UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~February~~May 29, ~~2004~~2005

Commission File Number 1-10226

THE ROWE COMPANIES

(Exact name of registrant as specified in its charter)

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


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

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

N/A

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x No ¨

~~YES~~Indicate xby Nocheck mark whether the registrant is an accelerated filed (as defined in Rule 12b-2 of the Exchange Act) YES ¨ No x

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

YES ¨ No x

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

Class		Outstanding at ~~February~~May 29, ~~2004~~2005
Common stock, par value $1.00 per share		13,~~186~~291,~~125~~535 shares

THE ROWE COMPANIES

INDEX

		Page
Part I. Financial Information
Consolidated Balance Sheets – February 29, 2004 and November 20, 2003		3
Consolidated Balance Sheets – May 29, 2005 and November 28, 2004		3
Consolidated Statements of Operations – Three Months Ended February 29, 2004 and March 2, 2003		4
Consolidated Statements of Operations – Three Months and Six Months Ended May 29, 2005 and May 30, 2004		4
Consolidated Statements of Cash Flows – Three Months Ended February 29, 2004 and March 2, 2003		5
Consolidated Statements of Cash Flows - Six Months Ended May 29, 2005 and May 30, 2004		5
Notes to Consolidated Financial Statements		7
Management’s Discussion and Analysis of Financial Condition and Results of Operations		1114
Forward Looking Statements		1623
Quantitative and Qualitative Disclosures about Market Risk		1926
Controls and Procedures		19
Part II. Other Information		28
Part II. Other Information		20

PART 1 - FINANCIAL INFORMATION

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	February 29, 2004			November 30, 2003
	(Unaudited)			(Audited)
	($ in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,360		$	3,708
Restricted cash collateralizing letters of credit		3,674			3,674
Accounts receivable, net (Note 4)		20,920			19,889
Notes receivable		100			100
Inventories (Note 5)		33,105			32,387
Deferred income tax asset		869			880
Prepaid expenses and other		3,543			2,711
Total current assets		63,571			63,349
PROPERTY AND EQUIPMENT, net		40,459			41,624
GOODWILL		14,224			14,224
OTHER NONCURRENT ASSETS		11,153			10,871
	$	129,407		$	130,068
LIABILITIES
CURRENT LIABILITIES
Current maturities of long-term debt	$	2,011		$	3,314
Accounts payable and accrued liabilities		20,437			21,683
Income taxes payable		1,065			1,061
Customer deposits		12,896			13,512
Total current liabilities		36,409			39,570
LONG-TERM DEBT		36,721			34,312
DEFERRED LIABILITIES		4,257			4,269
Total liabilities		77,387			78,151
STOCKHOLDERS’ EQUITY
COMMON STOCK, par value $1 per share: 50,000,000 shares authorized; issued shares 16,607,990 and 16,587,407, respectively; outstanding shares 13,186,125 and 13,166,599, respectively		16,608			16,587
CAPITAL IN EXCESS OF PAR VALUE		23,110			23,084
OTHER COMPREHENSIVE INCOME		(549	)		(566	)
RETAINED EARNINGS		34,814			34,770
Less treasury stock, 3,421,865 shares in 2004 and 3,420,808 shares in 2003, at cost		(21,963	)		(21,958	)
Total stockholders’ equity		52,020			51,917
	$	129,407		$	130,068

UNAUDITED

See notes to consolidated financial statements


	May 29, 2005			November 28, 2004
	(in thousands, except per share amounts)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	4,389		$	5,560
Restricted cash collateralizing letters of credit		3,024			3,564
Accounts receivable, net		20,602			16,522
Inventories (Note 4)		46,662			37,781
Deferred income tax asset		1,911			1,931
Prepaid expenses and other		4,161			5,500

Total current assets		80,749			70,858

PROPERTY AND EQUIPMENT, net (Note 5)		45,206			43,846

INVESTMENT PROPERTY HELD FOR SALE (Note 10)		6,744			7,248
GOODWILL		13,182			13,182
OTHER NONCURRENT ASSETS		3,709			3,987

	$	149,590		$	139,121

LIABILITIES
CURRENT LIABILITIES
Current maturities of long-term debt	$	1,867		$	1,867
Accounts payable and accrued liabilities		25,655			25,366
Income taxes payable		850			1,064
Customer deposits		17,459			14,296

Total current liabilities		45,831			42,593

LONG-TERM DEBT		36,417			24,077
LONG-TERM DEBT ASSOCIATED WITH INVESTMENT PROPERTY HELD FOR SALE (Note 10)		5,735			8,968
DEFERRED RENT (Note 5)		8,285			7,581
DEFERRED LIABILITIES		3,201			3,222

Total liabilities		99,469			86,441

STOCKHOLDERS’ EQUITY
COMMON STOCK, par value $1 per share, 50,000,000 authorized shares; issued shares 16,723,859 and 16,674,653, respectively; outstanding shares 13,291,535 and 13,247,821 respectively		16,724			16,675
CAPITAL IN EXCESS OF PAR VALUE		23,282			23,206
RETAINED EARNINGS		32,089			34,779
ACCUMULATED OTHER COMPREHENSIVE INCOME		41			9
Less treasury stock, 3,432,324 shares in 2005 and 3,426,832 shares in 2004		(22,015	)		(21,989	)

Total stockholders’ equity		50,121			52,680

	$	149,590		$	139,121

See notes to consolidated financial statements.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED ~~FEBRUARY~~MAY 29, ~~2004~~2005 AND ~~MARCH~~MAY 230, ~~2003~~2004

UNAUDITED

	Three Months Ended						Six Months Ended
	February 29, 2004			March 2, 2003
	May 29, 2005			May 30, 2004			May 29, 2005			May 30, 2004
	(in thousands - except pershare amounts)
	(in thousands, except per share amounts)
Net shipments	$	70,746		$	63,719
				Restated						Restated
Cost of shipments		45,644			41,376
Net shipments	$	79,915		$	75,561		$	145,426		$	145,983
Gross profit		25,102			22,343
Cost of shipments		55,732			48,507			100,972			94,151
Selling and administrative expenses		24,224			22,684
Gross profit		24,183			27,054			44,454			51,832
Operating income (loss)		878			(341	)
Selling and administrative expenses		27,600			25,447			52,728			49,305
Interest expense		(894	)		(1,336	)
Operating income (loss)		(3,417	)		1,607			(8,274	)		2,527
Other income		347			395
Interest expense		(707	)		(752	)		(1,229	)		(1,463	)
Earnings (loss) from continuing operations before taxes		331			(1,282	)
Other income, net (Note 12)		79			215			868			390
Tax expense (benefit)		182			(469	)
Earnings (loss) from continuing operations before taxes		(4,045	)		1,070			(8,635	)		1,454
Net earnings (loss) from continuing operations		149			(813	)
Tax expense (benefit)		(1,493	)		347			(3,181	)		548
Earnings (loss) from discontinued operations, net of tax expense (benefit) of $(65) and $499, respectively (Note 11)		(105	)		815
Net earnings (loss) from continuing operations		(2,552	)		723			(5,454	)		906
Net earnings	$	44		$	2
Discontinued operations (Note 10):
Net earnings (loss) from continuing operations per common share	$	0.01		$	(0.06	)
Loss on contingencies associated with operations discontinued in prior years, net of tax benefit of $65		—			—			—			(105	)
Net earnings per common share	$	0.00		$	0.00
Earnings (loss) from discontinued real estate operations, net of tax expense of $7, $4, $51 and $0, respectively		11			6			81			(1	)
Weighted average common shares		13,176			13,165
Gain on disposal of Sylmar investment property, net of tax expense of $1,680		—			—			2,683			—
Net earnings (loss) from continuing operations per common share assuming dilution	$	0.01		$	(0.06	)
Net earnings (loss)	$	(2,541	)	$	729		$	(2,690	)	$	800
Net earnings per common share assuming dilution	$	0.00		$	0.00
Net earnings (loss) from continuing operations per common share	$	(0.19	)	$	0.05		$	(0.41	)	$	0.07
Weighted average common shares and equivalents		13,476			13,212
Net earnings (loss) per common share	$	(0.19	)	$	0.06		$	(0.20	)	$	0.06
Weighted average common shares		13,293			13,188			13,283			13,182
Net earnings (loss) from continuing operations per common share assuming dilution	$	(0.19	)	$	0.05		$	(0.41	)	$	0.07
Net earnings (loss) per common share assuming dilution	$	(0.19	)	$	0.05		$	(0.20	)	$	0.06
Weighted average common shares and equivalents		13,293			13,527			13,283			13,501

See notes to consolidated financial statements.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

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

~~ENDED~~MAY ~~FEBRUARY~~ 29, ~~2004~~2005 AND ~~MARCH~~MAY 230, ~~2003~~ 2004

UNAUDITED

	2004			2003
	2005			2004
	($ in thousands)
	(in thousands)
INCREASE (DECREASE) IN CASH:
Increase (Decrease) In Cash
Cash flows from operating activities:
Cash received from customers	$	69144,~~042~~782		$	79146,~~820~~074
Cash paid to suppliers and employees		(70158,~~896~~108	)		(76141,~~215~~121	)
Income taxes paid, net of refunds		(114	)		(122	)
Income taxes received (paid), net		1,179			(596	)
Interest paid		(~~894~~1,503	)		(1,~~647~~829	)
Other receipts - net		347			395
Incentive payments received from landlords		844			—
Net cash and cash equivalents provided by (used in) operating activities		(2,515	)		2,231
Other receipts - net		1,283			754
Net cash and cash equivalents provided by (used in) operating activities		(11,523	)		3,282
Cash flows from investing activities:
Proceeds from sales of fixed assets		—			67
Payments received on notes receivable		—			75
Increase in cash surrender value		(3266	)		(1770	)
Capital expenditures		(949	)		(234	)
Proceeds from sale of assets		5,173			—
Net cash used in investing activities		(981	)		(184	)
Capital expenditures		(4,501	)		(1,979	)
Net cash provided by (used in) investing activities		606			(1,974	)
Cash flows from financing activities:
Draws under revolving loans		5,829			8,358
Restricted cash released from (deposited to) collateral for letters of credit		540			(540	)
Repayments under revolving loans		(2,990	)		(2,920	)
Draws under revolving loans		13,274			6,310
Payments to reduce long-term debt		(1,733	)		(3,800	)
Repayments under revolving loans		—			(4,514	)
Payments to reduce loans on cash surrendar value		—			(16	)
Payments to reduce long-term debt		(4,167	)		(2,233	)
Proceeds from issuance of common stock		47125			—59
Purchase of treasury stock		(526	)		—(10	)
Net cash provided by financing activities		1,148			1,622
Net cash provided by (used in) financing activities		9,746			(928	)
Net increase (decrease) in cash and cash equivalents		(21,~~348~~171	)		~~3,669~~380
Cash and cash equivalents at beginning of period		3,708			274
Cash at beginning of period		5,560			3,708
Cash and cash equivalents at end of period	$	1,360		$	3,943
Cash at end of period	$	4,389		$	4,088

See notes to consolidated financial statements.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

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

~~ENDED~~MAY ~~FEBRUARY~~ 29, ~~2004~~2005 AND ~~MARCH~~MAY 230, ~~2003~~2004

UNAUDITED

Reconciliation of Net Earnings to Net Cash


	2005			2004
	*(in thousands)*
Net earnings (loss)	$	(2,690	)	$	800

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Pre-tax gain on disposition of assets		(4,354	)		—
Depreciation and amortization		3,049			4,053
Provision for deferred compensation		80			138
Payments made for deferred compensation		(122	)		(163	)
Provision for losses on accounts receivable		(273	)		120
Provision for deferred taxes		(57	)		21

Change in operating assets and liabilities:
Decrease (increase) in accounts receivable		(3,807	)		(209	)
Decrease (increase) in inventories		(8,881	)		(1,694	)
Decrease (increase) in prepaid expenses and other		1,339			448
Decrease (increase) in other miscellaneous assets		118			(292	)
Increase (decrease) in accounts payable		876			240
Increase (decrease) in income taxes payable		(214	)		(134	)
Increase (decrease) in accrued expenses		(454	)		(82	)
Increase (decrease) in customer deposits		3,163			300
Increase (decrease) in deferred rent		704			(264	)

Total adjustments		(8,833	)		2,482

Net cash provided by (used in) operating activities	$	(11,523	)	$	3,282

~~Provided~~See notes Byto ~~(Used~~consolidated ~~In)~~financial ~~Operating~~statements. ~~Activities:~~

	2004			2003
	($ in thousands)
Net earnings	$	44		$	2
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization		2,099			1,687
Provision for deferred compensation		71			40
Payments made for deferred compensation		(82	)		(139	)
Provision for losses on accounts receivable		57			59
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable		(1,088	)		840
Decrease (increase) in inventories		(717	)		(758	)
Decrease (increase) in prepaid expenses and other		(822	)		670
Decrease (increase) in other assets		(247	)		152
Increase (decrease) in accounts payable		613			802
Increase (decrease) in accrued expenses		(1,831	)		(1,584	)
Increase (decrease) in income taxes payable		4			(92	)
Increase (decrease) in customer deposits		(616	)		552
Total adjustments		(2,559	)		2,229
Net cash provided by (used in) operating activities	$	(2,515	)	$	2,231

See notes to consolidated financial statements

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

Note 1 – The Rowe Companies operates primarily through Rowe Furniture, Inc., its upholstered furniture manufacturing subsidiary, and Storehouse, Inc., a 61-store retail furniture chain.


Note 1 -		The Rowe Companies (the “Company”) operates primarily through Rowe Furniture, Inc., (“Rowe”), its core upholstered furniture manufacturing subsidiary, and Storehouse Inc., (“Storehouse”), a multi-channel, lifestyle home furnishings business including 65 retail home furnishings stores.

Note 2 -		In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position as of May 29, 2005 and the results of operations and cash flows for the three and six month periods ended May 29, 2005 and May 30, 2004. Selling and administrative expenses included $1,677,000 and $1,397,000 of retail delivery expenses for the three months ended May 29, 2005 and May 30, 2004, respectively, and $3,326,000 and $2,819,000 for the six months ended May 29, 2005 and May 30, 2004, respectively.

		These interim financial statements and the related notes should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K/A for the fiscal year ended November 28, 2004. See Note 5.

Note 3 -		The results of operations for the six months ended May 29, 2005 and May 30, 2004 are not necessarily indicative of the results to be expected for the full year.

Note 4 -		Inventory components are as follows:

Note 2 – In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position as of February 29, 2004 and the results of operations and cash flows for the three months ended February 29, 2004 and March 2, 2003. Selling and administrative expenses include $1,422,000 and $1,207,000 of retail delivery expenses for the three months ended February 29, 2004 and March 2, 2003, respectively.


	May 29, 2005		November 28, 2004
	*(in thousands)*
Retail merchandise	$	25,299	$	21,103
Finished goods		2,955		2,376
Work-in-process		4,346		3,507
Raw materials		14,062		10,795

Total inventories	$	46,662	$	37,781

Note 35 –- ~~The~~As ~~results~~previously ofreported, ~~operations~~like ~~for~~many other organizations, the ~~three~~Company ~~months~~recently ~~ended~~completed ~~February~~an ~~29,~~internal ~~2004~~review ~~and~~in ~~March~~the 2,first ~~2003~~quarter of fiscal 2005 to ensure its accounting practices are ~~not~~consistent ~~necessarily~~with ~~indicative~~the application of lease accounting under Generally Accepted Accounting Principles (GAAP). As a result, the ~~results~~Company tocorrected beits ~~expected~~method of accounting for ~~the~~certain ~~full~~leases ~~year~~and restated its consolidated balance sheet as of November 28, 2004 in its 2004 Form 10-K/A.

Note 4 – Accounts receivable are customer obligations due under normal trade terms. The Company sells its products to distributors and retailers in the residential home furnishings industry, including traditional furniture retailers and specialty home furnishings stores. Management performs continuing credit evaluations of its customers’ financial condition and although generally does not require collateral, letters of credit may be required from customers in certain circumstances. Senior management reviews accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible. Any accounts receivable balances that are determined to be uncollectible, along with a general reserve are included in the overall allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on the information available, management believes the allowance for doubtful accounts as of February 29, 2004 is adequate. However, actual write-offs might exceed the recorded allowance.

Note 5 – Inventory components are as follows:

	February 29,2004		November 30,2003
	(in thousands)
Retail merchandise	$	19,275	$	19,149
Finished goods		1,628		2,036
Work-in-process		3,188		3,208
Raw materials		9,014		7,994
Total inventories	$	33,105	$	32,387

THE	ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

~~Note~~Following 6is –a Assummary ~~previously~~of ~~reported,~~the ineffects ~~2002~~of the ~~Company~~lease ~~restructured~~accounting ~~its~~corrections ~~two~~on ~~retail operations into one operating under~~ the ~~Storehouse name. The~~ Company’s ~~recognized~~consolidated ~~restructuring~~statements and related charges in 2002, and modified these charges in 2003, relating primarily to costs for closing and subleasing two store locations and one administrative office location, terminating or relocating certain employees, and writing off certain fixed assets associated with its former subsidiary, Home Elements. As of ~~November~~operations ~~30, 2003, a reserve of $335,000 was included in accrued expenses~~ for the ~~sublease~~three ofand ~~the~~six ~~excess administrative office space. During the three~~ months ended May ~~February 29~~30, 2004, ~~payments,~~(in ~~net of sublease income received~~thousands, ~~totaling~~except ~~$16,000~~per ~~were~~share ~~applied against the reserve, as shown below~~data):

	11/30/2003 ReserveBalance		Revisions		Paid To Date		2/29/2004 Reserve Balance
	(in thousands)
Lease termination costs	$	335	$	—	$	16	$	319
	12/1/2002Reserve Balance		Revisions		PaidTo Date		3/2/2003ReserveBalance
			(in thousands)
Lease termination costs	$	519	$	—	$	75	$	444

Consolidated Statements of Operations and Comprehensive Income

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


Three months ended May 30, 2004	As Previously Reported		Lease Adjustments			As Restated
Selling and administrative expenses	$	25,466	$	(19	)	$	25,447
Operating income		1,588		19			1,607
Earnings from continuing operations before taxes		1,051		19			1,070
Tax expense		341		6			347
Net earnings from continuing operations		710		13			723
Net earnings		716		13			729
Comprehensive income		1,068		13			1,081
Net earnings from continuing operations per common share	$	0.05	$	—		$	0.05
Net earnings per common share	$	0.05	$	0.01		$	0.06
Net earnings from continuing operations per common share assuming dilution	$	0.05	$	—		$	0.05
Net earnings per common share assuming dilution	$	0.05	$	—		$	0.05

Six months ended May 30, 2004
Selling and administrative expenses	$	49,367	$	(62	)	$	49,305
Operating income		2,465		62			2,527
Earnings from continuing operations before taxes		1,392		62			1,454
Tax expense		527		21			548
Net earnings from continuing operations		865		41			906
Net earnings		759		41			800
Comprehensive income		1,128		41			1,169
Net earnings from continuing operations per common share	$	0.07	$	—		$	0.07
Net earnings per common share	$	0.06	$	—		$	0.06
Net earnings from continuing operations per common share assuming dilution	$	0.06	$	0.01		$	0.07
Net earnings per common share assuming dilution	$	0.06	$	—		$	0.06

	Three Months Ended
	February 29, 2004		March 2,2003
	(in thousands)
Net earnings available to basic and diluted shares	$	44	$	2
Weighted average common shares outstanding (Basic)		13,176		13,165
Effect of dilutive stock options		300		47
Weighted average common shares and equivalents outstanding (Diluted)		13,476		13,212


		There was no net impact from the lease accounting corrections on the Company’s consolidated statement of cash flows for the six months ended May 30, 2004.

Note 6 -		The following table shows the components of the earnings per share computations shown in the Consolidated Statements of Operations.

As of February 29, 2004 and March 2, 2003, there were 1,075,295 and 1,961,348 outstanding options, respectively, whose exercise price was equal to or greater than the average market price of the Company’s common stock for the three months then ended, respectively. These options are excluded from the computation of the effect of dilutive stock options shown in the table above.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

Note 8 – The Company’s operations are classified into two business segments: wholesale and retail home furnishings. The wholesale home furnishings segment (consisting specifically of Rowe Furniture) manufactures upholstered furniture for distribution through home furnishings retailers. Upholstered furniture includes sofas, loveseats, occasional chairs and sleep sofas, covered with fabric or leather. The retail home furnishings segment (consisting specifically of Storehouse) sells home furnishings and accessories to customers through Company-owned stores located from Texas through the southeast and mid-Atlantic markets. These products consist of upholstered furniture (primarily obtained from Rowe Furniture), case goods and home accessories. The other category is comprised of additional subsidiaries reviewed by management including parent company expenses.


	Three Months Ended					Six Months Ended
	May 29, 2005			May 30, 2004		May 29, 2005			May 30, 2004
	*(in thousands)*
Net earnings (loss) available to basic and diluted shares	$	(2,541	)	$	729	$	(2,690	)	$	800

Weighted average common shares outstanding (Basic)		13,293			13,188		13,283			13,182

Effect of dilutive stock options		—			339		—			319

Weighted average common shares and equivalents outstanding (Diluted)		13,293			13,527		13,283			13,501

	WholesaleHomeFurnishingsSegment		RetailHomeFurnishingsSegment			Other			Inter-segmentEliminations			Consolidated
	As of May 29, 2005, there were 990,375 options with an exercise price equal to or greater than the average market price of the Company’s common stock for the three months then ended, and these options are excluded from the computation of the effect of dilutive stock options shown in the table above. In addition, due to the losses reported for the three and six month periods ended May 29, 2005, an additional 942,295 options which would have been dilutive if not for the losses for the periods (as the exercise prices of these options were less than the average market price of the Company’s common stock for the three and six months then ended) were also excluded from the computation of the effect of dilutive options shown in the table above.
	(in thousands)
	As of May 30, 2004, there were 940,356 outstanding options whose exercise price was equal to or greater than the average market price of the Company’s common stock for the three months then ended. These options are excluded from the computation of the effect of dilutive stock options shown in the table above.
2004
Note 7 -	The Company’s operations are classified into two business segments, manufacturing and retail home furnishings. The manufacturing segment, consisting specifically of Rowe, manufactures upholstered furniture (sofas, loveseats, occasional chairs and sleep sofas, covered primarily in fabric) for distribution through home furnishings retailers. The retail segment, consisting specifically of Storehouse, sells home furnishings and accessories to customers through Company-owned stores. These products consist of upholstered furniture (primarily obtained from Rowe), case goods, and home accessories. The other category is comprised of additional subsidiaries reviewed by management, including parent company expenses.
Net shipments	$	41,786	$	34,022		$	—		$	(5,062	)	$	70,746
Earnings (loss) from continuing operations before taxes		1,388		(304	)		(768	)		15			331
Total assets		111,372		30,919			42,431			(55,315	)		129,407
2003
Net shipments	$	41,472	$	27,461		$	—		$	(5,214	)	$	63,719
Earnings (loss) from continuing operations before taxes		2,231		(2,883	)		(606	)		(24	)		(1,282	)
Total assets		117,423		44,861			36,994			(72,036	)		127,242

The 2003 total assets reported above exclude $48,270,000 of assets held for sale relating to the Company’s discontinued Mitchell Gold operating unit, which was sold in April 2003.

Note 9 – The components of comprehensive income (loss) for the three months ended February 29, 2004 are shown below:

	Three Months Ended
	February 29, 2004			March 2, 2003
	(in thousands)
Net earnings	$	44		$	2
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on derivatives		(230	)		(158	)
Payments transferred to expense		213			204
Comprehensive income	$	27		$	48

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

Note 10 – The Company uses the intrinsic value method to account for stock-based employee compensation. As the Company’s awards of stock options carry an exercise price equal to the fair market value of the stock on the date of grant, no accounting cost is reflected in the Company’s Consolidated Statements of Operations. Had the Company utilized the fair value based method of accounting for stock-based employee compensation, the impact on earnings and earnings per share would have been as follows:


	Manufacturing Home Furnishings Segment			Retail Home Furnishings Segment			Other			Inter- Segment Eliminations			Consolidated
	*(in thousands)*
2005
Net shipments	$	83,136		$	72,079		$	—		$	(9,789	)	$	145,426
Operating income (loss)		(3,094	)		(1,658	)		(3,357	)		(165	)		(8,274	)
Interest expense		(479	)		(355	)		(395	)		—			(1,229	)
Other income, net		(644	)		(479	)		1,991			—			868
Earnings (loss) from continuing operations before taxes		(4,217	)		(2,492	)		(1,761	)		(165	)		(8,635	)

Depreciation and amortization		1,621			1,328			100			—			3,049
Capital expenditures		1,129			3,240			132			—			4,501
Total assets		110,748			45,368			46,173			(52,699	)		149,590

2004
Net shipments	$	87,369		$	68,756		$	—		$	(10,142	)	$	145,983
Operating income (loss)		5,668			318			(3,489	)		30			2,527
Interest expense		(1,062	)		(324	)		(77	)		—			(1,463	)
Other income, net		(1,391	)		(490	)		2,271			—			390
Earnings (loss) from continuing operations before taxes		3,215			(497	)		(1,294	)		30			1,454

Depreciation and amortization		2,518			1,326			209			—			4,053
Capital expenditures		1,101			746			132			—			1,979
Total assets		113,995			34,516			43,589			(58,967	)		133,133

	Three Months Ended
	February 29, 2004			March 2, 2003
	(in thousands, except pershare amounts)
Net earnings, as reported	$	44		$	2
Earnings per share, basic, as reported	$	0.00		$	0.00
Earnings per share, diluted, as reported	$	0.00		$	0.00
Stock-based employee compensation cost, net of related taxes, included in net earnings as reported		—			—
Stock-based employee compensation cost, net of related taxes, that would have been included in net earnings if the fair value based method had been applied	$	304		$	88
Pro forma net earnings (loss), including the impact of applying the fair value based method	$	(260	)	$	(86	)
Pro forma earnings (loss) per share, basic	$	(0.02	)	$	(0.01	)
Pro forma earnings (loss) per share, diluted	$	(0.02	)	$	(0.01	)


Note 8 -		The components of comprehensive income for the three months and six months ended May 29, 2005 and May 30, 2004, are shown below:

Note 11 – Effective April 2003, the Company sold its Mitchell Gold subsidiary. Included in earnings (loss) from discontinued operations in the Company’s consolidated statements of operations for the three months ended March 2, 2003, were the following amounts associated with Mitchell Gold:


	Three Months Ended					Six Months Ended
	May 29, 2005			May 30, 2004		May 29, 2005			May 30, 2004
	*(in thousands)*
Net earnings (loss)	$	(2,541	)	$	729	$	(2,690	)	$	800

Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on derivatives		(36	)		128		5			(68	)
Payments transferred to expense		10			224		27			437

Comprehensive income (loss)	$	(2,567	)	$	1,081	$	(2,658	)	$	1,169

Net shipments		$	15,016,000
Pre-tax earnings		$	1,352,000

During the three months ended February 29, 2004, the Company recorded certain adjustments relating to its workers compensation insurance reserves for policy years 1999 and 2000. These adjustments included amounts associated with its discontinued Wexford and Mitchell Gold operations, in the amounts of $74,000 and $31,000, net of tax, respectively. These amounts have been included in losses from discontinued operations.

Note 12 – The Company has been named as a defendant in various lawsuits arising in the ordinary course of business. It is not possible at the present time to estimate the ultimate outcome of these actions; however, management believes that the resulting liability, if any, will not have a material adverse effect on the Company’s consolidated financial condition or results of operations.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED


Note 9 -		The Company uses the intrinsic value method to account for stock-based employee compensation. As the Company’s awards of stock options carry an exercise price equal to the fair market value of the stock on the date of grant, no accounting cost is reflected in the Company’s Consolidated Statements of Operations. Had the Company utilized the fair value based method of accounting for stock-based employee compensation, the impact on earnings and earnings per share would have been as follows:


	Three Months Ended					Six Months Ended
	May 29, 2005			May 30, 2004		May 29, 2005			May 30, 2004
	*(in thousands, except per share amounts)*
Net earnings (loss), as reported	$	(2,541	)	$	729	$	(2,690	)	$	800
Earnings (loss) per share, basic, as reported	$	(0.19	)	$	0.06	$	(0.20	)	$	0.06
Earnings (loss) per share, diluted, as reported	$	(0.19	)	$	0.05	$	(0.20	)	$	0.06

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

Stock-based employee compensation cost, net of related taxes, that would have been included in net earnings if the fair value based method had been applied	$	500		$	13	$	511		$	317

Pro forma net earnings (loss), including the impact of applying the fair value based method	$	(3,041	)	$	716	$	(3,201	)	$	483
Pro forma earnings (loss) per share, basic	$	(0.23	)	$	0.05	$	(0.24	)	$	0.04
Pro forma earnings (loss) per share, diluted	$	(0.23	)	$	0.05	$	(0.24	)	$	0.04


Note 10 -		During fiscal 2004, the Company’s Board of Directors approved management’s plans to sell two investment real estate properties. The first property, located in Sylmar, California, was sold in December, 2004. Net proceeds of $5.2 million were used to pay down debt and expenses of the sale. The Company recognized a gain, net of taxes, of $2.7 million, or $0.20 per share, during the quarter ended February 27, 2005. As previously reported, in April 2005, the Company entered into a definitive agreement to sell the second property, located in Jessup, Maryland, for a cash purchase price of $8,350,000, subject to adjustment. The purchaser will be assuming the Company’s outstanding mortgage debt secured by the Jessup Property (the “Mortgage”) and will receive a credit against the purchase price in an amount equal to the outstanding principal balance of the Mortgage as of the closing date, plus accrued and unpaid interest, late fees and any other fees and charges then due and owing the lender, less a one percent assumption fee payable to the lender by the Purchaser. As of May 29, 2005, the outstanding principal balance on the Mortgage was $5,735,000. On June 10, 2005, an amendment to the sale agreement was executed to reduce the purchase price to $8,097,625. The sale of the Jessup property is expected to close in July 2005. The Company expects to realize a gain of approximately $800,000, net of taxes, from the sale of this property.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED


		As also previously reported, in March 2005, the Company’s Board of Directors approved management’s plan to sell a third investment real estate property, located in Christiansburg, Virginia, and effective March 30, 2005 the Company entered into a definitive agreement to sell this property for a cash purchase price of $2,000,000. Consummation of the transaction is subject to customary closing conditions, including completion by the purchaser of a 120-day due diligence period during which the purchaser may, in its sole and absolute discretion, terminate the agreement if it is not satisfied with the results of its investigation. Closing is expected to occur in July 2005. The Christiansburg property is subject to liens of Company lenders. It is anticipated that such lenders will require that substantially all of the proceeds from the sale be applied against outstanding loan balances. The Company expects to realize a gain of approximately $1.1 million, net of taxes, from the sale of this property.

		Income and expense items associated with these properties have been classified as discontinued operations, and all prior periods have been restated to conform to the current presentation. Included in earnings from discontinued operations in the Company’s consolidated statements of operations were the following amounts associated with these investment properties:


	Three Months Ended						Six Months Ended
	May 29, 2005			May 30, 2004			May 29, 2005			May 30, 2004
	*(in thousands)*
Other income, net	$	136		$	193		$	407		$	365
Gain on sale		—			—			4,362			—
Interest expense		(119	)		(183	)		(274	)		(366	)

Earnings (loss) before taxes	$	17		$	10		$	4,495		$	(1	)

Earnings (loss) per share	$	0.00		$	0.00		$	0.21		$	(0.00	)
Earnings (loss) per diluted share	$	0.00		$	0.00		$	0.20		$	(0.00	)

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

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


	May 29, 2005		November 28, 2004
	*(in thousands)*
Investment property, net of accumulated amortization	$	6,744	$	7,248
Mortgage loans	$	5,735	$	8,968


		During February 2004, the Company recorded certain adjustments relating to workers compensation insurance reserves for policy years 1999 and 2000. These adjustments included amounts associated with prior discontinued operations, totaling $170,000 on a pre-tax basis, or $0.01 per share. These charges have also been included in discontinued operations.

Note 11 -		The Company has been named as a defendant in various lawsuits arising in the ordinary course of business. It is not possible at this time to estimate the ultimate outcome of these actions; however, management believes that the resulting liability, if any, will not have a material adverse effect on the Company’s consolidated financial condition or results of operations.

Note 12 -		During the three months ended February 27, 2005, the Company settled litigation with a vendor. In addition to reversing approximately $460,000 of costs previously included in costs of shipments, the Company reported in other income, net approximately $680,000 before taxes, representing amounts, net of legal expenses, received from the vendor to settle the litigation.

Note 13 -		In December 2004, the FASB released Statement 123R, “Share-Based Payment”. Statement 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements, and provides expanded guidance on measuring the fair value of share-based payment transactions. Statement 123R is effective for the Company’s stock option plans beginning in fiscal 2006, in accordance with rules issued by the SEC.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

Management’s Discussion and Analysis of Financial Condition and Results of Operations:

Three Months Ended February 29, 2004 Versus Three Months Ended March 2, 2003

Overview

The Rowe Companies ~~(the “Company”)~~ operates through two subsidiaries in the home furnishings industry. Rowe ~~Furniture, Inc. (“Rowe”)~~ manufactures quality, upholstered furniture serving the middle and upper middle market primarily throughout the United States. Storehouse, ~~Inc. (“Storehouse”)~~ is a multi-channel lifestyle home furnishings retailer with 61 65 stores from Texas through the Southeast and Mid-Atlantic markets.

~~During the~~The first ~~quarter~~half of fiscal 2005 has been dedicated to resolving problems resulting from the Enterprise Resource Planning (“ERP”) implementation and related manufacturing process changes undertaken in 2004. An ERP system is a fully-integrated set of programs and data bases. In our case, the ~~Company~~suite ~~continued~~of application programs includes order processing, payroll, human resources, production planning and scheduling, purchasing, inventory management and accounting. Operating results at Rowe reflect the ~~trend~~challenge ofthis ~~improved~~has ~~retail~~been. ~~operations~~Storehouse ~~that~~also ~~was~~embarked ~~evident~~on its aggressive store opening plan for 2005, with five store openings to date and six more in ~~the~~process ~~second~~and ~~half~~expected to open by the end of ~~2003,~~the ~~resulting~~year. New stores increase selling and administrative expenses and these costs are expected to increase in ~~improved~~future ~~operating~~periods ~~results~~as these additional openings occur.

~~The~~In ~~retail~~Rowe, ~~segment~~following ~~had~~the ~~significant~~implementation ~~sales~~of ~~growth~~our ERP system and ~~margin~~related ~~improvement,~~manufacturing ~~resulting~~process changes in ~~strong~~the ~~gross~~fall ~~profit~~of ~~growth~~2004, ~~partially~~manufacturing ~~offset~~backlog bybuilt ~~higher expenses~~rapidly. ~~associated~~During ~~with~~this ~~increased~~time, ~~shipments~~order ~~(primarily~~processing ~~commissions~~errors ~~and~~occurred ~~sales~~as ~~bonuses,~~a ~~delivery~~result ~~costs~~of lack of experience and ~~credit~~understanding ~~card~~of ~~fees).~~the ~~Operating~~new ~~income~~software ~~was~~on ~~positive~~the part of our customer service staff, and ~~earnings~~errors ~~before~~in ~~taxes~~converting ~~improved~~data from the preceding software application to ~~($304~~the current technology. These included errors in pricing,~~000)~~ ~~from~~ship ~~($2~~– to addresses,~~883~~ quantities ordered and,~~000)~~ occasionally, the entry of duplicate orders. Backlog peaked at a level in excess of two months of production in the second quarter of 2005.

~~Offsetting~~Additional ~~these~~resources ~~positive~~have ~~developments~~been ~~was~~assigned ato ~~reduction~~resolve inoutstanding ~~operating~~order ~~income~~processing ~~from the manufacturing segment~~issues. ~~While~~Further, ~~shipments~~daily ~~were~~and ~~slightly~~weekly ~~positive~~production tolevels ~~last~~have ~~year~~increased, ~~gross~~which ~~margin~~has ~~and~~enabled ~~gross~~us ~~profit~~to ~~declined~~reduce our backlog. ~~Gross~~At ~~profit~~the ~~and~~end ~~gross~~of ~~margin~~the ~~declined~~second quarter, ~~primarily~~backlog ~~due~~had been reduced to about the ~~accelerated~~same ~~depreciation~~level ~~associated~~as ~~with~~at ~~certain~~the ~~legacy~~start ~~systems~~of ~~that~~the ~~will be~~quarter, ~~replaced~~and inhas been further reduced since the ~~coming~~end ~~months~~of asthe quarter. Management foresees further reduction in the ~~new~~backlog ~~Enterprise~~in ~~Resource~~the ~~Planning~~third ~~(“ERP”)~~quarter. ~~system~~A isreduced ~~implemented,~~backlog and touse of amore ~~decline~~structured inproduction ~~manufacturing~~planning ~~productivity~~techniques ~~compared~~are expected to ~~last~~result ~~year,~~in ~~causing~~gradually ~~higher~~improving ~~than~~manufacturing ~~expected~~gross ~~labor~~profit ~~costs~~levels during the balance of the year.

1114

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

~~The~~RESULTS ~~following~~OF ~~table~~OPERATIONS ~~recaps operating earnings by segment for 2004’s and 2003’s first quarters:~~

	2004			2003
	(in thousands)
Net Shipments:
Manufacturing, total	$	41,786		$	41,472
Sales to retail segment		(5,062	)		(5,214	)
Manufacturing, net of eliminations		36,724			36,258
Retail		34,022			27,461
Total		70,746			63,719
Gross Profit:
Manufacturing		8,260			9,336
Retail		16,842			13,007
Total		25,102			22,343
Selling and Administrative Expenses:
Manufacturing		5,657			5,777
Retail		16,745			15,363
Other		1,822			1,544
Total	$	24,224		$	22,684
Operating Income (Loss):
Manufacturing	$	2,603		$	3,559
Retail		97			(2,356	)
Other		(1,822	)		(1,544	)
Total	$	878		$	(341	)

Six Months Ended May 29, 2005 Versus Six Months Ended May 30, 2004

Net shipments increased $7,027,000, or 11.0%, to $70,746,000 in 2004 from $63,719,000 in 2003. The increase primarily resulted from increased shipments in our retail segment.


	May 29, 2005			May 30, 2004			$ Variance			% Variance
				(in thousands)
Net shipments:
Manufacturing, total	$	83,136		$	87,369		$	(4,233	)	(4.8	)
Sales to retail segment		(9,789	)		(10,142	)		353		(3.5	)

Manufacturing, net of eliminations		73,347			77,227			(3,880	)	(5.0	)
Retail		72,079			68,756			3,323		4.8

Consolidated net shipments	$	145,426		$	145,983		$	(557	)	(0.4	)

Gross profit:
Manufacturing	$	8,281		$	17,135		$	(8,854	)	(51.7	)
Retail		36,173			34,697			1,476		4.3

Consolidated gross profit	$	44,454		$	51,832		$	(7,378	)	(14.2	)

Gross margin:
Manufacturing		11.3	%		22.2	%
Retail		50.2	%		50.5	%
Consolidated gross margin		30.6	%		35.5	%

Selling and administrative expenses:
Manufacturing	$	11,540		$	11,437		$	103		0.9
Retail		37,831			34,379			3,452		10.0
Other		3,357			3,489			(132	)	(3.8	)

Consolidated selling and administrative expenses	$	52,728		$	49,305		$	3,423		6.9

Operating income (loss):
Manufacturing	$	(3,259	)	$	5,698		$	(8,957	)	(157.2	)
Retail		(1,658	)		318			(1,976	)	(621.4	)
Other		(3,357	)		(3,489	)		132		(3.8	)

Consolidated operating income (loss)	$	(8,274	)	$	2,527		$	(10,801	)	(427.4	)

~~Retail~~Net ~~segment net~~ shipments: increased $6.6 million, or 23.9%, from $27.5 million in 2003 to $34.0 million in 2004. While virtually every product category showed growth over 2003, particularly strong increases were in the categories of accessories (up 50% over last year), office and library walls (16%), bedroom (12%), and textiles (224%). Textiles improved due to the roll out of the new window treatment product line introduced over the last few months. Accessories are benefiting from revisions in the manner in which they are purchased and inventoried, allowing for an improved flow of product into the customers hands, as well as from an expanded catalogue and call center operation. Overall, same store sales increased 18.8% over the first three months of 2003.

~~Manufacturing~~Net ~~segment net~~ shipments ~~increased~~declined ~~$466,000, or 1~~0.34%, ~~from $36.3 million~~ in ~~2003~~2005 tofrom ~~$36.7 million in~~ 2004., from ~~The~~reduced ~~increase~~shipments ~~was~~at ~~achieved~~Rowe. ~~despite~~Storehouse’s ~~two~~shipments ~~fewer~~increased ~~production~~from ~~days~~prior inyear ~~the 2004 calendar~~levels. ~~The~~Shipments ~~manufacturing segment~~from ~~also~~Rowe ~~shipped $5.1 million~~ to ~~the~~Storehouse ~~retail~~declined ~~segment,~~compared ~~2.9%~~to ~~less~~last ~~than the amount shipped in 2003~~year. ~~These shipments have been eliminated in consolidation.~~

1215

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

~~Gross~~Manufacturing ~~profit~~segment ~~increased~~net ~~$2,759,000,~~shipments ordecreased ~~12.3%,~~in ~~from~~the ~~$22,343,000~~first inhalf ~~2003~~of to2005 ~~$25,102,000~~compared into 2004~~. Gross margin~~, ~~or gross~~ ~~profit~~primarily as a ~~percent~~result of ~~net~~disruptions ~~shipments~~in order processing, ~~improved~~scheduling, ~~from~~and ~~35.1%~~production infollowing ~~2003~~the toERP ~~35.5%~~implementation induring the fourth quarter of 2004. ~~These~~Rowe ~~increases~~also ~~were~~recorded ~~due~~additional tocosts ~~increased~~relating ~~retail~~to ~~margins~~returns and anallowances. ~~increase~~Incoming inorders ~~retail~~declined approximately ~~shipments~~3% ason a ~~percent~~dollar ofbasis ~~total~~compared ~~shipments~~to last year.

Retail segment ~~gross~~net shipments ~~profit~~increased ~~improved~~in by2005 $3over 2004.8 ~~million,~~The ~~from~~accessories ~~$13.0~~and ~~million~~textiles incategories ~~2003~~continued to ~~$16.8 million~~show ingrowth ~~2004,~~and ~~primarily~~were asthe alargest ~~result~~percentage ofgrowth ~~increased~~categories, ~~shipments.~~and ~~Retail~~the ~~gross~~first ~~margin~~and ~~also~~fourth ~~improved,~~largest ~~from~~dollar 47growth categories.4% inUpholstery ~~2003~~was tothe ~~49.5%~~category inwith the ~~2004~~largest dollar decrease, ~~due~~although tothe apercentage ~~combination~~decline ofwas ~~more~~relatively ~~higher~~small. ~~margin~~Overall, ~~goods~~same instore ~~the~~sales ~~mix~~increased ~~(accessories~~1.1% ~~and~~over ~~textiles~~2004. inThe ~~particular);~~Company aopened ~~price increase,~~five ~~averaging~~new ~~2-3%,~~retail ~~taken~~stores during the ~~latter~~first half of ~~2003;~~2005, ~~and~~while athree ~~decline~~stores inwere ~~clearance~~relocated ~~shipments~~and asone closed aduring ~~percentage~~the ofsame ~~net~~time ~~shipments~~period. ~~from~~Six ~~9.5%~~additional instores ~~2003~~are slated to ~~8.8%~~open during the second half of fiscal 2005, mostly in ~~2004~~the September/October time period.

~~Manufacturing segment gross profit declined $1.1 million, or 11.5%, from $9.3 million in 2003 to $8.3 million in 2004.~~ Gross ~~margin declined from 25.7% in 2003 to 22.5% in 2004. Approximately $750,000 of the decline in gross~~ profit: (or 2.0% of gross margin) resulted from accelerated depreciation of certain legacy systems being replaced later this year with the ERP system. The other significant factor in the decline in gross profit (as well as gross margin) was a decline in manufacturing productivity, causing higher labor costs.

~~Selling~~Gross ~~and~~profit ~~administrative~~declined ~~expenses~~in ~~increased~~the byfirst ~~$1,540,000,~~half orof ~~6.8%,~~2005 ~~from~~compared ~~$22,684,000~~to in2004 ~~2003~~due to ~~$24,224,000~~lower inshipments ~~2004.~~at ~~Selling~~Rowe and ~~administrative~~the ~~expenses~~costs ~~improved~~of ~~from~~production inefficiencies in the manufacturing segment, 35as well as increases in certain costs.6% Gross margin, or gross profit as a percentage of net shipments, indeclined ~~2003~~from ~~to 34~~35.25% in 2004. ~~Increases~~to 30.6% in ~~retail~~2005, ~~segment~~due ~~expenses~~to ~~and~~the ~~other~~decline ~~administrative~~in ~~costs~~gross ~~were~~profit ~~partially offset by decreases~~ in the manufacturing segment ~~expenses~~.

~~Retail~~Manufacturing segment ~~selling~~gross profit and ~~administrative~~gross ~~expenses~~margin ~~increased~~declined ~~$1.4~~substantially ~~million,~~in or2005 ~~9.0%~~from 2004 levels caused by disruptions in production, scheduling and manufacturing productivity resulting from ~~$15~~ERP implementation and manufacturing process change issues.4 ~~million~~Direct inlabor ~~2003~~costs toincreased approximately $161.76 million indue ~~2004. These~~to ~~increases~~downtime ~~are~~caused ~~primarily~~by inefficient ascheduling ~~result~~and ofthe ~~higher~~periodic ~~net~~shortage ~~shipments,~~of ininternally ~~the~~manufactured ~~form~~frame ofparts. ~~higher~~Overhead ~~commissions,~~costs increased ~~delivery~~over ~~costs,~~last ~~credit~~year ~~card~~as ~~and~~a ~~related~~result ~~fees~~of overtime costs, ~~and~~due ~~other~~to ~~similar~~low ~~costs.~~rates Inof ~~addition~~production, ~~while~~increases ~~the~~in ~~overall~~customer ~~store~~service ~~count~~costs ~~has~~and ~~not~~certain ~~increased from~~other ~~last~~categories ~~year,~~of ~~two~~indirect ~~stores~~labor. ~~did~~Certain ~~open~~costs ~~late~~included in ~~2003,~~the ~~adding~~2004 ~~incremental~~first ~~costs~~half towere ~~the~~not ~~2004~~repeated ~~expenses.~~in ~~Costs~~2005, ~~associated~~such ~~with~~as the ~~accessories~~accelerated ~~warehouse~~depreciation ~~(to~~on ~~support~~scheduling ~~catalogue~~software ~~and~~incurred ~~upcoming~~last ~~internet~~year ~~sales~~of ~~efforts)~~$1.2 ~~and~~million. ~~catalogue~~There ~~call~~was ~~center~~lower ~~also~~transportation ~~contributed~~revenue toon ~~the~~lower ~~increase~~shipments, ~~from~~and ~~2003’s~~transportation ~~first~~costs ~~quarter,~~also increased as ~~both~~trucks ~~opened~~were ~~after~~shipped ~~the~~with ~~first~~less ~~quarter~~than ofoptimal ~~2003~~loads.

~~Manufacturing~~While ~~segment~~the ~~selling~~Company ~~and~~has ~~administrative~~made ~~expenses~~progress ~~decreased~~since ~~$120,000,~~the orstart ~~2.1%,~~of ~~from~~the ~~$5.8~~fiscal ~~million~~year in ~~2003~~some toof ~~$5.7~~the ~~million~~areas inimpacting ~~2004.~~the ~~This~~efficient ~~decrease~~scheduling ~~was~~and ~~largely~~production ~~attributable~~processes, toincluding ~~the~~increased ~~impact~~weekly ofunit ~~two~~production, ~~fewer~~negative ~~business~~impacts ~~days~~are inexpected ~~the~~to ~~2004~~continue ~~quarter~~into ~~versus~~at ~~2003,~~least ~~and~~the ~~its~~third ~~impact~~quarter onof ~~personnel~~fiscal ~~costs~~2005 and possibly longer.

~~Other administrative~~Retail ~~costs~~gross profit increased ~~$278,000,~~reflecting ~~from~~the ~~$1,544,000~~increase in ~~2003 to $1~~shipments,~~822,000~~ inwhile ~~2004.~~retail ~~The~~gross ~~increase~~margin ~~resulted~~decreased ~~primarily~~slightly from ~~higher~~the ~~insurance~~prior ~~costs,~~year ~~up $230~~period,~~000,~~ ~~including~~largely ~~$182,000~~due ~~for~~to ~~changes~~sales inof ~~reserves~~clearance ~~for~~items ~~workers~~at ~~compensation~~stores ~~claims~~that ~~relating~~were toclosing for ~~old~~relocation ~~policy~~at ~~years~~points during the period.

~~Operating~~Selling ~~earnings were $878,000 in 2004, compared to a loss of $(341,000) in 2003, as a result of increased retail shipments~~ and ~~gross profit, offset by lower manufacturing segment gross profit and increased retail and other selling and~~ administrative expenses,: ~~as discussed above.~~

13Selling and administrative expenses increased by 6.9% overall in 2005. Retail segment expenses accounted for most of the increase. As a percentage of net shipments, total selling and administrative expenses increased 2.5% over 2004.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

~~Interest~~Storehouse ~~expense~~also ~~decreased~~added ~~from~~costs ~~$1,366,000~~to insupport ~~2003~~direct tomarketing ~~$894,000~~since inthe first quarter of fiscal 2004. ~~Reductions~~and in ~~outstanding~~mid ~~loan~~2004 ~~balances achieved~~added ~~during~~a ~~2003~~cross-dock ~~largely~~warehouse ~~accounted~~facility ~~for~~to ~~the~~support ~~reduction.~~new ~~Declining~~store ~~short-term~~openings ~~interest~~in ~~rates~~New Jersey and ~~slightly~~Pennsylvania. ~~reduced~~Offsetting ~~margins~~these ~~over~~increases, ~~base~~in ~~rates~~part, onhas ~~certain~~been ~~components~~favorable ofhealthcare ~~our~~costs. ~~outstanding~~Storehouse ~~debt~~anticipates ~~(based~~opening ~~upon~~a ~~improved~~total ~~financial~~of ~~condition~~eleven ~~and~~new stores ~~operating~~in ~~ratios)~~fiscal 2005. As these additional stores open, ~~also~~ ~~contributed~~retail toselling ~~the~~and ~~decline~~administrative inexpenses ~~interest~~are ~~expense~~expected to increase.

~~Other~~Manufacturing ~~income,~~segment ~~net,~~selling and administrative expenses increased 0.9% in 2005 over 2004. Increases principally related to salaries for staff that had been working on ~~decreased~~the ERP programming effort early in 2004 (their salaries were capitalized as part of the project costs during that time). During 2005, Rowe reduced the allowance for bad debts by $48400,000 (included in selling and administrative expenses), ~~from~~while increasing service costs $~~395~~491,000 (included in ~~2003~~cost toof goods sold) and recording approximately $~~347~~294,000 (in ~~2004,~~deductions ~~due~~from net shipments) to ~~reduced~~cover ~~net~~price ~~rental~~adjustments ~~income~~relating ~~associated~~to ~~with~~order anentry ~~investment~~issues ~~property,~~and ~~partially~~other sales-related costs. The reduction in bad debt reserves offset bythe ~~additional~~impact ~~rental~~of ~~income~~administrative salary increases described above.

~~Earnings~~The ~~from~~decline ~~continuing~~in ~~operations~~other ~~before~~selling ~~taxes~~and ~~improved~~administrative toexpenses ~~earnings~~largely represents the absence of ~~$331,000~~a provision for management bonuses in ~~2004~~2005. ~~from~~The a2004 ~~loss~~first ofhalf ~~$(1,282,000)~~management inbonus ~~2003,~~accruals ~~reflecting the~~were ~~factors~~reversed ~~discussed~~later ~~above~~in 2004.

AsOperating ~~the~~earnings: Company achieved profitability in 2004, the effective tax rate was 55.0%. The effective rate exceeded the statutory rate due to state income taxes, non-deductible items and other items, net. In 2003, the Company recorded a tax benefit as a result of a loss from operations. The effective rate of the tax benefit was 36.6%. The 2003 effective tax benefit rate was lower than the statutory rate as miscellaneous non-deductible items reduced the potential recovery.

Operating earnings declined by $10.8 million to a loss of $8.3 million in 2005 as a result of lower shipments at Rowe; manufacturing segment operating inefficiencies, service costs, returns and other manufacturing-related costs; and retail segment selling and administrative expenses primarily resulting from new stores and related costs, as discussed above.

Interest expense:

Interest expense decreased by $234,000 from 2004 to 2005 largely due to the maturity in late 2004 of the interest rate swap agreement entered into in 2000 in conjunction with the original lease agreement for the Elliston manufacturing facility. Interest on increased borrowings under the revolver loan in early 2005, as well as increased rates (both the base rates and the spread over base rates) partially offset the savings from the swap. The spread over base rates on the Company’s outstanding debt increased by 100 basis points effective with the beginning of the second quarter.

Other income, net, increased $478,000 in 2005 over 2004, primarily due to a gain recognized on the settlement of litigation in the first quarter of 2005. The Company collected $725,000, less certain expenses, as a result of the settlement. Offsetting this gain was reduced net rental income, principally due to the absence in 2005 of certain short-term leases in effect during 2004.

Earnings from continuing operations before taxes declined from earnings of $1,454,000 in 2004 to a loss of $(8,635,000) in 2005, reflecting the factors discussed above.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

Three Months Ended May 29, 2005 Versus Three Months Ended May 30, 2004


	May 29, 2005			May 30, 2004			$ Variance			% Variance
				(in thousands)
Net shipments:
Manufacturing, total	$	48,122		$	45,907		$	2,215		4.8
Sales to retail segment		(5,646	)		(5,080	)		(566	)	11.1

Manufacturing, net of eliminations		42,476			40,827			1,649		4.0
Retail		37,439			34,734			2,705		7.8

Consolidated net shipments	$	79,915		$	75,561		$	4,354		5.8

Gross profit:
Manufacturing	$	5,140		$	9,199		$	(4,059	)	(44.1	)
Retail		19,043			17,855			1,188		6.7

Consolidated gross profit	$	24,183		$	27,054		$	(2,871	)	(10.6	)

Gross margin:
Manufacturing		12.1	%		22.5	%
Retail		50.9	%		51.4	%
Consolidated gross margin		30.3	%		35.8	%

Selling and administrative expenses:
Manufacturing	$	6,209		$	6,104		$	105		1.7
Retail		19,705			17,676			2,029		11.5
Other		1,686			1,667			19		1.1

Consolidated selling and administrative expenses	$	27,600		$	25,447		$	2,153		8.5

Operating income (loss):
Manufacturing	$	(1,069	)	$	3,095		$	(4,164	)	(134.5	)
Retail		(662	)		179			(841	)	(469.8	)
Other		(1,686	)		(1,667	)		(19	)	1.1

Consolidated operating income (loss)	$	(3,417	)	$	1,607		$	(5,024	)	(312.6	)

Net shipments:

Net shipments increased 5.8% in the second quarter of 2005 from the comparable 2004 period. Both Rowe’s and Storehouse’s shipments increased from prior year levels. Shipments from Rowe to Storehouse increased substantially compared to last year’s second quarter, as production volume was higher in the current quarter.

Manufacturing segment net shipments increased in the second quarter of 2005 compared to 2004, as some progress has been made, including increased weekly unit production, in overcoming the

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

disruptions resulting from the ERP implementation and manufacturing process changes. The 2005 net shipments are net of an additional $600,000 in costs related to returns and allowances as a result of late shipments and customer service issues experienced in recent months.

Retail segment net shipments increased in the second quarter of 2005 over 2004. The accessories and bedroom categories continued to show growth and were the largest dollar growth categories, while textiles had the largest percentage growth. Upholstery was the only category with a dollar decrease, although the percentage decline was relatively small. The remaining categories were a mixture of relatively small dollar increases. Overall, same store sales increased 1.9% for the quarter. The Company opened four new retail stores during the first three months of 2005, and one during the second quarter, for a total of five year to date. Three stores relocated during the first half of 2005, and six more stores are currently slated to open during the second half of the year.

Gross profit:

Gross profit declined in the second quarter of 2005 compared to 2004 due to the costs of production inefficiencies in the manufacturing segment, as well as some increases in certain costs. Gross margin declined from 35.8% in 2004 to 30.3% in 2005, due to the decline in gross profit in the manufacturing segment.

Manufacturing segment gross profit and gross margin declined substantially in 2005 from 2004 levels. Materials costs were $1.6 million over the prior year period with increases in most categories, in particular petroleum derived materials, plywood and hardwood, steel springs and bed frame parts. Expediting of materials drove inbound freight costs higher by $220,000. Direct labor costs increased approximately $1.0 million due to downtime caused by inefficient scheduling and the periodic shortage of proper materials. Overhead costs increased $2.0 million over last year, as a result of overtime costs and increases in customer service costs and most other categories of indirect labor. Transportation costs increased approximately $500,000 as trucks were shipped with less than optimal loads in order to meet customer demand.

While the Company has made progress since the start of the fiscal year in some of the areas impacting the efficient scheduling and production processes, negative impacts are expected to continue into at least the third quarter of fiscal 2005 and possibly longer.

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

Selling and administrative expenses:

Selling and administrative expenses increased by 8.5% overall in 2005. Retail segment expenses accounted for most of the increase. As a percentage of net shipments, total selling and administrative expenses increased 0.8% over 2004.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

Retail segment selling and administrative expenses increased in virtually all categories, driven by costs at nine new stores opened since May 2004 (four in fiscal 2004, five in the first half of 2005). Storehouse has also added costs to support e-commerce in particular since the first quarter of fiscal 2004 and in mid 2004 added a cross-dock warehouse facility to support new store openings in New Jersey and Pennsylvania. Offsetting these increases, in part, has been favorable healthcare costs.

Manufacturing segment selling and administrative expenses increased 1.7% in 2005 over 2004. Increases principally related to salaries for staff that had been working on the ERP programming effort early in 2004 (their salaries were capitalized as part of the project costs during that time). Offsetting this increase was a reduction during the second quarter of 2005 in the reserve for bad debts (reflecting a re-allocation of reserves amongst bad debts, sales discounts and allowances, and service costs, as described above).

Operating earnings:

Operating earnings declined by $5.0 million to a loss of $3.4 million in 2005 as a result of manufacturing segment production inefficiencies, sales allowances and service costs, and increased retail segment selling and administrative expenses primarily resulting from new stores and related costs, as discussed above.

Interest expense:

Interest expense decreased by $45,000 from 2004 to 2005 largely due to the maturity in late 2004 of the swap agreement entered into in 2000 in conjunction with the original lease agreement for the Elliston manufacturing facility. Interest on increased borrowings under the revolver loan in 2005, as well as increased rates (both base rates and the spread over base rates), largely offset the savings from the swap.

Other income, net, decreased $136,000 in 2005 from 2004, primarily due to operating expense adjustments recognized in net rental income in 2004, as well as rental income in 2004 from a short-term tenant that did not renew for 2005.

Earnings from continuing operations before taxes declined from earnings of $1,070,000 in 2004 to a loss of $(4,045,000) in 2005, reflecting the factors discussed above.

Critical Accounting Policies:

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

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

Self-Insurance Reserves

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

Long-lived Asset Valuations and Impairments

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

14Bad Debt Reserves

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

Inventory Reserves

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

Goodwill

In accordance with SFAS 142, “Goodwill and Other Intangible Assets,” which was adopted by the Company in 2003, goodwill and other intangible assets are to be evaluated for impairment at the reporting unit level on an annual basis and between annual tests whenever events or circumstances indicate that the carrying value of a reporting unit may exceed its fair value. The Company conducts its required annual impairment test during the second quarter of each fiscal year. The impairment test uses a discounted cash flow and projected profitability model to estimate the fair value of the reporting unit. This model requires the use of long-term planning forecasts and assumptions regarding specific economic conditions that are outside the control of the Company. Based upon the results of testing, there was no impairment of goodwill as of May 29, 2005.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

When cash flow analysis indicates that the fair value of an asset is less than its book value, and such shortfall is not believed to be temporary in nature, then an adjustment to reduce the asset to its fair value is made. As conditions change, additional adjustments of fair value may be required.

Inventory Reserves

The Company maintains its inventories at the lower of cost or market value. Cost is determined on a last-in, first-out (LIFO) basis for inventory held at retail facilities, and on a first-in, first-out (FIFO) basis for inventory held at its manufacturing facilities. When conditions warrant, reserves are established to reduce the value of inventory to net realizable values. As conditions warrant, additional adjustments may be required.

Goodwill

Liquidity and Source of Capital:

Cash from Operations

Net cash provided by (used in) operating activities was $(211,~~515~~523,000) and $23,~~231~~282,000 in ~~2004~~2005 and ~~2003~~2004, respectively. Fluctuations in net cash provided by ~~(used in)~~ operating activities ~~were~~are primarily the result of changes in operating income and changes in working capital accounts. Substantial changes ~~from~~between ~~2003~~2005 toand 2004 included an increase in accounts ~~certain~~receivable ~~other receivables~~ in ~~2004~~2005 ~~versus~~as ashipments ~~decrease~~increased in ~~receivables~~2005 inand ~~2003~~as ~~due~~customer service issues related to ~~weak~~the ~~shipments~~ERP inimplementation impacted the ~~wholesale~~timely ~~segment~~payments on accounts receivable invoices; an increase in ~~prepaid~~inventories ~~expenses~~to ~~and~~improve ~~other~~in-stock ~~assets~~fabric position in ~~2004~~manufacturing, ~~versus~~higher amanufacturing ~~decline~~work-in-process inventory and five new stores; an increase in ~~2003~~customer deposits in 2005, due to ~~changes~~higher Memorial day weekend sales in ~~premium~~2005 ~~payment practices~~at ~~relating~~quarter ~~primarily~~end and in part due to ~~our~~retail ~~workers~~delivery ~~compensation~~delays ~~insurance~~affected ~~program~~by the timing of Rowe’s shipments to Storehouse; ~~and~~the receipt in early 2005 of a ~~swing~~refund inof ~~customer~~2004’s ~~deposits~~estimated ~~(relating~~tax topayments ~~retail~~in ~~segment~~excess ~~sales)~~of taxes due, as well as the ~~retail~~funds ~~segment~~received ~~delivered~~on the litigation settlement in ~~2004~~early ~~against~~2005. ~~orders~~Storehouse ~~written~~also ~~(and~~received $844,000 ~~cash~~of ~~collected)~~rent incentives from landlords in ~~late~~2005. ~~2003~~No atrent ~~a higher~~incentives ~~rate~~were ~~than~~received induring ~~early~~the ~~2003~~prior year period.

Cash from Investing Activities

Net cash provided by (used in) investing activities was $~~981~~606,000 and $~~184~~(1,974,000) in ~~2004~~ 2005 and ~~2003~~2004, respectively, primarily reflecting anproceeds ~~increase~~from inthe ~~capital~~sale ~~expenditures,~~of ~~particularly~~the Sylmar atinvestment ~~Storehouse~~real estate property in 2005. ~~Such~~Capital expenditures ~~related~~in ~~principally~~2005 inlargely ~~2004~~related to a new ~~distribution~~stores ~~center~~at ~~located~~Storehouse inand ~~Atlanta~~included $844,000 GAfunded by landlord incentives, ~~scheduled~~while to2004 ~~replace~~capital ~~the~~expenditures ~~existing~~were a combination of investments in new stores, a new distribution center ~~during~~and the ~~second~~ERP ~~quarter of 2004~~system.

15Cash from Financing Activities

Net cash provided by (used in) financing activities was $9,746,000 and $(928,000) in 2005 and 2004, respectively. In 2005, the Company drew upon its revolving bank loan to fund operating losses, capital expenditures, and inventory purchases, while the repayments of long-term debt in 2005 include both scheduled payments and the pay-off of the mortgage loan securing the Sylmar investment property with proceeds from the sale of the property. In 2004, draws, net of repayments on the revolving loan, reflected more normal business activities, while the payments on long-term debt included a payment in conjunction with the extension of the lease for the Elliston facility in December 2003, in addition to scheduled debt payments.

As of May 29, 2005, the Company had $1.4 million available under its revolving bank loan. The Company believes it has the financial resources (including available cash, expected cash flow from operations, and bank loans) needed to meet business requirements for the next twelve months including capital expenditures and working capital. The Company may consider raising additional debt or equity capital in fiscal 2005 or 2006 to fund further expansion of its Storehouse subsidiary in fiscal 2006 and other general corporate purposes. Cash flow from operations is highly dependent on order rates and the Company’s operating performance, and for the immediate future, reductions in inventory levels and resolution of the order entry issues that have contributed to the increase in receivables in recent months.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

Cash from Financing Activities

Net cash provided by financing activities was $1,148,000 and $1,622,000 for 2004 and 2003, respectively. In early 2003, the Company was required to make “excess cash flow” payments under certain components of its then outstanding debt, which were in part funded through the revolving loan, in addition to regular periodic principal payments under its debt. In 2004, the Company reduced the outstanding balance of the Elliston capital lease in conjunction with a modification and extension of its terms, in addition to other required principal payments on its existing debt. In 2004, and largely in 2003, draws under the revolving loans were used to offset the impact on cash flow timing of the holiday plant shutdowns at Rowe.

As of February 29, 2004, the Company had $9.3 million available under its revolving bank loan. The Company believes it has the financial resources (including available cash, expected cash flow from operations, and bank loans) needed to meet business requirements for the foreseeable future including capital expenditures and working capital. Cash flow from operations is highly dependent on order rates and the Company’s operating performance.

Interest Rate Risk and Foreign Currency Exchange Rate Risk:

Because the Company’s obligations under its term loan, revolving loan and capital lease obligation bear interest at variable rates, the Company is sensitive to changes in prevailing interest rates. A 10% fluctuation in market interest rates would not result in a material change in interest expense during the 2004 fiscal year. The Company is exposed to market risk from changes in the value of foreign currencies because it imports a substantial portion of its retail inventory and some of its raw materials from foreign sources. See “Forward-Looking Statements” below.

Forward-Looking Statements:

When used in this ~~Quarterly~~ ~~Report~~quarterly onreport ~~Form~~and ~~10-Q~~in ~~filed~~filings with the Securities and Exchange Commission, in press releases or other public shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “believe,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “plans,” or similar expressions, as well as the use of future dates, are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date made. These statements may relate to our future financial performance, strategic plans or objectives, revenues or earnings projections, or other financial items. By their nature, these statements are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the statements. Important factors that could cause actual results to differ materially from the results anticipated or projected include, but are not limited to, the following: changes from anticipated levels of sales, whether due to future national or regional economic and competitive conditions, customer acceptance of existing and new products, or otherwise; the price at which an investment property is sold, cash and non-cash charges incurred in connection therewith, and the timing of any such sale; pending or future litigation; pricing pressures due to excess capacity; raw material cost increases; transportation cost increases; the inability of a major customer to meet its obligations; loss of significant customers in connection with a merger, acquisition, redisposition, bankruptcy or otherwise; actions of current or new competitors; increased advertising costs associated with promotional efforts; change of tax rates; change of interest rates; future business decisions and other uncertainties, all of which are difficult to predict and many of which are beyond the control of the Company.

16Additional risks include:

•

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

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

•

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

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

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

~~increases;~~Our ~~the~~production ~~inability~~management ofpersonnel, aassisted ~~major~~by ~~customer~~experts toprovided ~~meet~~by ~~its~~the ~~obligations;~~software ~~loss of significant customers in connection with a merger~~vendor, ~~acquisition,~~have ~~redisposition, bankruptcy~~been orintensely ~~otherwise;~~focused ~~actions~~on ofidentifying ~~current~~the orspecific ~~new~~problems ~~competitors;~~and ~~increased~~solutions ~~advertising~~to ~~costs~~them. ~~associated~~While ~~with~~progress ~~promotional~~has ~~efforts;~~been ~~change~~made, ofproblems continue ~~tax~~to ~~rates;~~persist ~~change of interest rates; future business decisions~~ and ~~other~~there ~~uncertainties,~~can ~~all~~be ofno ~~which~~assurance ~~are difficult~~as to ~~predict~~when operations and ~~many~~profitability ofwill ~~which~~improve ~~are beyond the control of the Company~~significantly.

Additional risks include:

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

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

•

Our retail operations may not become profitable.

Our retail operations are currently unprofitable, and there can be no assurance that profitability will be achieved.

• ~~The~~Our ~~Company imports a substantial portion of its~~ retail ~~inventory,~~operations ~~and~~are ~~some~~opening ofstores ~~its~~at ~~raw~~a ~~materials,~~higher ~~from~~rate ~~foreign~~than ~~sources. Changes~~ in ~~exchange~~recent ~~rates could impact the price the Company pays for these goods, resulting in potentially higher retail prices and/or lower gross profit on these goods~~years.

~~Approximately~~Storehouse ~~one-third~~opened offive ~~the~~new ~~Company’s~~stores ~~purchases~~in ofthe ~~retail~~first ~~inventory~~half ~~originates~~of ~~overseas,~~2005 and ~~the~~anticipates ~~Company~~opening ~~also~~six ~~purchases~~additional ~~some~~stores ~~raw~~during ~~materials,~~the ~~particularly~~remainder ~~wood~~of ~~components,~~fiscal ~~fabric,~~2005. ~~and~~There ~~leather~~are ~~chairs~~numerous ~~for~~risks ~~re-sale,~~inherent ~~from~~in ~~overseas~~new ~~sources.~~store ~~Most~~development ofwhich ~~these~~could ~~purchases~~result ~~have been denominated~~ in USunprofitable ~~dollars~~locations. AsRisk ~~exchange~~exposure ~~rates~~areas ~~with~~include ~~certain~~site ~~currencies~~selection, ~~have~~contractual ~~become~~commitment ~~unfavorable~~to rent expense, ~~the~~and ~~likelihood~~successful execution of ~~price~~store ~~increases~~selling ~~from~~and ~~our~~operations ~~foreign~~activities. ~~vendors~~There ~~has~~can ~~increased.~~be ~~Such~~no ~~price~~assurance ~~increases,~~that ifthese ~~they~~new ~~occur,~~stores ~~could~~will ~~have~~achieve ~~one~~adequate orlevels ~~more~~ of ~~the~~shipments ~~following~~or ~~impacts:~~profitability.

We• ~~could~~The beCompany ~~forced~~imports toa ~~raise~~substantial portion of its retail ~~prices~~merchandise, soand ~~high~~some ~~that~~of weits ~~are~~raw ~~unable~~materials, tofrom ~~sell~~foreign sources. Changes in exchange rates could impact the ~~products~~price atthe ~~current~~Company ~~unit~~pays ~~volumes.~~for these goods, resulting in potentially higher retail prices and/or lower gross profit on these goods.

IfDuring wefiscal ~~are~~2004, ~~unable~~nearly to40% ~~raise~~of the Company’s purchases of retail ~~prices~~merchandise ~~commensurately~~originated ~~with~~overseas, and the ~~cost increases,~~Company ~~gross~~also ~~profit~~purchased ~~could~~some beraw materials, ~~negatively~~particularly ~~impacted;~~wood orcomponents, wefabric, ~~may~~and beleather ~~forced~~chairs tofor ~~find~~re-sale, ~~alternative~~from overseas sources. Most of ~~comparable~~these ~~product,~~purchases ~~which~~were ~~may~~denominated bein ~~more~~US ~~expensive~~dollars. ~~than~~As exchange rates between the ~~current~~U.S. ~~product~~dollar and certain other currencies have become unfavorable, the likelihood of ~~lower~~price ~~quality,~~increases orfrom ~~the~~our ~~vendor~~foreign ~~may~~vendors behas ~~unable~~increased. toSuch ~~meet~~price ~~our~~increases, ~~requirements for~~if ~~quantities~~they occur, ~~delivery~~could ~~schedules~~have one or ~~other~~more ~~key~~of ~~terms.~~the following impacts:

•

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

•

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

•

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

Similar impacts could be experienced in our manufacturing segment.

•24 ~~We may not be able to pay-off or refinance the debt obligations that mature in fiscal 2007 and 2008.~~

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

~~The~~• ~~Company~~We ~~has~~may ~~substantial~~not ~~debt obligations that mature in 2007 and 2008 in particular. At those times, the Company would~~ be ~~required~~able to pay -off or refinance ~~these obligations. If economic conditions, as well as~~ the ~~Company’s~~debt ~~own operating results, do not improve in the intervening years, then the Company would be more likely to need to refinance, rather than pay off, such~~ obligations. ~~There can be no assurance~~ that ~~the~~mature ~~Company would be successful~~ in ~~obtaining~~fiscal ~~this~~2007 ~~financing, or that, if obtained, the financing would be on favorable terms~~ and ~~conditions~~2008.

The Company has substantial debt obligations that mature in 2007 and 2008 in particular. At those times, the Company would be required to pay off or refinance these obligations. There can be no assurance that the Company will have sufficient cash to satisfy these obligations or that the Company will be successful in obtaining new financing, or that, if obtained, the financing would be on favorable terms and conditions.

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

•

Our bad debts experience may differ materially from our estimates.

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

• We are implementing new Enterprise Resource Planning (“ERP”) software that may not work as planned.

Our manufacturing operations are implementing a new ERP system that includes accounting, order processing, materials purchasing and inventory management, human resources and payroll management and certain other functions. This is a complex, multi-step implementation. Various parts of the system may not perform as planned, which could create problems in entering or processing customer orders, processing payroll, procuring and managing inventory or record keeping. We could also experience costs to implement in excess of our budgeted amount.

•

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

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

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

We are an importer of finished goods for our retail operations and components for our manufacturing operations. Disruptions to our supply chain could result in late arrival or unavailability of components or finished goods for resale, causing manufacturing delays or negatively affecting retail sales due to increased out-of-stock merchandise.

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

1825

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk ~~Disclosures:~~and Foreign Currency Exchange Rate Risk

Because the Company’s obligations under its term loan, revolving loan and capital lease obligation bear interest at variable rates, the Company is sensitive to changes in prevailing interest rates. ABased ~~10%~~upon ~~fluctuation~~the inbalances ~~market~~of ~~interest~~the ~~rates~~above ~~would~~loans ~~not~~as ~~have~~of aMay ~~material~~29, ~~impact~~2005, onan ~~results~~increase of ~~operations~~100 ~~during~~basis ~~the~~points ~~2004~~in ~~fiscal~~market ~~year~~interest rates would increase quarterly interest expense by approximately $75,000.

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

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

Item 4. Controls and Procedures.

An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(a)) under the Securities Exchange Act of 1934 (the “Act”)) was carried out as of ~~February~~May 29, ~~2004~~2005 under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management. Our Chief Executive Officer and Chief Financial Officer concluded that as of May 29, 2005, our disclosure controls and procedures were effective in ensuring that the information we are required to disclose in the reports we file or submit under the Act is (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

During the second quarter ~~ended~~of ~~February~~fiscal 292005, ~~2004~~the Company determined that certain controls relating to order processing were not effective subsequent to the initial implementation of Rowe’s ERP system. These issues were exacerbated by the assignment of inexperienced personnel to assist in order entry during, noand ~~change~~subsequent to, the transition to the new system. As a result of these issues, some invoices to customers reflected incorrect unit prices; and in some cases, duplicate shipments or duplicate invoicing occurred. The identification of these issues has contributed to the increased costs for returns, pricing adjustments, and sales allowances reflected during the six months ended May 29, 2005, and in ~~our~~particular ~~internal~~the ~~control~~three ~~over~~months ~~financial~~ended ~~reporting~~thereon. ~~that~~To correct these problems going forward, Rowe has ~~materially~~implemented functionality ~~affected~~within its ERP system that directly links the shipping and invoicing activities, oreliminating isthe ~~reasonably~~major ~~likely~~source of shipping vs. invoicing problems; and Rowe has assigned additional experienced customer service staff to ~~materially~~order ~~affect,~~entry ~~our~~both ~~internal~~to ~~control~~prevent additional ~~over~~future ~~financial~~instances ~~reporting~~and to resolve existing customer service issues.

~~During~~26 the quarter ended February 29, 2004, the Company implemented the payroll module of its planned ERP implementation. The new payroll module has internal controls that are substantially similar to the prior payroll system. In addition, the new system enhances certain controls within the system.

THE ROWE COMPANIES AND WHOLLY-OWNED SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UNAUDITED

Except for the order entry issues described above, there were no changes in the Company’s internal control over financial reporting that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

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

At the end of fiscal 2006, Section 404 of the Sarbanes-Oxley Act will require the Company’s management to provide an assessment of the effectiveness of the Company’s internal control over financial reporting, and the Company’s independent registered public accounting firm will be required to audit management’s assessment. The Company is in the process of performing the system and process documentation, evaluation and testing required for management to make this assessment and for its independent registered public accountants to provide its attestation report. The Company has not completed this process or its assessment, and this process will require significant amounts of management time and resources. In the course of evaluation and testing, management may identify deficiencies that will need to be addressed and remediated.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

None

Item 2. ~~Changes~~Unregistered inSales of Equity Securities and ~~Used~~Use of Proceeds.

~~None~~The following table sets forth information with respect to shares of common stock of the Company purchased by the Company during the six months ended May 29, 2005.


Period	(a) Total Number of Shares Purchased	(b) Average Price Paid Per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs
02/28/05 thru 04/03/05	—	$	—	—	—
04/04/05 thru 05/01/05	479		3.99	—	—
05/02/05 thru 05/29/05	1,061		4.11	—	—

Total	1,540	$	4.07	—	—

The shares shown above have been purchased by the Company in accordance with the terms of the Company’s ESOP/PAYSOP, which grants participants the right to sell their shares back to the company under certain conditions. Except for such purchases of its shares, the Company is prohibited by the terms of its bank lending agreements from purchasing its shares. As of May 29, 2005, there were 134,277 shares in the Company’s ESOP/PAYSOP.

Item 3. Defaults Upon Senior Securities.

None

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

~~None~~The annual meeting of shareholders for The Rowe Companies was held on April 7, 2005, in McLean, Virginia. The shareholders approved the re-election of two individuals to the Board of Directors; Rosen and Silver. Voting results are shown below:


	For	Withheld
Election of directors:

Charles T. Rosen	12,437,870.9383	198,991.4910
Sidney J. Silver	12,434,240.9383	202,621.4910

Item 5. Other Information.

~~None~~On July 11, 2005, the Company entered into amendments modifying the loan and security agreement with Fleet Capital Corporation and the CIT Group/Commercial Services, Inc. governing the Company’s working capital revolving credit facility and term loan, and the agreement with SunTrust Bank and Atlantic Financial Group, Ltd. governing the capital lease of the Company’s Elliston, Virginia manufacturing facility. The amendments modified certain of the Company’s financial covenants under these agreements by: (i) increasing the limits on capital expenditures during 2005; (ii) eliminating the testing of the Company’s consolidated leverage ratio (defined generally as the ratio of consolidated debt to consolidated EBIDTA (earnings before interest, taxes, depreciation and amortization)) for the four fiscal quarter periods ending May 31, 2005, August 31, 2005 and November 30, 2005, and providing for the resumption of such testing with the four fiscal quarter period ending February 28, 2006; (iii) reducing the amount of EBITDA the Company must achieve for each specified cumulative monthly measurement period beginning with the four-month period ended March 31, 2005 and extending through November 30, 2005; and (iv) increasing the maximum amount of eligible inventory allowed in the computation of available funds through August 31, 2005.

~~Item~~Copies 6.of the amendments are filed as Exhibits 10.1 and ~~Reports~~10.2 onto ~~Form~~this ~~8-K~~report.

a.28 ~~The following exhibits are furnished as part of this report.~~

Exhibit		Description
31.1		Certification of CEO under Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of CFO under Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of CEO under Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of CFO under Section 906 of the Sarbanes-Oxley Act of 2002

b. Reports on Form 8-K:

On March 19, 2004, a Form 8-K was furnished under Item 12 containing the Company’s press release announcing the first quarter results.

Item 6. Exhibits.

The following exhibits are furnished as part of this report.


Exhibit		Description
10.1		Ninth Amendment to Loan and Security Agreement dated July 11, 2005 among The Rowe Companies, Rowe Diversified, Inc., Rowe Furniture Wood Products, Inc., Storehouse, Inc, Rowe Furniture, Inc., Fleet Capital Corporation and the CIT Group/Commercial Services, Inc.

10.2		Fourth Omnibus Amendment dated July 11, 2005 among The Rowe Companies, Rowe Diversified, Inc., Rowe Furniture Wood Products, Inc., Storehouse, Inc., Rowe Furniture, Inc., Atlantic Financial Group, LTD, and Sun Trust.

31.1		Certification of CEO under Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of CFO under Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of CEO under Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of CFO under Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

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

THE ROWE COMPANIES Registrant


		THE ROWE COMPANIES
		Registrant

Date: July 13, 2005		/s/ Gene S. Morphis
		Gene S. Morphis
		Chief Financial Officer

~~Date:~~30 ~~April 7, 2004 /s/ Gene S. Morphis Gene S. Morphis Chief Financial Officer (Duly Authorized Officer)~~

EXHIBIT INDEX

Exhibit No.		Description
10.1		Ninth Amendment to Loan and Security Agreement dated as of July 11, 2005 among The Rowe Companies, Rowe Diversified, Inc., Rowe Furniture Wood Products, Inc., Storehouse, Inc, Rowe Furniture, Inc., Fleet Capital Corporation and the CIT Group/Commercial Services, Inc.
10.2		Fourth Omnibus Amendment dated July 11, 2005, among The Rowe Companies, Rowe Diversified, Inc., Rowe Furniture Wood Products, Inc., Storehouse, Inc., Rowe Furniture, Inc., Atlantic Financial Group, LTD, and Sun.
31.1		Certification of the CEO under Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of the CFO under Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of the CEO under Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of the CFO under Section 906 of the Sarbanes-Oxley Act of 2002

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Filing Compare · ROWE COMPANIES