UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X]     QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004

or

[   ]      TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to               

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.

[X] Yes [    ] No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

[X] Yes [    ] No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

At March 31, 2004, there were 37,280,037 shares
of Common Stock, par value $.01 outstanding.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

TABLE OF CONTENTS

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)

See accompanying notes to consolidated financial statements.

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)

See accompanying notes to consolidated financial statements.

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)

See accompanying notes to consolidated financial statements.

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
Nine Months Ended March 31, 2004
(Unaudited)
(In thousands, except share data)

See accompanying notes to consolidated financial statements.

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

(1)       Basis of Presentation

(2)      Interim Financial Presentation

(3)      Employee Stock Plans

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

(4)      Inventories

           Inventories at March 31, 2004 and June 30, 2003 are summarized as follows (in thousands):

(5)       Restructuring and Impairment Charges

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

(6)       Business Acquisitions

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Notes to Consolidated Financial Statements

(Unaudited)

(7)       Goodwill and Other Intangible Assets

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Notes to Consolidated Financial Statements

(Unaudited)

(8)       Litigation

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Notes to Consolidated Financial Statements

(Unaudited)

(10)     Comprehensive Income

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Notes to Consolidated Financial Statements

(Unaudited)

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Notes to Consolidated Financial Statements

(Unaudited)  

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

        The discussions set forth in this Form 10-Q should be read in conjunction with (i) the financial information included herein and (ii) the Company’s Annual Report on Form 10-K for the year ended June 30, 2003. Management’s discussion and analysis of financial condition and results of operations and other sections of this Quarterly Report contain forward-looking statements. Such forward-looking statements are identified by use of forward-looking words such as “anticipates”, “believes”, “plans”, “estimates”, “expects”, and “intends” or words or phrases of similar expression. These forward-looking statements are subject to various assumptions, risks and uncertainties, including but not limited to: changes in political and economic conditions; changes in demand for the Company’s products; acceptance of new products; changes in conditions in the various geographical markets where the Company does business; technology developments affecting the Company’s products; changes in laws and regulations; and those matters discussed in the Company’s filings with the Securities and Exchange Commission. Accordingly, actual circumstances and results could differ materially from those contemplated by the forward-looking statements.

Critical Accounting Policies

        The Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America which require, in some cases, that certain estimates and assumptions be made that affect the amounts and disclosures reported in those financial statements and the related accompanying notes. Estimates are based on currently known facts and circumstances, prior experience and other assumptions believed to be reasonable. Management uses its best judgment in valuing these estimates and may, as warranted, solicit external advice. Actual results could differ from these estimates, assumptions and judgments and these differences could be material. The following critical accounting policies, some of which are impacted significantly by estimates, assumptions and judgments, affect the Company’s consolidated financial statements.

        Retail Store Acquisitions — The Company accounts for the acquisition of retail stores and related assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations, which requires application of the purchase method for all business combinations initiated after June 30, 2001. Accounting for these transactions as purchase business combinations requires the allocation of purchase price paid to the assets acquired and liabilities assumed based on their fair values as of the date of the acquisition. The amount paid in excess of the fair value of net assets acquired is accounted for as goodwill.

        Impairment of Long-Lived Assets and Goodwill — The Company periodically evaluates whether events or circumstances have occurred that indicate that long-lived assets may not be recoverable or that the remaining useful life may warrant revision. When such events or circumstances are present, the Company assesses the recoverability of long-lived assets by determining whether the carrying value will be recovered through the expected undiscounted future cash flows resulting from the use of the asset. In the event the sum of the expected undiscounted future cash flows is less than the carrying value of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded. The long-term nature of these assets requires the estimation of its cash inflows and outflows several years into the future and only takes into consideration technological advances known at the time of the impairment test.

        In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, which was adopted by the Company on July 1, 2001, goodwill and other intangible assets are to be evaluated for impairment at the reporting unit level on an annual basis and between annual tests whenever events or circumstances indicate that the carrying value of a reporting unit may exceed its fair value. The Company conducts its required annual impairment test during the fourth quarter of each fiscal year. The impairment test uses a discounted cash flow model to estimate the fair value of a reporting unit. This model requires the use of long-term planning forecasts and assumptions regarding industry-specific economic conditions that are outside the control of the Company.

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        Allowance for Doubtful Accounts – The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The allowance for doubtful accounts is based on a review of specifically identified accounts in addition to an overall aging analysis. Judgments are made with respect to the collectibility of accounts receivable based on historical experience and current economic trends. Actual losses could differ from those estimates.

        Inventories– Inventories (finished goods, work in process and raw materials) are stated at the lower of cost, determined on a first-in, first-out basis, or market. Cost is determined based solely on those charges incurred in the acquisition and production of the related inventory (i.e. material, labor and manufacturing overhead costs). The Company estimates an inventory reserve for excess quantities and obsolete items based on specific identification and historical write-offs, taking into account future demand and market conditions. If actual demand or market conditions in the future are less favorable than those estimated, additional inventory write-downs may be required.

        Revenue Recognition – Revenue is recognized when all of the following have occurred: persuasive evidence of a sales arrangement exists (e.g. a wholesale purchase order or retail sales invoice); the sales arrangement specifies a fixed or determinable sales price; product is shipped or services are provided to the customer; and collectability is reasonably assured. This generally occurs upon the shipment of goods to independent dealers or, in the case of Ethan Allen-owned retail stores, upon delivery to the customer. Recorded sales provide for estimated returns and allowances. The Company permits retail customers to return defective products and incorrect shipments, and terms offered by the Company are standard for the industry.

        Business Insurance Reserves – The Company has insurance programs in place to cover workers’ compensation and property/casualty claims. The insurance programs, which are funded through self-insured retention, are subject to various stop-loss limitations. The Company accrues estimated losses using actuarial models and assumptions based on historical loss experience. Although management believes that the insurance reserves are adequate, the reserve estimates are based on historical experience, which may not be indicative of current and future losses. In addition, the actuarial calculations used to estimate insurance reserves are based on numerous assumptions, some of which are subjective. The Company adjusts insurance reserves, as needed, in the event that future loss experience differs from historical loss patterns.

        Other Loss Reserves – The Company has a number of other potential loss exposures incurred in the ordinary course of business such as environmental claims, product liability, litigation, restructuring charges, and the recoverability of deferred income tax benefits. Establishing loss reserves for these matters requires management’s estimate and judgment with regard to maximum risk exposure and ultimate liability or realization. As a result, these estimates are often developed with the Company’s counsel, or other appropriate advisors, and are based on management’s current understanding of the underlying facts and circumstances. Because of uncertainties related to the ultimate outcome of these issues or the possibilities of changes in the underlying facts and circumstances, additional charges related to these issues could be required in the future.

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Results of Operations

        Ethan Allen’s revenues are comprised of (i) wholesale sales to independently-owned and Company-owned retail stores and (ii) retail sales of Company-owned stores. See Note 11 to the Company’s Consolidated Financial Statements for the three and nine months ended March 31, 2004 and 2003.

        The components of consolidated revenues and operating income were as follows (in millions):

Quarter Ended March 31, 2004 Compared to Quarter Ended March 31, 2003

        Consolidated revenue for the three months ended March 31, 2004 increased by $20.0 million, or 8.9%, to $244.6 million, from $224.6 million for the three months ended March 31, 2003. Net sales for the period reflect the delivery of product associated with the increased level of booked orders and related backlog noted as of the end of the second quarter. Such order levels are reflective of (i) the continued expansion and strategic re-positioning of the Company’s retail segment, and (ii) an increase in the incoming order rate resulting, primarily, from a sustained level of recovery in both consumer confidence and the U.S. economy in recent months, and the success of recent product introductions, some of which have been introduced in accordance with the Company’s “everyday value” pricing strategy.

        Total wholesale revenue for the third quarter of fiscal 2004 increased by $5.0 million, or 2.9%, to $178.9 million from $173.9 million in the third quarter of fiscal 2003. As stated previously, the Company experienced an increase in the incoming order rate as a result, primarily, of improved consumer spending habits and a sustained strengthening of the U.S. economy during the period. In addition, wholesale revenue for the period reflects the positive impact of one additional shipping day in the current year quarter as compared to the prior year, and, to a lesser extent, deliveries associated with floor sample orders, placed during the second quarter of fiscal 2004, for new products introduced at the Company’s October 2003 Retail conference. Partially offsetting these increases were lower than anticipated shipments stemming from (i) longer lead times necessary in the production of selected, recently-introduced case goods items, and (ii) modest delays in receiving certain upholstery-related import shipments (both finished goods and raw materials).

        Total retail revenue from Ethan Allen-owned stores for the three months ended March 31, 2004 increased by $16.7 million, or 13.1%, to $144.1 million from $127.4 million for the three months ended March 31, 2003. The increase in retail sales by Ethan Allen-owned stores was attributable to an increase in sales generated by newly opened (including relocations) or acquired stores of $9.4 million, and an increase in comparable store delivered sales of $11.6 million, or 9.7%, partially offset by a decrease resulting from closed stores, which generated $4.3 million fewer sales in the third quarter of fiscal 2004 as compared to the same period in fiscal 2003. The number of Ethan Allen-owned stores increased to 124 as of March 31, 2004 as compared to 120 as of March 31, 2003. During that twelve month period, the Company acquired 1 store from an independent dealer, closed 2 stores and opened 2 new stores, both being dedicated Ethan Allen Kids retail

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

store locations. The Company-owned store count at March 31, 2004 also reflects the net addition of 3 stores stemming from Ethan Allen’s acquisition of the 25% minority interest in a joint venture previously established in 1998 between the Company and an independent dealer, the purpose of which was to own and operate 4 stores in the Dallas market. Subsequent to the Company’s acquisition of the minority interest, the assets of 1 store were sold to the joint venture partner. While the operations of these stores have been reflected in the Company’s consolidated financial statements since inception of the joint venture as a result of the Company’s 75% majority ownership, the stores have not been previously included in the Company’s store count due to the fact that they were independently managed.

        Comparable stores are those which have been operating for at least 15 months. Minimal net sales, derived from the delivery of customer ordered product, are generated during the first three months of operations of newly opened stores. Stores acquired from dealers by Ethan Allen are included in comparable store sales in their 13th full month of Ethan Allen-owned operations.

        Total booked orders, which include wholesale orders and written business of Ethan Allen-owned retail stores, increased 14.0% from the prior year quarter. Quarter-over-quarter, wholesale orders increased 13.6% while Ethan Allen-owned store written business increased 15.2% and comparable store written business increased 11.6%. These increases are indicative of the continued expansion of the Company’s retail segment and a sustained level of recovery in both consumer confidence and the U.S. economy in recent months.

        Gross profit increased during the quarter to $119.3 million from $112.0 million in the prior year comparable quarter. The $7.3 million, or 6.5%, increase in gross profit was primarily attributable to a higher proportionate share of retail sales to total sales (59% in the current quarter compared to 57% in the prior year quarter), and an overall increase in sales volume as a result of the Company servicing the related backlog noted as of the end of the second quarter. These favorable variances were partially offset by increased costs associated with unabsorbed overhead at the Company's manufacturing facilities resulting, primarily, from excess capacity, particularly during the fourth quarter of fiscal 2003, and, to a lesser extent, a modest decline in retail gross profit as a result of the sell-off of floor inventory necessary to make room for new product offerings. Consolidated gross margin decreased to 48.8% in the third quarter of fiscal 2004 from 49.8% in the prior year quarter as a result, primarily,  of the factors identified previously.

        The Company recorded a pre-tax restructuring and impairment charge of $13.4 million during the prior year quarter related to the consolidation of three of its smaller manufacturing facilities. The costs incurred in closing the facilities consisted, primarily, of employee severance and benefits and other plant exit costs, as well as fixed asset impairment charges, primarily for real property and machinery and equipment associated with the closed facilities. In addition, adjustments totaling $0.2 million were made during the prior year quarter to reverse certain other restructuring accruals established in fiscal 2002 which were no longer required.

        Including the March 2003 pre-tax restructuring and impairment charge of $13.2 million, operating expenses decreased $11.8 million, or 12.6%, to $81.3 million, or 33.3% of net sales, in the current year quarter from $93.1 million, or 41.5% of net sales, in the prior year quarter. This decrease is primarily attributable to the aforementioned restructuring and impairment charge and a decline in selling expenses within the wholesale division as the result of a continued Company-wide focus on cost containment, particularly within national television advertising, as well as initiatives undertaken in recent periods to streamline the Company’s U.S. manufacturing operations. These decreases were partially offset by the continued growth of the retail segment and the higher proportionate share of retail sales to total sales in the current quarter as compared to the prior year quarter. This expansion has resulted in higher costs associated with designer salaries and commissions, occupancy, healthcare and other managerial salaries and benefits, delivery and warehousing, and advertising.

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

        Including the March 2003 pre-tax restructuring and impairment charge of $13.2 million, operating income for the three months ended March 31, 2004 was $37.9 million, or 15.5% of net sales, compared to $18.8 million, or 8.4% of net sales, for the three months ended March 31, 2003. This represents an increase of $19.1 million, and is primarily attributable to the aforementioned restructuring and impairment charge, an increase in sales volume and gross profit occurring during the current period, and lower operating expenses within the wholesale division, partially offset by increased costs related to continued expansion of the retail segment.

        Including the March 2003 pre-tax restructuring and impairment charge of $13.2 million, total wholesale operating income for the third quarter of fiscal 2004 was $34.1 million, or 19.1% of net sales, as compared to $20.9 million, or 12.0% of net sales, in the comparable prior year quarter. The increase of $13.2 million, or 62.8%, is primarily attributable to the aforementioned restructuring and impairment charge and decreased operating expenses within the division, partially offset by increased costs associated with unabsorbed overhead at the Company's manufacturing facilities resulting, primarily, from excess capacity, particularly during the fourth quarter of fiscal 2003.

        Operating income for the retail segment increased $1.8 million to $4.0 million, or 2.8% of net sales, for the third quarter of fiscal 2004, as compared to $2.2 million, or 1.7% of net sales, in the prior year period. The increase in retail operating income generated by Ethan Allen-owned stores is primarily attributable to increased sales volume associated with newly-opened (including relocations) or acquired stores and an increase in comparable store sales, partially offset by (i) higher operating expenses related to the continued expansion of the retail network, and (ii) a modest decline in gross margin resulting from the sell-off of floor inventory necessary to make room for new product offerings.

        Interest and other miscellaneous income for the current quarter totaled $0.2 million, representing an increase of $0.1 million from $0.1 million recorded in the prior year quarter. The increase is due, primarily, to (i) increased interest income associated with higher cash balances during the period, and (ii) current period gains recorded in connection with the sale of real estate.

        Income tax expense for the three months ended March 31, 2004 was $14.6 million as compared to $7.1 million for the three months ended March 31, 2003. The Company’s effective tax rate for the current quarter was 38.5%, up from 37.8% in the prior year quarter. The higher effective tax rate is the result of recently-enacted changes within certain state tax legislation, and increased state income tax liability arising in connection with the operation of a greater number of Company-owned stores, some of which are located in new jurisdictions.

        The Company recorded net income for the three months ended March 31, 2004 of $23.4 million as compared to $11.7 million recorded in the third quarter of fiscal 2003. Net income per diluted share for the current quarter amounted to $0.61, up from $0.30 per diluted share in the prior year quarter.

Nine Months Ended March 31, 2004 Compared to Nine Months Ended March 31, 2003

        Consolidated revenue for the nine months ended March 31, 2004, increased by $37.7 million, or 5.6%, to $708.5 million, from $670.8 million for the nine months ended March 31, 2003. Net sales have increased due to (i) the continued expansion and strategic re-positioning of the Company’s retail segment and (ii) an increase in the incoming order rate as a result, primarily, of ongoing improvements in consumer confidence, a further strengthening of the U.S. economy during the period, and the success of recent product introductions, some of which have been introduced in accordance with the Company’s “everyday value” pricing strategy.

        Total wholesale revenue for the first nine months of fiscal 2004 increased by $11.4 million, or 2.3%, to $501.5 million from $490.1 million in the prior year comparable period. As stated previously, the incoming order rate increased as a result, primarily, of improved consumer spending habits and a strengthening of the U.S. economy during the

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period. In addition, wholesale revenue for the period reflects deliveries associated with floor sample orders, placed during the first and second quarters of fiscal 2004, for new products introduced at the Company’s June 2003 and October 2003 Retail conferences. Partially offsetting these increases were lower than anticipated shipments stemming from (i) longer lead times necessary in the production of selected, recently-introduced case goods items, and (ii) modest delays in receiving certain upholstery-related import shipments (both finished goods and raw materials).

        Total retail revenue from Ethan Allen-owned stores for the nine months ended March 31, 2004, increased by $39.2 million, or 10.1%, to $426.3 million from $387.1 million for the nine months ended March 31, 2003. The increase in retail sales by Ethan Allen-owned stores was attributable to an increase in sales generated by newly opened or acquired stores of $37.5 million, and an increase in comparable store delivered sales of $14.8 million, or 4.0%, partially offset by a decrease resulting from closed stores, which generated $13.1 million fewer sales in the first nine months of fiscal 2004 as compared to the same period in fiscal 2003.

        Total booked orders, which include wholesale orders and written business of Ethan Allen-owned retail stores, increased 8.2% from the prior year period. Year-over-year, wholesale orders increased 7.3% while Ethan Allen-owned store written business increased 10.6% and comparable store written business increased 4.4%. These increases are indicative of the continued expansion of the Company’s retail segment, improvements in consumer confidence, and a further strengthening of the U.S. economy during the current period.

        Gross profit increased during the nine month period to $344.0 million from $334.5 million in the prior year comparable period. The $9.5 million, or 2.8%, increase in gross profit was primarily attributable to a higher proportionate share of retail sales to total sales (60% in the current period compared to 58% in the prior year), and an overall increase in sales volume during the period. These favorable variances were partially offset by increased costs associated with unabsorbed overhead at the Company's manufacturing facilities resulting, primarily, from excess capacity, particularly during the third and fourth quarters of fiscal 2003, and a modest decline in retail gross profit as a result of the sell-off of floor inventory necessary to make room for new product offerings. Consolidated gross margin for the nine months ended March 31, 2004 decreased to 48.6% from 49.9% in the prior year period as a result of the factors identified previously.

        The Company recorded a pre-tax restructuring and impairment charge of $13.4 million during the prior year quarter related to the consolidation of three of its smaller manufacturing facilities. The costs incurred in closing the facilities consisted, primarily, of employee severance and benefits and other plant exit costs, as well as fixed asset impairment charges, primarily for real property and machinery and equipment associated with the closed facilities. In addition, adjustments totaling $0.2 million were made during the prior year quarter to reverse certain other restructuring accruals established in fiscal 2002 which were no longer required.

        Including the March 2003 pre-tax restructuring and impairment charge of $13.2 million, operating expenses decreased $8.1 million, or 3.3%, to $238.4 million, or 33.6% of net sales, in the current year period from $246.5 million, or 36.7% of net sales, in the prior year period. This decrease is primarily attributable to the aforementioned restructuring and impairment charge and a decline in selling expenses within the wholesale division as the result of a continued Company-wide focus on cost containment, particularly within national television advertising, as well as initiatives undertaken in recent periods to streamline the Company’s U.S. manufacturing operations. These decreases were partially offset by the continued growth of the retail segment and the higher proportionate share of retail sales to total sales in the current quarter as compared to the prior year quarter. This expansion has resulted in higher costs associated with designer salaries and commissions, occupancy, delivery and warehousing, advertising, and healthcare and other managerial salaries and benefits.

        Including the March 2003 pre-tax restructuring and impairment charge of $13.2 million, operating income for the nine months ended March 31, 2004 was $105.6 million, or

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14.9% of net sales, compared to $88.0 million, or 13.1% of net sales, for the nine months ended March 31, 2003. This represents an increase of $17.6 million, or 20.1%, and is primarily attributable to the aforementioned restructuring and impairment charge, an increase in sales volume and gross profit occurring during the current period, and lower operating expenses within the wholesale division, partially offset by increased costs related to continued expansion of the retail segment.

        Including the March 2003 pre-tax restructuring and impairment charge of $13.2 million, total wholesale operating income for the nine months ended March 31, 2004 was $91.3 million, or 18.2% of net sales, compared to $77.9 million, or 15.9% of net sales, in the comparable prior year period. The increase of $13.4 million, or 17.2%, is primarily attributable to the aforementioned restructuring and impairment charge and to decreased operating expenses within the division, partially offset by increased costs associated with unabsorbed overhead at the Company's manufacturing facilities resulting, primarily, from excess capacity, particularly during the third and fourth quarters of fiscal 2003.

        Operating income for the retail segment decreased $3.1 million to $10.2 million, or 2.4% of net sales, for the current year period, as compared to $13.3 million, or 3.4% of net sales, in the prior year period. The decrease in retail operating income generated by Ethan Allen-owned stores is primarily attributable to (i) higher operating expenses related to the continued expansion of the retail network, and (ii) a modest decline in gross margin resulting from the sell-off of floor inventory necessary to make room for the aforementioned new product offerings. These unfavorable variances were partially offset by increased sales volume associated with newly-opened (including relocations) or acquired stores and an increase in comparable store sales.

        Interest and other miscellaneous income for the current nine month period totaled $3.2 million, up from $0.8 million in the prior year period. The increase of $2.4 million is due, primarily, to (i) gains recorded in the current period in connection with the sale of real estate, (ii) a favorable judgment in the case of an outstanding legal matter, (iii) increased interest income associated with higher cash balances during the period, and (iv) a decrease in the Company’s share of fiscal year-to-date losses incurred in connection with its United Kingdom joint venture with MFI Furniture Group Plc.

        Income tax expense for the nine months ended March 31, 2004 was $41.6 million as compared to $33.3 million for the nine months ended March 31, 2003. The Company’s effective tax rate for the current period was 38.4%, up from 37.8% in the prior year period. The higher effective tax rate is the result of recently-enacted changes within certain state tax legislation, and increased state income tax liability arising in connection with the operation of a greater number of Company-owned stores, some of which are located in new jurisdictions.

        For the nine months ended March 31, 2004, the Company recorded net income of $66.7 million, an increase of $11.9 million, as compared to $54.8 million recorded in the prior year comparable period. Net income per diluted share for the current period amounted to $1.74, representing an increase of $0.11 per diluted share, or 6.7%, from $1.63 per diluted share in the prior year period.

Financial Condition and Liquidity

        The Company’s principal sources of liquidity include cash and cash equivalents, cash flow from operations, and borrowing capacity under a $125.0 million revolving credit facility.

        As of March 31, 2004, the Company maintained cash and short-term investments totaling $177.0 million and outstanding long-term debt and capital lease obligations totaling $9.3 million. The current and long-term portions of the Company’s outstanding debt and capital lease obligations totaled $4.8 million and $4.5 million, respectively, at that date. The Company had no revolving loans outstanding under the credit facility as of March 31, 2004, and trade and standby letters of credit outstanding under the facility at that date totaled $20.0 million. Remaining available borrowing capacity under the facility was $105.0 million at March 31, 2004.   

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        Net cash provided by operating activities totaled $112.6 million for the nine months ended March 31, 2004, compared to $74.0 million for the nine months ended March 31, 2003. The year-over-year increase of $38.6 million was principally the result of (i) changes in inventory levels, which decreased $12.4 million during the current period, representing a $24.7 million variance from the increase in inventory noted in the prior year period,(ii) an increase in net income of $11.9 million, (iii) a $10.3 million decrease in cash required to satisfy outstanding accounts payable, (iv) changes in the deferred tax balance of $9.4 million, and (v) changes in prepaid expenses and other current assets representing a $5.3 million variance from the prior year period. These favorable variances were partially offset by (i) the restructuring and impairment charge recorded during the prior year quarter ($13.1 million), (ii) changes in accrued expenses and other current liabilities representing a $5.2 million variance from the prior year period, (iii) a $2.7 million decrease in cash collected related to outstanding accounts receivable, and (iv) a $1.8 million decrease in customer deposits.

        The decrease in inventory levels since June 2003 was the result, primarily, of (i) a decline in finished goods inventories attributable to the volume of deliveries occurring during the period and execution of the Company’s plan to diminish inventory levels among certain discontinued product lines, and (ii) a decrease in plant inventories, namely raw materials and work-in-process, as a result of an increase in through-put and reduced inventory requirements stemming from the closure of three manufacturing facilities as was previously announced in March 2003.

        Net cash used in investing activities totaled $8.5 million in the current period as compared to $31.5 million recorded in the prior year period. The decrease of $23.0 million was due, primarily, to (i) a $10.9 million decline in cash utilized to fund acquisition activity (no retail stores were acquired in the current period as compared to 15 retail stores acquired in the prior year period), (ii) a $9.4 million decline in the other capital spending, exclusive of acquisitions, to $14.0 million for the nine months ended March 31, 2004 from $23.4 million for the nine months ended March 31, 2003, and (iii) a $3.3 million increase in proceeds from the disposal of certain property, plant and equipment. The current level of capital spending is principally attributable to (i) new store development and renovation, (ii) technology improvements and (iii) manufacturing expansion within certain facilities. The Company anticipates that cash from operations will be sufficient to fund future capital expenditures.

        Net cash used in financing activities totaled $8.9 million in the current period as compared to $58.0 million in the prior year period, a decrease of $49.1 million. The decrease in net cash used in financing activities is the result, primarily, of (i) a decrease in payments related to the acquisition of treasury stock ($48.3 million), and (ii) a decrease in cash utilized in the repayment of debt ($2.5 million). These decreases were partially offset by a $3.4 million increase in dividends paid.

         On April 27, 2004, the Board of Directors of the Company declared (i) a special one-time cash dividend of $3.00 per share, payable on May 27, 2004 to shareholders of record as of May 10, 2004, and (ii) a regular quarterly cash dividend of $0.10 per share payable on July 26, 2004 to shareholders of record as of July 9, 2004.

        In addition to using available cash to fund changes in working capital, necessary capital expenditures, acquisition activity, the repayment of debt, and the payment of dividends, the Company has been authorized by its Board of Directors to repurchase its common stock from time to time, either directly or through agents, in the open market at prices and on terms satisfactory to the Company. The Company also retires shares of unvested restricted stock and, prior to June 30, 2002, repurchased shares of common stock from terminated or retiring employee’s accounts in the Ethan Allen Retirement Savings Plan. All of the Company’s common stock repurchases and retirements are recorded as treasury stock and result in a reduction of shareholders’ equity.

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

        During the first nine months of fiscal years 2004 and 2003, the Company repurchased the following shares of its common stock:

        The Company funded its common stock repurchases through available cash and cash from operations. As of March 31, 2004, the Company had a remaining Board authorization to purchase 1.2 million shares.

        During April 2004, the Company repurchased, in 8 separate transactions, an additional 316,545 shares of its common stock at a total cost of $13,096,559, representing an average price per share of $41.37. On April 27, 2004, the Board of Directors increased the remaining authorization of 904,755 shares to 2.5 million shares.

        As of March 31, 2004, the aggregate scheduled maturities of the Company’s long-term debt for each of the next five fiscal years are as follows: $4.7 million in fiscal 2005, $0.2 million in fiscal 2006, $0.1 million in fiscal 2007, $0.1 million in fiscal 2008, $0.1 million in fiscal 2009 and $4.1 million thereafter. Management believes that its cash flow from operations, together with its other available sources of liquidity, will be adequate to make all required payments of principal and interest on its debt, to permit anticipated capital expenditures and to fund working capital and other anticipated cash requirements. As of March 31, 2004, the Company maintained working capital of $288.9 million and a current ratio of 2.92 to 1.

Off-Balance Sheet Arrangements and Other Commitments, Contingencies and Contractual Obligations

        Except as indicated below, the Company does not utilize or employ any off-balance sheet arrangements, including special-purpose entities, in operating its business. As such, the Company does not maintain any (i) retained or contingent interests, (ii) derivative instruments, or (iii) variable interests which could serve as a source of potential risk to its future liquidity, capital resources and results of operations.

        The Company, or its consolidated subsidiaries, may, from time to time in the ordinary course of business, provide guarantees on behalf of selected affiliated entities or become contractually obligated to perform in accordance with the terms and conditions of certain business agreements. The nature and extent of these guarantees and obligations may vary based on the underlying relationship of the benefiting party to the Company and the business purpose for which the guarantee or obligation is being provided. Details of those arrangements for which the Company, or any of its wholly-owned subsidiaries, act as guarantor or obligor are provided below.

Dealer-Related Guarantees

        As part of the Company’s expansion strategy for the Ethan Allen retail store network, selected independent dealers are provided, on rare occasion, with financial guarantees relating to leases in connection with certain store locations. As of March 31, 2004, one such guarantee exists. This guarantee, which has been provided by Ethan Allen Inc. on behalf of an independent dealer, has a remaining term of six months, which generally represents the remaining contractual term of the underlying lease agreement (subject to certain term limitations). The Company is obligated to act under such guarantee in the event of default by the respective dealer (lessee). The maximum potential amount of future payments (undiscounted) that the Company could be required to make under this guarantee is limited to the amount of the remaining contractual lease payments

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(subject to certain term limitations) and, as such, is not an estimate of future cash flows. As of March 31, 2004, the amount of remaining contractual lease payments guaranteed by the Company was approximately $0.2 million. The Company maintains specific recourse rights related to this dealer arrangement which are intended to enable recovery of any amount paid under this guarantee. Management expects, based on the underlying creditworthiness of the guaranteed party, this guarantee will expire without requiring funding by the Company. Accordingly, as of March 31, 2004, the carrying amount of the liability related to such guarantee is zero.

        In addition, Ethan Allen Inc. has obligated itself, on behalf of one of its independent dealers, with respect to a $1.5 million credit facility (the “Credit Facility”) comprised of a $1.1 million revolving line of credit and a $0.4 million term loan. This obligation requires the Company, in the event of the dealer’s default under the Credit Facility, to repurchase the dealer’s inventory, applying such purchase price to the dealer’s outstanding indebtedness under the Credit Facility. The Company’s obligation remains in effect for the life of the term loan which expires in April 2008. The maximum potential amount of future payments (undiscounted) that the Company could be required to make under this obligation is limited to the amount outstanding under the Credit Facility at the time of default (subject to pre-determined lending limits based on the value of the underlying inventory) and, as such, is not an estimate of future cash flows. No specific recourse or collateral provisions exist that would enable recovery of any portion of amounts paid under this obligation, except to the extent that the Company maintains the right to take title to the repurchased inventory. Management anticipates that the repurchased inventory could subsequently be sold through the Company’s retail store network. As of March 31, 2004, the total amount outstanding under the Credit Facility totaled approximately $1.2 million, of which $0.9 million was outstanding under the revolving credit line. Management expects, based on the underlying creditworthiness of the respective dealer, this obligation will expire without requiring funding by the Company. However, in accordance with the provisions of FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, a liability has been established to reflect the Company’s non-contingent obligation under this arrangement as a result of modifications made to the Credit Facility subsequent to January 1, 2003. As of March 31, 2004, the carrying amount of such liability is less than $50,000.

Indemnification Agreement

        In connection with the Company’s joint venture arrangement with United Kingdom-based MFI Furniture Group Plc., Ethan Allen Inc. has entered into a tax cross-indemnification agreement with the joint venture partner. The indemnification agreement stipulates that both parties agree to pay fifty percent of the amount of any tax liability arising as a result of (i) an adverse tax judgment or (ii) the imposition of additional taxes against either partner, and attributable to the operations of the joint venture. The indemnification agreement is effective until such time that the joint venture is terminated. At the present time, management anticipates that the joint venture will continue to operate for the foreseeable future.

        The maximum potential amount of future payments (undiscounted) that the Company could be required to make under this indemnification agreement is indeterminable as no such tax liability currently exists. Further, the nature, extent and magnitude of any such tax liability arising in the future as a result of an adverse tax judgment or change in applicable tax law cannot be estimated with any reasonable certainty. It should be further noted that no recourse or collateral provisions exist that would enable recovery of any portion of amounts paid under this indemnification agreement. Management expects, based on its current understanding of the applicable tax laws and the existing legal structure of the joint venture, subject to future changes in applicable laws and regulations, this cross-indemnity agreement will expire without requiring funding by the Company. Accordingly, as of March 31, 2004, the carrying amount of the liability related to this indemnification agreement is zero.

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Product Warranties

        The Company’s products, including its case goods, upholstery and home accents, generally carry explicit product warranties that extend from three to five years and are provided based on terms that are generally accepted in the industry. All of the Company’s independent dealers are required to enter into, and perform in accordance with the terms and conditions of, a warranty service agreement. The Company records provisions for estimated warranty and other related costs at time of sale based on historical warranty loss experience and makes periodic adjustments to those provisions to reflect actual experience. On rare occasion, certain warranty and other related claims involve matters of dispute that ultimately are resolved by negotiation, arbitration or litigation. In certain cases, a material warranty issue may arise which is beyond the scope of the Company’s historical experience. The Company provides for such warranty issues as they become known and estimable. It is reasonably possible that, from time to time, additional warranty and other related claims could arise from disputes or other matters beyond the scope of the Company’s historical experience. As of March 31, 2004, the Company’s product warranty liability totaled $1.1 million.

Business Outlook

        We believe the business outlook for our industry continues to show signs of improvement. Encouraging signs noted in recent periods which seemed to indicate some strengthening in consumer confidence appear to have been sustained in the current quarter. The U.S. economy appears to be benefiting from a stronger employment environment and historically low interest rates which, in turn, have led to a surge in refinancing activity and housing purchases. Recent comments by the Federal Reserve Board suggest a continued “patient” approach toward future interest rate increases. These factors seem to have had a positive efffect on consumer spending habits which is reflected in the Company’s incoming order trends. If these apparent signs of economic recovery continue, we believe the longer-term outlook is promising as well. As the economy strengthens, however, it is also possible that costs associated with production (including raw materials and labor), distribution (including freight and fuel charges), and retail operations (including compensation, delivery and warehousing, occupancy and advertising expenses) may increase. Similarly, an increase in interest rates could serve to adversely impact the level of discretionary spending on the part of consumers. We cannot reasonably predict when, or to what extent, events may occur which could impact the availability of such resources and/or their related cost to the Company.

        We continue to believe that there is considerable interest on the part of consumers to invest in their homes. We also believe that this interest has, until recently, been restrained by such factors as high unemployment, sluggish consumer confidence levels and the fact that many home buyers stretched themselves financially to purchase as much house as possible in the current low rate environment. As the economy improves and this interest in home decorating continues to emerge, as we anticipate it will, we believe we will be well positioned to take advantage of the long-awaited increase in demand as a result of (i) our established brand, (ii) our comprehensive complement of home furnishing solutions, and (iii) our vertically-integrated business model.

        In July 2003, The American Furniture Manufacturers Committee for Legal Trade (the “Committee”) filed an anti-dumping petition with the U.S. Department of Commerce (“DOC”) and the International Trade Commission (“ITC”) seeking tariff protection on wooden bedroom furniture imported from China. In December 2003, the ITC ruled that the Committee’s petition met the ITC’s initial requirements resulting in a preliminary determination of injury and causing the DOC to move forward with a formal investigation of the matter. Should the DOC conclude that wooden bedroom furniture imported from China violates fair trade provisions, it could enforce the application of tariffs on such products. Initially, it was believed that tariffs, if imposed, could be in effect as early as April 2004. However, in early April 2004, the Committee requested, and was granted, a 50-day postponement of the DOC's final ruling. As such, a decision by the DOC with regard to the aforementioned matter is not expected until, at the earliest, June 2004. Accordingly, the amount of such tariffs is not reasonably estimable at this time.

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        While Ethan Allen fully supports all efforts undertaken to ensure fair trade, the Company remained neutral with respect to the matter set forth in the Committee’s petition. At the present time, sales of case goods represent approximately 52% of the Company’s wholesale sales. Imported case goods, which include items in addition to wooden bedroom furniture and which are sourced from various locations, including China, represent only a portion of those case good sales. As such, we believe that tariffs, if any, imposed on wooden bedroom furniture imported from China, will not have a material effect on our consolidated results of operations.

        On April 19, 2004, the Company, in an effort to absorb excess capacity and increase operating efficiencies, announced a plan to close and consolidate two of its manufacturing facilities.  The plants, which are involved in the production of wood case goods furniture, are located in Boonville, New York and Bridgewater, Virginia.  Management anticipates that most of the production from these plants will be absorbed by other Ethan Allen manufacturing facilities.  The plant closures are expected to result in a headcount reduction totaling approximately 500 employees.  The Company will record a pre-tax restructuring and impairment charge of approximately $12.5 to $13.5 million ($7.7 to $8.3 million, after-tax) for costs associated with these plant closings, the majority of which is non-cash in nature and is related to fixed asset impairment charges, primarily for real property and machinery and equipment associated with the closed facilities.  The balance of the charge is related to employee severance and benefits and other plant exit costs.  Most of the earnings impact is expected to occur in the Company's fourth fiscal quarter ended June 30, 2004.  Ethan Allen has 12 remaining plant locations, including six wood case goods plants, five upholstery plants, and 1 accessory assembling plant.  These facilities total nearly 4 million square feet and employ approximately 4,000 people.

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Item 3. Quantitative and Qualitative Disclosure About Market Risk

        The Company is exposed to interest rate risk primarily through its borrowing activities. The Company’s policy has been to utilize United States dollar denominated borrowings to fund its working capital and investment needs. Short-term debt, if required, is used to meet working capital requirements and long-term debt is generally used to finance long-term investments. There is inherent rollover risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and the Company’s future financing requirements.

        The Company has one debt instrument outstanding with a variable interest rate. This debt instrument has a principal balance of $4.6 million and matures in 2004. Based on the principal balance outstanding during the period, a one-percentage point increase in the variable interest rate would not have had a significant impact on the Company’s consolidated results of operations.

        The Company’s exposure to foreign currency exchange risk is primarily limited to its operation of seven Ethan Allen-owned retail stores located in Canada as substantially all purchases of imported parts and finished goods are denominated in United States dollars. As such, gains or losses resulting from market changes in the value of foreign currencies have not had, nor are they expected to have, a material effect on the Company’s consolidated results of operations.

        Currently, the Company does not enter into financial instrument transactions for trading or other speculative purposes or to manage interest rate or currency exposure.

Item 4. Controls and Procedures

        Ethan Allen’s management, including the Chairman of the Board and Chief Executive Officer (“CEO”) and the Vice President-Finance (“VPF”), conducted an evaluation of the effectiveness of disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-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. Based on such evaluation, the CEO and VPF have concluded that, as of March 31, 2004, the Company’s disclosure controls and procedures are effective in ensuring that material information relating to the Company (including its consolidated subsidiaries), which is required to be included in the Company’s periodic filings under the Exchange Act, has been made known to them in a timely manner.

        There have been no significant changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES


PART II — OTHER INFORMATION

Item 1. Legal Proceedings

        There has been no material change to the matters discussed in Part I, Item 3 — Legal Proceedings in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on September 22, 2003.

Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

         Certain information regarding purchases made by or on behalf of the Company or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended) of our common stock during the three months ended March 31, 2004 is provided below:

Item 3. Defaults Upon Senior Securities

         None.

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

         None.

Item 5. Other Information

         None.

Item 6. Exhibits and Reports on Form 8-K

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

ETHAN ALLEN INTERIORS INC.
(Registrant)

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