables decreased by $2.1 million, or 50.3%, to a total of $2.1 million at ~~August~~November 3130, 2011 from the balance at February 28, 2011. This decrease was primarily a result of decreased sales and timings of payments from third party financing and credit card companies at ~~August~~ November 3130, 2011 compared to February 28, 2011. The last day of ~~August~~November 2011 fell on a Wednesday as compared to a Monday for the last day of February 2011 and therefore ~~more~~additional February payments were not received until the beginning of the following month.

As a result of a barter agreement, prepaid expenses at ~~August~~November 3130, 2011 includes $1.21 million of prepaid advertising received in exchange for the cost of mattresses provided to a third party by the Company. Under this agreement, the Company will receive an additional $1.10 million of estimated advertising value at no further cost to the Company.

Accounts payable increased $3.0 million, or 20.3%, at November 30, 2011 from the balance at February 28, 2011. The increase was mainly as a result of delayed payments to vendors tied to the decreased credit facility availability. Accrued liabilities increased $2.6.2 million, or 1435.73%, to $2023.29 million at ~~August~~November 3130, 2011 from the balance at February 28, 2011. This increase is mainly due to increases in accrued compensation and benefits, accrued advertising and customer deposits related to merchandise orders placed but not yet booked at the end of each period.

19The Condensed Consolidated Financial Statements do not include any adjustments relating to recoverability of the value of recorded asset amounts and reclassifications of liabilities that might be necessary as a consequence of the Chapter 11 Case.

On January 5, 2012, the Bankruptcy Court approved an order allowing the Company to enter into an Agency Agreement (the “Agency Agreement”) between the Company and a joint venture comprised of Hilco Merchant Resources, LLC, SB Capital Group, LLC, Planned Furniture Promotions, Inc., and Tiger Capital Group, Inc. (collectively, the “Agent”), pursuant to which the Agent was given the right to liquidate all of the merchandise in eighteen of the Company’s furniture retail stores (the “Closed Stores”) in exchange for payments from the Agent to the Company of an aggregate of $4.4 million subject to an inventory count during which an evaluation of the salability of the inventory would be made. This amount includes a guaranteed amount of $100,000 pursuant to the terms of the Agency Agreement, as well as an augmented recovery amount of $250,000. The Company received payment of approximately $4.0 million on January 6, 2012. The book value of the merchandise in the Closed Stores conveyed pursuant to the Agency Agreement was approximately $3.8 million on January 6, 2012, and accordingly, there were no charges incurred in connection with entering into the Agency Agreement.

The Company has retained Feinblum Real Estate, Inc. (“Feinblum”) to market the surplus leases for the Closed Stores. Pursuant to this agreement, Feinblum will receive customary fees for marketing the Closed Stores. In addition to the Closed Stores, the Bankruptcy Court approved the Company liquidating the merchandise in an additional seven stores through its own efforts, although the Company subsequently decided to close only six of these stores (the “Additional Stores”). The book value of the merchandise in the Additional Stores on January 6, 2012 was approximately $1.2 million. The Company closed five of the Additional Stores and rejected the leases for those five locations during January 2012. The leases for the Closed Stores and the Additional Stores will either be rejected or sold.

In March 2012, after discussions with the lender and creditors committee, the Company determined that it needed additional liquidity and decided to sell all or substantially all of the physical assets (including inventory) associated with its North Texas market (the “North Texas Market”), which will result in the closing of all ten of the Company’s stores and the distribution center in that market. On April 12, 2012, the Bankruptcy Court approved an order allowing the Company to enter into an Agency Agreement with Furniture Asset Acquisition (“FAA”) to transfer to FAA (i) the lease disposition rights of all ten stores in the North Texas Market, subject to FAA’s payment of all cure amounts then owed, (ii) all of the inventory of all of such stores and the going out of

~~The~~ business ~~Consolidated~~rights ~~Financial~~in ~~Statements~~the doNorth ~~not~~Texas ~~include~~Market, ~~any~~(iii) the ~~adjustments~~rights ~~relating~~ to ~~recoverability~~the “RoomStore” name in the state of Texas, and (iv) all of the ~~value~~customer lists and other customer data of the Company’s customers in Texas. Pursuant to this agreement, the Company will receive $1.7 million for the lease disposition rights, 100% of ~~recorded~~the ~~asset~~cost ~~amounts~~of its inventory, estimated at approximately $2.2 million, and ~~reclassifications~~$0.3 ofmillion ~~liabilities~~for ~~that~~the ~~might~~rights to the “RoomStore” name and the customer lists. A final payment will be ~~necessary~~made assubject to the reconciliation of the inventory counts and the inventory status evaluation. As a ~~consequence~~result of ~~plan~~this agreement, the Company will be prevented from opening any new stores in the state of ~~reorganization~~Texas under the “RoomStore” name.

The Company recently adopted a policy minimizing severance payments to terminated employees and does not anticipate that there will be any material severance expenses due as a result of recently terminated employees.

Financing and Debt

OnPursuant ~~May~~to a hearing held on December 2713, 2011, the Bankruptcy ~~2010~~Court entered an interim order on December 14, 2011, authorizing the Company ~~entered~~to ~~into~~execute aall ~~four~~documents necessary to obtain post-~~year~~petition, Debtor-in-Possession financing up to a maximum amount of $3014.0 million, ~~revolving~~subject ~~credit~~to ~~facility~~ (~~“Revolver”~~a) carve ~~with~~out ~~Wells~~for professional ~~Fargo~~fees ~~secured~~in byan ~~all~~amount ~~assets~~increasing ofover ~~the~~time ~~Company.~~to ~~The~~$500,000, ~~agreement~~and ~~has~~(b) certain another ~~accordion~~borrowing ~~feature~~restrictions ~~which~~(the ~~allows~~“DIP usFacility”) tofrom ~~increase~~Wells Fargo, the ~~facility~~Company’s tothen ~~$35 million~~existing ~~if needed~~lender. ~~Amounts~~On ~~available~~December 15, ~~for~~2011, ~~borrowing~~the ~~under~~Company executed ~~this~~a ~~facility~~Ratification ~~are~~Agreement ~~based~~to onobtain and secure the ~~valuation~~DIP ofFacility. ~~several~~Under ~~different~~the ~~asset~~terms ~~categories.~~of ~~The~~the ~~value~~Ratification ofAgreement, Wells Fargo has the ~~Company’s~~discretion ~~inventory~~to isapply the ~~largest~~Company’s ~~asset~~post-petition ~~category~~payments and ~~therefore~~proceeds ~~the~~first ~~bank~~to ~~requires~~amounts ~~that~~owed anpre-petition ~~independent~~to ~~company~~Wells ~~perform~~Fargo anbefore ~~inventory~~applying ~~valuation~~payments ~~three~~and ~~times~~proceeds aagainst ~~year~~post-petition advances. ~~This~~At ~~valuation~~the istime ~~based~~of onthe anfiling ~~estimate~~ of the ~~value~~Chapter ~~that~~11 ~~could~~Case, bethe ~~realized~~Company ~~from~~owed anWells ~~orderly~~Fargo ~~liquidation~~approximately ~~sale~~$5.7 Onmillion ~~May 27,~~under ~~2010,~~ the ~~previous~~Revolver. ~~Bank~~The ofBankruptcy ~~America~~Court ~~credit~~entered ~~facility~~a final ~~was~~order ~~paid~~on ~~off~~January 5, ~~with~~2012 ~~respect~~authorizing tothe ~~any~~DIP ~~outstanding~~Facility. ~~borrowings,~~The ~~and~~Company ~~the~~paid ~~payoff~~financing ~~amount~~fees ~~then~~of ~~became~~$150,000 ~~outstanding~~on ~~borrowings~~December 15, ~~under~~2011 for the ~~Wells~~DIP ~~Fargo facility~~Facility.

~~Interest~~On ~~rates~~January 20, 2012, Wells Fargo assigned all of its interests and obligations under the ~~new~~Revolver ~~facility~~and ~~are~~DIP ~~variable~~Facility ~~based~~to onSalus. Subsequent to this assignment, the ~~higher~~Company and Salus have agreed to revise certain terms of the ~~Federal~~DIP ~~Funds~~Facility ~~rate~~(the ~~plus~~revised DIP Facility hereinafter referred to as the “New DIP Facility”). The Bankruptcy Court approved these revisions by court order entered on February 8, 2012. The New DIP Facility increased the maximum amount of the facility to $15.0 million.5% The Company paid financing fees of $150,000 ~~LIBOR~~on ~~rate~~February 8 ~~plus~~2012 1%for orthe New DIP Facility and, upon the assignment of the DIP Facility to Salus, received a waiver from Wells Fargo ~~prime~~of ~~rate~~an additional $130,000 fee due to Wells Fargo. AnThe ~~additional~~Company 2%entered isinto ~~then~~the ~~added~~New toDIP Facility because the ~~highest rate~~borrowing base formula in the New DIP Facility initially provided substantial incremental liquidity, including (i) up to ~~get~~$3.0 million of borrowing availability in respect of certain pledged equity, and (ii) increased advance rates on eligible inventory and real estate. The Company and Salus entered into a Fourth Amendment to the ~~total~~Revolver ~~interest~~(the ~~rate~~“Fourth Amendment”) on April 11, 2012, pursuant to which Salus waived certain technical events of default under the ~~borrowing.~~New ~~Within~~DIP Facility and decreased the revolving credit ~~facility~~loan ceiling to $10.0 million from $15.0 million, which was offset in part by amending the ~~Company~~formula for ~~has~~funds available under the ~~option~~New toDIP ~~enter~~Facility ~~into~~such upthat tothe ~~five~~funds ~~fixed~~available ~~maturity~~to ~~loans~~the ~~with~~Company ~~interest~~decreased ~~calculated~~by atan ~~LIBOR~~aggregate ~~plus~~of $3.9 million rather than $5.0% million. The ~~fixed~~Company ~~maturity~~paid ~~LIBOR~~Salus ~~loans~~a ~~generally~~portion ~~have~~of the termination fee for the New DIP Facility in the amount of $37,500. The Bankruptcy Court entered an order approving the Fourth Amendment on April 19, 2012. The Company and Salus entered into a Fifth Amendment to the Revolver (the “Fifth Amendment”) on April 19, 2012 to replace ~~30-day~~line ~~maturity~~item expense budget variance covenants with less rigorous liquidity and aggregate disbursement covenants and to extend the time for the Company to file a ~~lower~~plan ~~interest~~of ~~rate~~reorganization from April 15, 2012 to June 15, 2012. The Fifth Amendment also added a more stringent minimum sales requirement, whereby the Company will be required to achieve sales (a) for each week ending during the first three weeks after the Bankruptcy Court issues an order approving the Fifth Amendment of not less than 80% of the ~~variable~~projected ~~portion~~sales for such week as set forth in the budget agreed to by the Company and Salus, and (b) for each test period thereafter, of not less than 85% of the ~~facility~~projected sales for such period. The ~~Company~~Fifth ~~will~~Amendment ~~use~~also resulted ~~this~~in ~~facility~~the ~~based~~base onmargin ~~fluctuating~~interest ~~operating~~rate ~~needs~~charged to the Company increasing from 3.0% to 3.5%, and ~~pay~~requires ~~off~~that the ~~borrowings~~Company asbegin ~~quickly~~closing, by June 4, 2012, the retail stores for which the Company has not received landlord consents by that date to extend the Company’s time to assume or reject such leases, as ~~possible~~permitted by the Bankruptcy Code. In consideration for entering into the Fifth Amendment, the Company paid Salus a fee of $75,000 on May 4, 2012.

On26 September 23, 2011, the Company entered into an amendment to the revolver agreement. Among other things, the amendment modified minimum excess availability on the revolver for certain periods through January 2012 and added an event of default if the Company failed to provide net cash payments to the lender of at least $5,800,000 by December 9, 2011 from a capital event consummated by the Company. The amendment also requires the Company to provide certain cash reports on a weekly basis.

Loans made under the New DIP Facility bear interest at a rate equal to 3.5% plus the highest of (a) the federal funds rate plus 0.5%, (b) three month LIBOR plus 1.0%, or (c) the JP Morgan Chase Bank N.A. “prime rate” as announced from time to time at its principal office in New York, New York. The Company is required to pay an unused line fee of 0.75% per annum, paid monthly in arrears, and fees of 3.0% per annum on the stated amount of outstanding documentary letters of credit and 3.0% per annum on the principal balance of outstanding letters of credit. In addition, the Company is required to pay collateral monitoring fees of $5,000 per month, fully earned and payable in advance each month that the New DIP Facility is outstanding. The interest rate applicable to advances against the pledged equity components added to the borrowing base is 13.0% until 90 days after February 8, 2012, subject to reduction thereafter. The New DIP Facility matures on the earliest to occur of (a) June 12, 2013, (b) the effective date of a plan of reorganization of the Company, (c) the consummation of a sale or sales of all or substantially all of the Company’s assets and properties or of all equity interests in the Company, (d) the last termination date set forth in the Final Order of the Bankruptcy Court, and (e) the payment in full of all of the Company’s obligations under the New DIP Facility after notice by the Company to Salus of the Company’s intent to terminate the New DIP Facility. Under the New DIP Facility as amended by the Fifth Amendment, in the event that the Company has not, on or before the close of business on June 15, 2012, repaid the New DIP Facility in full or filed a Chapter 11 plan in form and substance reasonably satisfactory to Salus, the Company is required, by June 29, 2012, to commence the sale of all of its assets, other than leases and fixtures, and by July 10, 2012, commence an auction for the sale of all of its leases and fixtures. This financing should enable the Company to meet its post filing obligations in the ordinary course of business, fund its operations and pay for merchandise, and finance the costs associated with the Chapter 11 Case. The Company continues to pursue additional sources of capital to allow it to purchase additional inventory.

There can be no assurance that cash on hand, cash generated through operations, cash generated through liquidation of assets and other available funds will be sufficient to meet the Company’s reorganization or ongoing cash needs or that the Company will be in compliance with all necessary terms and conditions of the New DIP Facility or that the lending commitments under the New DIP Facility will not be terminated by the lenders.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our market risks, and the ways we manage them, are summarized in the discussion of “Quantitative and Qualitative Disclosures About Market Risk” in Form 10-K in the section labeled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and are incorporated herein by reference. Since the date of the filing of the Form 10-K, there have been no material changes to our market risks or to our management of such risks.

Item 4. Controls and Procedures

Disclosure Controls and Procedures. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a — 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it is required to file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified by the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive and Chief Financial Officers, as appropriate to allow timely decisions regarding required disclosures. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective.

~~Changes~~27 in Internal Control Over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a — 15(f) under the Exchange Act) during the quarter ended August 31, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Changes in Internal Control Over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a — 15(f) under the Exchange Act) during the quarter ended November 30, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Chapter 11 Case

On December 12, 2011, the Company filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. Under Section 362 of the Bankruptcy Code, the filing of a bankruptcy petition automatically stays most actions against a debtor, including most actions to collect indebtedness incurred prior to the Petition Date or to exercise control over property of the debtor. Unless the Bankruptcy Court orders otherwise, substantially all pre-petition liabilities are subject to settlement under a plan of reorganization.

Section 365 of the Bankruptcy Code provides a process by which the Company may assume, assume and assign or reject certain pre-petition executory contracts (contracts that are not fully performed by either party) subject to the approval of the Bankruptcy Court and certain other conditions. Essentially, a rejection of a contract by the Company is a court-authorized breach of contract and, subject to certain exceptions, relieves the Company of further obligations under that contract, but creates a deemed pre-petition claim for damages by the party whose contract is rejected. Such parties may file claims in the Bankruptcy Court for damages. Generally, the assumption, or assumption and assignment, of an executory contract requires a debtor to cure all prior defaults under that contract and to provide the other party with adequate assurance of the debtor’s future performance under the contract. A plan of reorganization determines the rights and satisfaction of claims of various creditors and security holders, and is subject to the ultimate outcome of negotiations and Bankruptcy Court decisions ongoing through the date the plan of reorganization is confirmed. At this time, it is not possible to accurately predict the effect the Chapter 11 Case will have on our business.

In the normal course of business, we are involved in various claims and legal proceedings. While the ultimate resolution of these currently pending matters has yet to be determined, we do not presently believe that their outcome will adversely affect our financial position, results of operations or liquidity.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Form 10-K, which we filed on May 31, 2011, and the additional ~~factor~~factors below. The risks described in this Form 10-Q and in our Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial could have a material adverse affect on our business, financial condition and/or operating results.

~~Our~~There ~~sources~~can ofbe ~~liquidity~~no ~~are~~assurance ~~insufficient~~that ~~to fund~~ the Company’s ~~operations~~will ~~and~~be weable ~~are~~to remain ~~focusing our efforts on obtaining debtor-~~in~~-possession~~ ~~financing~~compliance ~~and~~with athe ~~filing~~requirements ~~for protection under Chapter 11~~ of the ~~U.S.~~New ~~Bankruptcy~~DIP ~~Code.~~Facility Itor isthat ~~management~~the ~~and~~lending ~~the~~commitments ~~Board’s~~under ~~intent~~the toNew ~~reorganize~~DIP ~~the Company~~Facility ~~around~~will anot ~~reduced~~be ~~number~~terminated ofby ~~stores~~our lenders.

~~Our~~The ~~sources~~Company ofhas ~~liquidity~~missed ~~are~~certain ~~insufficient~~performance totargets ~~fund~~of the ~~Company’s~~New ~~operations.~~DIP ~~While~~Facility ~~the Company~~and has ~~looked~~entered atinto ~~raising~~subsequent ~~additional~~amendments ~~capital~~with ~~through~~Salus ~~various~~to ~~means,~~obtain ~~these~~waivers ~~efforts~~of ~~have~~these ~~been~~events ~~unsuccessful~~of todefault ~~date.~~If, Asas a result, ~~our~~of ~~efforts are now focused on obtaining debtor-in-possession financing and reorganizing our operations by a filing~~any ~~under~~subsequent ~~Chapter~~breach 11 of the ~~U.S.~~terms ~~bankruptcy~~thereof, ~~laws. Our seeking relief under~~ the ~~U.S.~~New ~~Bankruptcy~~DIP ~~Code,~~Facility ~~whether~~is terminated or ~~not~~the ~~such~~Company’s ~~relief~~access ~~leads~~ to afunding ~~quick~~thereunder ~~emergence~~is ~~from~~restricted ~~Chapter 11~~or terminated, ~~could~~the ~~materially~~Company ~~adversely~~may ~~affect~~not ~~the~~have ~~relationship~~sufficient ~~between~~cash usavailability ~~and~~to meet our ~~existing~~ ~~and~~operating ~~potential~~needs ~~customers,~~or ~~employees,~~satisfy our ~~suppliers,~~obligations ~~partners~~as ~~and~~they ~~others~~fall due, ~~and~~in ~~could~~which ~~result~~instance inthe ~~very~~Company ~~little~~could orbe norequired ~~recovery~~ to ~~our~~seek ~~existing~~a ~~security~~sale ~~holders.~~of ~~Further,~~the ~~our~~Company ~~ability~~or tocertain ~~timely~~of ~~and~~its ~~efficiently~~material ~~emerge~~assets ~~from~~pursuant ~~Chapter~~to Section 11363 ~~could~~of ~~be negatively~~the ~~impacted~~Bankruptcy byCode, ~~inter-creditor~~or ~~disputes~~to ~~and~~convert ~~other~~the ~~contingencies~~Chapter ~~beyond~~11 ~~our~~Case ~~control,~~into ~~and~~a liquidation ~~our~~under ~~business~~Chapter ~~model~~7 ~~upon~~of ~~emergence~~the ~~from~~Bankruptcy ~~a bankruptcy filing may be altered~~Code.

~~Item 5.~~28 ~~Other Information~~

On November 5, 2011, the Board of Directors voted to terminate the employment of Curtis C. Kimbrell, and Mr. Kimbrell was notified of this decision on the same day. Mr. Kimbrell resigned from the Company’s Board of Directors on November 5, 2011.

On November 9, 2011, Stephen A. Giordano was appointed as President and CEO of the Company. On the same date, Mr. Giordano was appointed as a Director on the Company’s Board of Directors.

On November 22, 2011, Robert C. Shaffner resigned from the Board of Directors as both a member and as its Chairman. Effective December 3, 2011, Steve Gidumal was elected as the new Chairman of the Board of Directors. Also effective December 3, 2011 Ron Kaplan became Chairman of the Governance and Compensation Committees of the Board.

OnIf ~~November 7,~~the ~~2011,~~Company is unable to implement a plan of reorganization or if sufficient debtor-in-possession financing is not available the Company ~~retained~~could be required to seek a sale of the ~~law~~Company ~~firm~~or certain of ~~Lowenstein~~its ~~Sandler~~material assets pursuant to ~~advise~~Section 363 of the ~~Company~~Bankruptcy ~~on restructuring~~Code, ~~alternatives~~or liquidate under Chapter 7 of the Bankruptcy Code.

There can be no assurance that the lenders of the New DIP Facility, the unsecured creditors or the Bankruptcy Court will approve any proposed plan of reorganization or that the New DIP Facility will not be terminated by the lenders for our breach thereof. If either of these events were to occur, the Company could be forced to liquidate under Chapter 7 of the Bankruptcy Code.

Our liquidity position imposes significant risks to our operations.

The New DIP Facility provides for a loan in the aggregate amount of $10.0 million, which is intended to be used for the financing of ordinary working capital and general corporate needs of the Company, including certain fees and expenses of retained professionals, and for payment of certain pre-petition expenses. There can be no assurance that the amounts of cash from operations together with amounts available under the New DIP Facility will be sufficient to fund operations. As discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations” above, RoomStore sales have been negatively affected by the lack of availability of inventory to fill customer orders due to the decrease in funds available to purchase inventory. This negative impact has been exacerbated during the Company’s Chapter 11 proceeding, as fees of professionals and other costs incurred in the Chapter 11 Case have made it increasingly more difficult for the Company to have sufficient inventory on hand to fulfill customers’ orders. The Company continues to pursue additional sources of capital to cover this shortfall. Without additional capital, the Company will continue to struggle with meeting customer sales needs. There can be no assurance that such additional financing will be available, or, if available, will be available on acceptable terms. Failure to secure any necessary additional financing would have a material adverse affect on our operations and ability to continue as a going concern.

Operating under Chapter 11 may restrict our ability to pursue our strategic and operational initiatives.

Under Chapter 11, transactions outside the ordinary course of business are subject to the prior approval of the Bankruptcy Court, which may limit our ability to respond in a timely manner to certain events or take advantage of certain opportunities. Additionally, the terms of the New DIP Credit Facility limit our ability to undertake certain business initiatives.

The Chapter 11 Case has consumed and will continue to consume a substantial portion of the time and attention of our management and will impact how our business is conducted, which may have an adverse effect on our business and results of operations.

The requirements of the Chapter 11 Case have consumed and will continue to consume a substantial portion of our management’s time and attention and leave them with less time to devote to the operation of our business. This diversion of attention may materially adversely affect the conduct of our business, and, as a result, our financial condition and results of operations may also be materially adversely affected, particularly if the Chapter 11 Case is protracted.

The Company may experience increased levels of employee attrition.

During the pendency of the Chapter 11 Case, the Company may experience increased levels of employee attrition, and our employees are facing considerable distraction and uncertainty. A loss of key personnel or material erosion of employee morale could have a materially adverse affect on our ability to meet customer, trade partner and strategic partner expectations, thereby adversely affecting our business and results of operations. The loss of services of members of our senior management team could impair our ability to execute our strategy and implement operational initiatives, thereby having a material adverse affect on our financial condition and results of operations.

Trading in our securities during the pendency of the Chapter 11 Case is highly speculative and poses substantial risks. It is impossible to predict at this time whether our common stock will be cancelled or if holders of such common stock will receive any distribution with respect to, or be able to recover any portion of, their investments in our common stock.

It is unclear at this stage of the Chapter 11 Case if any plan of reorganization would allow for distributions with respect to our common stock. Equity interests in a Chapter 11 case are often cancelled and extinguished upon confirmation of a plan of reorganization and the holders thereof would not be entitled to receive, and would not receive or retain, any property or interest in property on account of such equity interests. In such an event, outstanding common stock would have no value. Trading prices for our common stock may bear little or no relationship to the actual recovery, if any, by the holders thereof in the Chapter 11 Case. Accordingly, the Company urges extreme caution with respect to existing and future investments in our equity securities and any of our other securities.

Item 3. Defaults Upon Senior Securities.

At November 30, 2011, the Company was in default of certain financial covenants of its credit facility agreement with Wells Fargo. These defaults were waived pursuant to the Company entering into the DIP Facility with Wells Fargo. On January 20, 2012, Wells Fargo assigned all of its interests and obligations under the under the Revolver and DIP Facility to Salus. The Company has missed certain performance targets of the New DIP Facility and has entered into subsequent amendments with Salus to obtain waivers of these events of default. The Company and Salus entered into the Fourth Amendment on April 11, 2012 and the Fifth Amendment on April 19, 2012. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Financial Position – Financing and Debt” for additional information about the DIP Facility, Wells Fargo’s subsequent assignment of the DIP Facility to Salus, and the additional amendments to the Company’s loan agreements.

Item 6. Exhibits

The index to exhibits appears on page 2432 of this Form 10-Q.

2230

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.

	RoomStore, Inc. (Registrant)
	RoomStore, Inc.
Date: December 12, 2011	By:	/s/ Stephen A. Giordano
	(Registrant)
Date: May 25, 2012	By:	/s/ Stephen A. Giordano
		Stephen A. Giordano
		President and Chief Executive Officer (Principal Executive Officer)
		President and Chief Executive Officer
Date: December 12, 2011	By:	/s/ Lewis M. Brubaker, Jr.
		(Principal Executive Officer)
Date: May 25, 2012	By:	/s/ Lewis M. Brubaker, Jr.
		Lewis M. Brubaker, Jr.
		Senior Vice President and Chief Financial Officer (Principal Finance and Accounting Officer)
		Senior Vice President and Chief Financial Officer
		(Principal Finance and Accounting Officer)

2331

Index To Exhibits

Exhibit No.		Description
3.1		Amended and Restated Certificate of Incorporation (incorporated by reference to the Company’s Form S-1, filed on April 2, 2009).
3.2		Amended and Restated Bylaws (incorporated by reference to the Company’s Form S-1, filed on April 2, 2009).
10.1		~~Amendment~~Employment ~~No. 1 to Loan and Security~~ Agreement, dated ~~September~~as 23of November 5, 2011, between ~~Wells Fargo Retail Finance~~RoomStore, ~~LLC~~Inc. and ~~RoomStore,~~Stephen ~~Inc~~Giordano.*
10.2		Ratification Agreement, dated as of December 15, 2011, by and among Wells Fargo Bank, N.A., in its capacity as agent acting for and behalf of the financial institutions from time to time party to the Loan Agreement as lenders (the “Lenders”), the Lenders, RoomStore, Inc. and Mattress Discounters Group, LLC (incorporated by reference from the Company’s Current Report on Form 8-K, filed on February 16, 2012).
10.3		Third Amendment to Loan and Security Agreement, dated as of February 6, 2012, by and among Salus Capital Partners, LLC (as assignee of Wells Fargo Bank, N.A.), in its capacity as agent acting for and behalf of the financial institutions from time to time party to the Loan Agreement as lenders (the “Lenders”), the Lenders, RoomStore, Inc. and Mattress Discounters Group, LLC (incorporated by reference from the Company’s Current Report on Form 8-K, filed on February 16, 2012).
10.4		Fourth Amendment to Loan and Security Agreement, dated as of April 11, 2012, by and among Salus Capital Partners, LLC (as assignee of Wells Fargo Bank, N.A.), in its capacity as agent acting for and behalf of the financial institutions from time to time party to the Loan Agreement as lenders (the “Lenders”), the Lenders, RoomStore, Inc. and Mattress Discounters Group, LLC*
10.5		Fifth Amendment to Loan and Security Agreement, dated as of April 19, 2012, by and among Salus Capital Partners, LLC (as assignee of Wells Fargo Bank, N.A.), in its capacity as agent acting for and behalf of the financial institutions from time to time party to the Loan Agreement as lenders (the “Lenders”), the Lenders, RoomStore, Inc. and Mattress Discounters Group, LLC*
31.1		Certification of the Chief Executive Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d- 14(a) under the Exchange Act of 1934.*
31.2		Certification of the Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d- 14(a), under the Exchange Act of 1934.*
32		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.*
101 INS		XBRL Instance Document**
101 SCH		XBRL Taxonomy Extension Schema**
101 CAL		XBRL Taxonomy Extension Calculation Linkbase**
101 DEF		XBRL Taxonomy Extension Definition Linkbase**
101 LAB		XBRL Taxonomy Extension Label Linkbase**
101 PRE		XBRL Taxonomy Extension Presentation Linkbase**

*	Filed herewith

24** Includes the following materials contained in this Quarterly Report on Form 10-Q for the quarter ended November 30, 2011 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statements Of Changes In Equity, and (v) Notes to Condensed Consolidated Financial Statements.

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