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
            Commission
                FileOctober
                27,
                2007
            Number
                1-5674








**ANGELICA
      CORPORATION**


(Exact
      name of
      registrant as specified in its charter)








MISSOURI
            43-0905260(State
                or
                other jurisdiction of
            (I.R.S.
                Employer Identification No.)incorporation
                or organization)424
                South
                Woods Mill RoadCHESTERFIELD,
                MISSOURI
            63017(Address
                of
                principal executive offices)
            (Zip
                Code)





(314)
      854-3800


(Registrant's
      telephone number, including area code)








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





Indicate
      by check
      mark whether the registrant is a large accelerated filer, an accelerated filer,
      or a non-accelerated filer. See definition of “accelerated filer and large
      accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer
      ___  Accelerated filer  _X_  Non-accelerated
      filer





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





The
      number of
      shares outstanding of registrant's Common Stock, par value $1.00 per share,
      at November 30, 2007 was 9,770,291 shares.



















ANGELICA
      CORPORATION AND SUBSIDIARIES





TABLE
      OF
      CONTENTS





OCTOBER
      27, 2007
      FORM 10-Q QUARTERLY REPORT





Page
                Number
              Reference**Part
                I.   Financial Information:**Item
                1.  Condensed Consolidated Financial Statements:Condensed
                Consolidated Statements of Income -
                Third Quarter and
              Nine
                Months Ended October 27, 2007 and October
                28, 2006 (Unaudited)
            2Condensed
                Consolidated Balance Sheets – October 27,
                2007 and January 27, 2007 (Unaudited)
            3Condensed
                Consolidated Statements of Cash Flows – Nine
                Months
              Ended
                October 27, 2007 and October 28, 2006
                (Unaudited)
            4Notes
                to Unaudited Condensed Consolidated Financial
                Statements
            5-14Item
                2.  Management's Discussion and Analysis of
                Financial Condition and Results of Operations
            15-21Item
                3.  Quantitative and Qualitative Disclosures
                About Market Risk
            22Item
                4.  Controls and
                Procedures
            22-23**Part
                II.  Other Information:**Item
              4. Submission of Matters to a Vote of Security
              Holders
            24Item
                6.  Exhibits
            24Signatures
            25Exhibit
                Index
            26









CONDENSED
      CONSOLIDATED STATEMENTS OF
      INCOME


*Angelica
      Corporation and Subsidiaries*


*Unaudited
      (Dollars in thousands, except per share amounts)*





Third
                  Quarter
                  Ended
              
              
              Nine
                  Months
                  EndedOctober
                  27,
                  2007
              
              
              October
                  28,
                  2006
              
              
              October
                  27,
                  2007
              
              
              October
                  28,
                  2006Revenues
              
              $
              108,814
              
              
              $
              107,768
              
              
              $
              324,167
              
              
              $
              320,060Cost
                  of
                  services
              
              
              (92,539
              )
              
              
              (90,467
              )
              
              
              (279,652
              )
              
              
              (272,893
              )Gross
                  profit
              
              
              16,275
              
              
              
              17,301
              
              
              
              44,515
              
              
              
              47,167Selling,
                  general and administrative expenses
              
              
              (10,834
              )
              
              
              (13,392
              )
              
              
              (37,944
              )
              
              
              (41,237
              )Amortization
                  of other acquired assets
              
              
              (1,045
              )
              
              
              (1,061
              )
              
              
              (3,171
              )
              
              
              (3,221
              )Other
                  operating income, net
              
              
              412
              
              
              
              2,415
              
              
              
              581
              
              
              
              2,912Income
                  from
                  operations
              
              
              4,808
              
              
              
              5,263
              
              
              
              3,981
              
              
              
              5,621Interest
                  expense
              
              
              (2,439
              )
              
              
              (2,486
              )
              
              
              (7,069
              )
              
              
              (7,055
              )Non-operating
                  income, net
              
              
              536
              
              
              
              185
              
              
              
              969
              
              
              
              567Income
                  (loss)
                  before income taxes
              
              
              2,905
              
              
              
              2,962
              
              
              
              (2,119
              )
              
              
              (867
              )Income
                  tax
                  benefit (provision)
              
              
              1,721
              
              
              
              (387
              )
              
              
              4,157
              
              
              
              1,228**Net
                  income**
              
              $
              4,626
              
              
              $
              2,575
              
              
              $
              2,038
              
              
              $
              361**Basic
                  income per share**
              
              $
              0.50
              
              
              $
              0.28
              
              
              $
              0.22
              
              
              $
              0.04**Diluted
                  income per share**
              
              $
              0.50
              
              
              $
              0.28
              
              
              $
              0.22
              
              
              $
              0.04
  The
      accompanying
      notes are an integral part of the consolidated financial
      statements.





2


CONDENSED
      CONSOLIDATED BALANCE SHEETS


*Angelica
      Corporation and Subsidiaries*


*Unaudited
      (Dollars in thousands)*





October
                  27,
              
              
              January
                  27,2007
              
              
              2007**ASSETS**Current
                  Assets:Cash
              
              $
              602
              
              
              $
              6,254Receivables,
                  less reserves of $1,626 and $848
              
              
              67,562
              
              
              
              56,874Linen
                  inventory
              
              
              52,100
              
              
              
              50,902Assets
                  held
                  for sale
              
              
              4,360
              
              
              
              4,491Prepaid
                  expenses and other current assets
              
              
              4,286
              
              
              
              4,019Total
                  Current
                  Assets
              
              
              128,910
              
              
              
              122,540Property
                  and
                  Equipment
              
              
              202,183
              
              
              
              196,423Less
                  --
                  accumulated depreciation
              
              
              110,024
              
              
              
              104,458Total
                  Property and Equipment
              
              
              92,159
              
              
              
              91,965Other:Goodwill
              
              
              49,259
              
              
              
              49,259Other
                  acquired assets
              
              
              34,955
              
              
              
              38,108Cash
                  surrender value of life insurance
              
              
              1,957
              
              
              
              9,664Deferred
                  income taxes
              
              
              20,080
              
              
              
              19,035Miscellaneous
              
              
              6,046
              
              
              
              5,734Total
                  Other
                  Assets
              
              
              112,297
              
              
              
              121,800Total
                  Assets
              
              $
              333,366
              
              
              $
              336,305**LIABILITIES
                  AND SHAREHOLDERS' EQUITY**Current
                  Liabilities:Current
                  maturities of long-term debt
              
              $
              -
              
              
              $
              96Life
                  insurance policy loans
              
              
              -
              
              
              
              8,298Accounts
                  payable
              
              
              30,046
              
              
              
              32,867Accrued
                  wages
                  and other compensation
              
              
              7,606
              
              
              
              8,961Deferred
                  compensation and pension liabilities
              
              
              1,704
              
              
              
              1,693Deferred
                  income taxes
              
              
              5,483
              
              
              
              4,961Other
                  accrued
                  liabilities
              
              
              29,293
              
              
              
              29,392Total
                  Current
                  Liabilities
              
              
              74,132
              
              
              
              86,268Long-Term
                  Debt, less current maturities
              
              
              95,700
              
              
              
              85,300Other
                  Long-Term Liabilities
              
              
              13,706
              
              
              
              17,191Shareholders'
                  Equity:Common
                  Stock,
                  $1 par value, authorized 20,000,000shares,
                  issued:  9,572,938 and 9,518,688 shares
              
              
              9,573
              
              
              
              9,519Capital
                  surplus
              
              
              8,924
              
              
              
              7,174Retained
                  earnings
              
              
              139,194
              
              
              
              140,277Accumulated
                  other comprehensive loss
              
              
              (3,390
              )
              
              
              (4,839
              )Common
                  Stock
                  in treasury, at cost: 289,592 and 296,419 shares
              
              
              (4,473
              )
              
              
              (4,585
              )Total
                  Shareholders' Equity
              
              
              149,828
              
              
              
              147,546Total
                  Liabilities and Shareholders' Equity
              
              $
              333,366
              
              
              $
              336,305




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




3


CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS


*Angelica
      Corporation and Subsidiaries*


*Unaudited
      (Dollars in thousands)*





Nine
                  Months
                  EndedOctober
                  27,
                  2007
              
              
              October
                  28,
                  2006Cash
                  Flows
                  from Operating Activities:Net
                  income
              
              $
              2,038
              
              
              $
              361Non-cash
                  items included in net income:Depreciation
              
              
              10,785
              
              
              
              11,371Amortization
              
              
              4,251
              
              
              
              4,024Deferred
                  income taxes
              
              
              (1,678
              )
              
              
              (1,228
              )Recognition
                  of uncertain tax positions
              
              
              (2,396
              )
              
              
              -Cash
                  surrender value of life insurance
              
              
              (1,123
              )
              
              
              (1,029
              )Gain
                  on
                  disposal of assets
              
              
              (287
              )
              
              
              (1,473
              )Change
                  in
                  working capital components of continuingoperations
              
              
              (13,879
              )
              
              
              (4,744
              )Other,
                  net
              
              
              (2,195
              )
              
              
              (1,768
              )Net
                  cash
                  (used in) provided by operating activities ofcontinuing
                  operations
              
              
              (4,484
              )
              
              
              5,514Cash
                  Flows
                  from Investing Activities:Expenditures
                  for property and equipment, net
              
              
              (9,561
              )
              
              
              (5,631
              )Disposals
                  of
                  assets
              
              
              526
              
              
              
              5,765Life
                  insurance premiums paid, net of death benefits received
              
              
              (367
              )
              
              
              158Net
                  cash
                  (used in) provided by investing activities ofcontinuing
                  operations
              
              
              (9,402
              )
              
              
              292Cash
                  Flows
                  from Financing Activities:Repayments
                  of
                  long-term debt
              
              
              (84,696
              )
              
              
              (80,144
              )Borrowings
                  of
                  long-term debt
              
              
              95,000
              
              
              
              77,500Repayments
                  of
                  life insurance policy loans
              
              
              (8,298
              )
              
              
              -Borrowings
                  from life insurance policy loans
              
              
              8,514
              
              
              
              1,101Debt
                  issuance
                  costs
              
              
              -
              
              
              
              (48
              )Dividends
                  paid
              
              
              (3,121
              )
              
              
              (3,116
              )Exercise
                  of
                  stock options
              
              
              847
              
              
              
              270Net
                  cash
                  provided by (used in) financing activities ofcontinuing
                  operations
              
              
              8,246
              
              
              
              (4,437
              )Cash
                  Flows
                  from Discontinued Operations:Operating
                  cash flows
              
              
              (12
              )
              
              
              (283
              )Net
                  (decrease) increase in cash
              
              
              (5,652
              )
              
              
              1,086Balance
                  at
                  beginning of year
              
              
              6,254
              
              
              
              4,377Balance
                  at
                  end of period
              
              $
              602
              
              
              $
              5,463Supplemental
                  cash flow information:Purchases
                  of
                  property and equipment included inaccounts
                  payable
              
              $
              1,835
              
              
              $
              -Life
                  insurance death benefit proceeds used to repay lifeinsurance
                  policy loans
              
              $
              542
              
              
              $
              306




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





4


NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





THIRD
      QUARTER AND
      NINE MONTHS ENDED


OCTOBER
      27, 2007
      AND OCTOBER 28, 2006




NOTE
      1.  BASIS OF PRESENTATION




The
        accompanying
        condensed consolidated financial statements are unaudited, and these
        consolidated financial statements should be read in conjunction with the
        Company’s audited consolidated financial statements and notes thereto contained
        in the Company’s Annual Report on Form 10-K for the fiscal year ended January
        27, 2007 (fiscal 2006). It is management’s opinion that all adjustments,
        consisting only of normal recurring adjustments, necessary for a fair statement
        of the results during the interim period have been included. All significant
        intercompany accounts and transactions have been eliminated. The results
        of
        operations for the third quarter and nine months ended October 27, 2007 and
        cash
        flows for the nine months ended October 27, 2007 are not necessarily indicative
        of the results that will be achieved for the full fiscal year 2007. Cash
        flows
        related to operations that were discontinued prior to fiscal year 2006 are
        segregated for reporting purposes in the Statement of Cash Flows.


NOTE
      2.  SHARE-BASED PAYMENTS




The
        Company has
        various stock option and stock bonus plans that provide for the granting
        of
        incentive stock options, non-qualified stock options, restricted stock and
        performance awards to certain employees and directors. Options and awards
        have
        been granted at or above the fair market value at the date of grant, although
        certain plans allow for awards to be granted at a price below fair market
        value.
        Options vest over periods ranging from six months to four years, and are
        exercisable not less than six months nor more than 10 years after the date
        of
        grant. Restricted shares granted to non-employee directors generally vest
        over
        one to three years. Restricted shares granted to employees generally represent
        performance-contingent awards that vest at the end of three years upon the
        attainment of certain earnings performance goals, with the exception of certain
        retention awards granted in the third quarter of fiscal 2006 that vest over
        a
        ten year period upon the attainment of certain earnings performance
        goals.
  The
      Company
      estimates the fair value of its option awards on the date of grant using the
      Black-Scholes option pricing model. No options were granted in the third quarter
      or nine months ended October 27, 2007 or October 28, 2006. A summary of the
      status of the Company’s stock option plans as of October 27, 2007, and changes
      for the nine months then ended is presented in the table below:





5


Shares
              
              
              Weighted
                  Average Exercise Price
              
              
              Weighted
                  Average Remaining Contractual Term (Years)
              
              
              Aggregate
                  Intrinsic ValueOptions
                  outstanding at January 28, 2007
              
              
              581,850
              
              
              $
              21.49
              
              
              
              6.4
              
              
              $
              3,496,000Granted
              
              
              -
              
              
              
              -Exercised
              
              
              (54,250
              )
              
              
              15.62Forfeited
              
              
              (4,500
              )
              
              
              32.88Expired
              
              
              -
              
              
              
              -Options
                  outstanding at October 27, 2007
              
              
              523,100
              
              
              $
              22.00
              
              
              
              5.8
              
              
              $
              487,000Options
                  exercisable at October 27, 2007
              
              
              466,850
              
              
              $
              21.82
              
              
              
              5.4
              
              
              $
              487,000




The
      Company
      determines the fair value of its restricted stock awards based on the market
      price of its common stock on the date of grant. Restricted stock activity for
      the nine months ended October 27, 2007 was as follows:




Shares
              
              
              Weighted
                Average
                  Grant
                DateFair
                  ValueNonvested
                  at
                  January 28, 2007
              
              
              296,269
              
              
              $
              19.70Granted
              
              
              79,157
              
              
              
              26.67Vested
              
              
              (7,276
              )
              
              
              22.48Forfeited
              
              
              (62,105
              )
              
              
              21.32Nonvested
                  at
                  October 27, 2007
              
              
              306,045
              
              
              $
              21.11





Total
      compensation
      expense for all stock option and stock bonus plans during the third quarter
      and
      nine months ended October 27, 2007 was $241,000 and $770,000, respectively
      (net
      of $97,000 and $310,000 related income tax benefit). During the third quarter
      and nine months ended October 28, 2006, the Company recognized expense of
      $130,000 and $500,000 for stock option and stock bonus plans, respectively
      (net
      of $81,000 and $309,000 related income tax benefit). The total compensation
      cost
      related to nonvested stock options and awards not yet recognized is currently
      expected to be a combined total of approximately $3,488,000. This cost is
      expected to be recognized over a weighted average period of 4.1
      years.





NOTE
      3.  NON-OPERATING INCOME, NET





In
      the first nine
      months of fiscal 2007, the Company recorded non-operating income of $969,000
      which consisted primarily of interest income earned on invested cash balances
      and notes receivable and a gain of $287,000 from the death benefit of a
      Company-owned life insurance policy.





In
      the first nine
      months of fiscal 2006, the Company recorded non-operating income of $567,000
      which included a $281,000 loss related to a natural gas derivative (see Note
      9)
      offset by interest income and a gain of $184,000 from the death benefit of
      a
      Company-owned life insurance policy.





6
 
 NOTE
          4.  INCOME
          TAXES
 On
          July 13, 2006,
          the Financial Accounting Standards Board (FASB) issued Interpretation No.
          48,
“Accounting for Uncertainty in Income Taxes – An Interpretation of FASB
          Statement No. 109” (FIN 48). The Company adopted the provisions of FIN 48 on
          January 28, 2007, the first day of its 2007 fiscal year. The implementation
          of
          FIN 48 did not result in a cumulative adjustment to the Company’s previously
          recorded liability for unrecognized tax benefits, which amounted to $2,329,000
          as of the date of adoption.
 
 The
          Company
          recognizes interest and penalties accrued related to unrecognized tax benefits
          in its tax provision. Due to its net operating loss and tax credit carryforward
          position, the Company recognized no penalties or interest during the first
          nine
          months ended October 27, 2007 or October 28, 2006, and had no interest
          or
          penalties accrued as of October 27, 2007 or January 27, 2007.
 
 During
          the current
          quarter, the statute of limitations on certain tax return years expired.
          The
          expiration of those statutes of limitation resulted in the recognition
          of
          uncertain tax positions in the amount of $2,329,000 through the effective
          tax
          rate. Following this recognition event, the Company has no remaining
          unrecognized tax benefit recorded.
 
 The
          Company is
          subject to taxation in the United States, and its tax years for 2004 through
          2006 are subject to examination by the tax authorities. With few exceptions,
          the
          Company is no longer subject to U.S. federal, state or local examinations
          by tax
          authorities for years before 2004.
 
 The
          Company
          recorded a tax benefit of $4,157,000 for the first nine months ended October
          27,
          2007. This benefit consisted of $608,000 based upon the Company’s estimated
          effective tax rate of 28.67% for the year, $719,000 from federal and state
          tax
          credits, $2,396,000 from the recognition of the uncertain tax positions
          discussed above and permanent true-ups following the filing of the fiscal
          2006
          tax return, and $434,000 from the favorable settlement of an audit with
          Revenue
          Canada related to its former foreign subsidiary, Angelica International,
          Ltd.
          during the second quarter of fiscal 2007.
 
 The
          Company has a
          federal net operating loss carryover of $36,430,000 which will expire beginning
          in 2025; $2,986,000 of federal tax credit carryovers which expire at various
          dates beginning in 2021 or have no expiration date; $9,064,000 of state
          tax
          credit carryovers which expire at various dates beginning in 2012 or have
          no
          expiration date; and various other charitable contribution carryovers,
          tax
          credits and state net operating loss carryovers.
  NOTE
            5.  EARNINGS PER SHARE
 
 Basic
          earnings per
          share is computed by dividing net income by the weighted average number
          of
          shares of Common Stock outstanding during the period. Diluted earnings
          per share
          is computed by dividing net income by the weighted average number of Common
          and
          Common equivalent shares outstanding.
 
 The
          following table
          reconciles weighted average shares outstanding to amounts used to calculate
          basic and diluted earnings per share for the third quarter and nine months
          ended
          October 27, 2007 and October 28, 2006 (shares in thousands):
  7
 Third
                        Quarter
                        Ended
                    
                    
                    Nine
                        Months
                        EndedOctober
                        27,
                    
                    
                    October
                        28,
                    
                    
                    October
                        27,
                    
                    
                    October
                        28,2007
                    
                    
                    2006
                    
                    
                    2007
                    
                    
                    2006Weighted
                        Average Shares:Average
                        shares outstanding
                    
                    
                    9,282
                    
                    
                    
                    9,191
                    
                    
                    
                    9,265
                    
                    
                    
                    9,179Effect
                        of
                        dilutive securities
                    
                    
                    28
                    
                    
                    
                    31
                    
                    
                    
                    58
                    
                    
                    
                    38Average
                        shares outstanding,adjusted
                        for
                        dilutive effects
                    
                    
                    9,310
                    
                    
                    
                    9,222
                    
                    
                    
                    9,323
                    
                    
                    
                    9,217
  NOTE
          6.  GOODWILL AND OTHER ACQUIRED ASSETS





In
      accordance with
      Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other
      Intangible Assets,” the Company performed its annual goodwill impairment test at
      the end of the third quarter of fiscal 2007 which resulted in no indication
      of
      impairment.





Other
      acquired
      assets consisted of the following (dollars in thousands):





October
                  27,
                  2007
              
              
              January
                  27,
                  2007Gross
              
              
              
              
              
              Other
              
              
              Gross
              
              
              
              
              
              OtherCarrying
              
              
              Accumulated
              
              
              Acquired
              
              
              Carrying
              
              
              Accumulated
              
              
              AcquiredAmount
              
              
              Amortization
              
              
              Assets,
                  net
              
              
              Amount
              
              
              Amortization
              
              
              Assets,
                  netCustomer
                  contracts
              
              $
              41,831
              
              
              $
              (13,112
              )
              
              $
              28,719
              
              
              $
              41,813
              
              
              $
              (10,984
              )
              
              $
              30,829Non-compete
                  covenants
              
              
              11,089
              
              
              
              (4,853
              )
              
              
              6,236
              
              
              
              11,089
              
              
              
              (3,810
              )
              
              
              7,279Other
                  acquired assets
              
              $
              52,920
              
              
              $
              (17,965
              )
              
              $
              34,955
              
              
              $
              52,902
              
              
              $
              (14,794
              )
              
              $
              38,108


Aggregate
      amortization expense for the nine months ended October 27, 2007 and October
      28,
      2006 amounted to $3,171,000 and $3,221,000, respectively. Other acquired assets
      are scheduled to be fully amortized by fiscal year 2021 with corresponding
      annual amortization expense estimated for each of the next five fiscal years
      as
      follows (dollars in thousands):




2007
              $4,1792008
              3,8262009
              3,5142010
              3,0512011
              3,041


NOTE
        7.  LONG TERM DEBT




The
      Company’s
      long-term bank borrowings are financed through a $125,000,000 revolving credit
      facility under a loan agreement that matures on November 30, 2010. Amounts
      borrowed under the credit facility bear interest at a floating rate equal to
      either (i) LIBOR




8


plus
      a margin, or
      (ii) a Base Rate, defined as the higher of either (a) the Federal Funds Rate
      plus 0.50% or (b) the Prime Rate. The margin for the LIBOR rate option is based
      on the Company’s ratio of “Funded Indebtedness” to “EBITDA,” as each is defined
      in the loan agreement, and may range from 1.5% to 2.0%. The LIBOR interest
      rate
      option may be selected for periods of 1 to 3 months, 6 months or 12
      months.





As
      of October 27,
      2007, there was $95,700,000 of outstanding debt under the credit facility,
      secured by a first lien on all equipment, inventory, and accounts receivable,
      and certain real estate. Of this amount, $93,000,000 bore interest at rates
      ranging from 4.87% to 5.40% under LIBOR contracts, plus a margin (2.00% as
      of
      October 27, 2007), and $2,700,000 bore interest at 7.75%, the Prime Rate, as
      of
      October 27, 2007. Furthermore, the Company had $12,827,000 outstanding in
      irrevocable letters of credit as of October 27, 2007, which reduced the amount
      available to borrow under the line of credit to $15,254,000 as of the end of
      the
      third quarter. As of October 27, 2007, the fee on the outstanding letters of
      credit and unused funds was 2.5% and 0.25%, respectively.





The
      Company is
      subject to certain financial covenants under its loan agreement. One of these
      covenants requires that the Company maintain a minimum consolidated net worth
      of
      $120,920,000 plus an aggregate amount equal to 50% of quarterly net income
      beginning with the fourth quarter of fiscal 2005 (with no reduction for net
      losses), and an asset coverage ratio of no less than 1 to 1. Other covenants
      require the Company to maintain a minimum ratio of “EBITDA” to “Fixed Charges”
of no less than 1.15 to 1, and a maximum ratio of “Funded Indebtedness” to
“EBITDA” of no more than 3.5 to 1. The Company was in compliance with these loan
      covenants as of October 27, 2007.





As
      of October 27,
      2007, there was $30,325,000 of life insurance policy loans outstanding. The
      loans bore interest at a fixed rate of 8.0% or variable rates ranging from
      5.7%
      to 6.2%. The proceeds upon surrender of the policies will be reduced by the
      amount of any loans outstanding, unless repaid by the Company prior to that
      time. The total amount borrowed is netted against cash surrender value of life
      insurance in the Condensed Consolidated Balance Sheet as of October 27,
      2007.




NOTE
        8.  RETIREMENT BENEFITS


The
      Company has a
      non-contributory defined benefit pension plan covering primarily all salaried
      and hourly administrative non-union personnel who had met participation
      requirements prior to September 1, 2004. The benefit formula is based on years
      of service and compensation during employment. The funding policy of the pension
      plan is in accordance with the requirements of the Employee Retirement Income
      Security Act of 1974. The Company amended the pension plan, effective September
      1, 2004, to freeze participation in the plan. No employee shall become a
      participant in the pension plan on or after that date.





The
      net periodic
      pension expense recognized in the third quarter and nine months ended October
      27, 2007 and October 28, 2006 was as follows:




9
 
  Third
                    Quarter
                    Ended
                
                
                Nine
                    Months
                    EndedOctober
                    27,
                
                
                October
                    28,
                
                
                October
                    27,
                
                
                October
                    28,(Dollars
                    in
                    thousands)
                
                2007
                
                
                2006
                
                
                2007
                
                
                2006Pension
                    expense:Service
                    cost
                
                $
                (1
                )
                
                $
                (3
                )
                
                $
                171
                
                
                $
                223Interest
                    cost
                
                
                300
                
                
                
                308
                
                
                
                962
                
                
                
                932Expected
                    return on plan assets
                
                
                (371
                )
                
                
                (322
                )
                
                
                (1,037
                )
                
                
                (966
                )Unrecognized
                    loss
                
                
                17
                
                
                
                17
                
                
                
                51
                
                
                
                51Net
                    periodic
                    pension expense
                
                $
                (55
                )
                
                $
                -
                
                
                $
                147
                
                
                $
                240
  An
        adjustment was
        made in the third quarter of fiscal 2007 to reflect final actuarial calculations
        for the pension plan’s 2007 plan year. The decrease in expense is reflective of
        the reduced number of active plan participants as of January 1, 2007. Total
        expense for fiscal 2007 is expected to be approximately $196,000. In addition,
        the Company currently expects to contribute a total of approximately $2,140,000
        to the pension plan in fiscal 2007.





NOTE
      9.  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES





The
      Company entered
      into an interest rate swap agreement with one of its lenders effective September
      9, 2002. The swap agreement fixed the variable portion of the interest rate
      (excluding a margin) at 3.58% on $10,000,000 of the outstanding debt under
      the
      Company’s revolving credit facility until the swap’s termination on May 30,
      2007. The Company elected to apply cash flow hedge accounting for the interest
      rate swap agreement in accordance with SFAS No. 133, “Accounting for Derivative
      Instruments and Hedging Activities.” Accordingly, the derivative was recorded as
      an asset or liability at its fair value and the effective portion of changes
      in
      the fair value of the derivative, as measured quarterly, was reported in
      accumulated other comprehensive income. The loss on the derivative included
      in
      accumulated other comprehensive loss in the third quarter ended October 28,
      2006
      amounted to $31,000, net of tax; and $41,000 and $33,000 for the nine months
      ended October 27, 2007 and October 28, 2006, respectively, net of tax. The
      Company recorded a current asset of $67,000 for the fair value of the derivative
      as of January 27, 2007.





Since
      October 2005,
      the Company has entered into natural gas futures contracts to fix the price
      for
      a portion of its future purchases of natural gas and reduce its exposure to
      volatility in the cost of natural gas consumed by its service centers due to
      fluctuations in the price on the New York Mercantile Exchange (NYMEX). For
      fiscal years 2007, 2008 and 2009, these futures contracts are expected to hedge
      approximately 73%, 61% and 34%, respectively, of the Company’s total
      requirements for natural gas (measured at current usage rates). As of October
      27, 2007, the weighted-average cost of natural gas under these contracts is
      $8.96 per decatherm. The Company has elected to apply cash flow hedge accounting
      for these derivatives in accordance with SFAS No. 133. Accordingly, the net
      gain
      (loss) on the derivatives included in other comprehensive income (loss) for
      the
      third quarter and nine months ended October 27, 2007, amounted to $262,000
      and
      $1,490,000, respectively, net of tax, and $(1,587,000) and $(2,489,000),
      respectively, net of tax, for the third quarter and nine months ended October
      28, 2006, respectively. Prior to the second quarter of fiscal 2006, a portion
      of
      the Company’s natural gas derivatives were not considered a cash flow hedge for
      accounting purposes. The change in fair value for




10


these
      derivatives
      was included in non-operating income for the nine months ended October 28,
      2006,
      and amounted to a loss of $281,000. The Company has recorded a current liability
      of $1,800,000 and $2,863,000 as of October 27, 2007 and January 27, 2007,
      respectively, and a long-term liability of $359,000 and $1,968,000 as of October
      27, 2007 and January 27, 2007, respectively, for the fair value of the
      derivatives. The Company estimates that $1,800,000 of unrealized losses included
      in accumulated other comprehensive loss before taxes as of October 27, 2007
      will
      be reclassified to cost of services within the next 12 months as natural gas
      is
      purchased for consumption in the service centers.





In
      addition to the
      futures contracts, the Company has existing contracts as of October 27, 2007
      for
      the physical delivery of natural gas that fix the NYMEX cost of gas for
      approximately 4% of its estimated natural gas purchase requirements in the
      next
      12 months, and that fix the basis cost of gas for approximately 81% of its
      estimated natural gas purchase requirements in the next 12 months. Although
      these contracts are considered derivative instruments, they meet the normal
      purchases exclusion contained in SFAS No. 133, as amended by SFAS No. 138,
      “Accounting for Certain Derivative Instruments and Certain Hedging Activities,”
and SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and
      Hedging Activities,” and are therefore exempted from the related accounting
      requirements.





NOTE
      10.  COMPREHENSIVE INCOME (LOSS)





Comprehensive
      income (loss), consisting primarily of net income (loss) and changes in the
      fair
      value of derivatives (see Note 9), net of taxes, totaled $4,888,000 and $956,000
      for the third quarter ended October 27, 2007 and October 28, 2006, respectively;
      and $3,487,000 and $(2,162,000) for the nine months ended October 27, 2007
      and
      October 28, 2006, respectively.





NOTE
      11.  COMMITMENTS AND CONTINGENCIES





Prior
      to its sale
      of the Life Uniform retail business segment to Healthcare Uniform Company,
      Inc.
      in fiscal 2004, the Company was a guarantor under certain Life Uniform store
      lease agreements. These guarantees obligated the Company to make all payments
      due under the leases until their expiration in the event of default of Life
      Uniform. In connection with the sale of Life Uniform, the Company requested
      consents, as required, from landlords to assign the store leases to Healthcare
      Uniform Company. As a condition to such consents, certain landlords required
      that the Company continue as a guarantor of the leases. Under the Company’s
      agreement with Healthcare Uniform Company, these guarantees will only extend
      until the end of each lease’s then current term. As of October 27, 2007, the
      Company is secondarily obligated as a guarantor for 30 store lease agreements
      and the estimated maximum potential amount of future payments the Company could
      be required to make under these guarantees is $4,973,000. Although these
      guarantees expire at various dates through fiscal year 2014, approximately
      84%
      of the estimated maximum potential future payments expire by the end of fiscal
      year 2010. Also in connection with the sale of Life Uniform the Company received
      an unsecured junior subordinated promissory note for approximately $4,000,000
      of
      the purchase price of its former retail business. The payment of this note
      is
      subordinated to the bank indebtedness which Healthcare Uniform Company incurred
      in connection with its acquisition of Life Uniform. The Company is currently
      carrying the note on its balance sheet at $3,714,000,




11


which
      reflects a
      discount of $1,000,000 made on the note at the time of the sale accreted through
      October 27, 2007.





The
      Company has
      provided certain indemnities to the buyer in connection with the sale of Life
      Uniform. Although indemnification claims are generally subject to an aggregate
      limit of $6,000,000, the Company believes the likelihood of making any payments
      for indemnification claims is remote and has reserved accordingly.





In
      connection with
      the March 2005 acquisition of Royal Institutional Services, Inc. and its
      affiliate, The Surgi-Pack Corporation, a portion of the purchase price was
      placed into escrow, with payment to the sellers contingent upon the occurrence
      of certain events as specified in the purchase agreement. As of October 27,
      2007, $1,000,000 remained in escrow due the sellers in March 2015 upon
      compliance with the restrictive covenants.





The
      Company carries
      insurance policies on insurable risks with coverage and other terms that it
      believes to be appropriate. The Company generally has self-insured retention
      limits and has obtained fully-insured layers of coverage above such self-insured
      retention limits. Accruals for self-insurance losses are made based on claims
      experience. Liabilities for existing and unreported claims are accrued for
      when
      it is probable that future costs will be incurred.





The
      Company faces a
      possible exposure to outstanding workers’ compensation claims incurred prior to
      fiscal 1999 that were sold to a former insurance carrier, in addition to
      exposure for deposits with that carrier for claims incurred in fiscal years
      1999, 2000 and 2001 that have not yet been resolved and for claims in excess
      of
      the deductible for fiscal years 1999, 2000, 2001 and 2002. This carrier is
      experiencing financial difficulties and may be unable to fulfill its obligation
      to pay these claims, which could have a material unfavorable impact on the
      Company’s results of operations and financial condition if it is forced to
      assume these liabilities. The Company estimates its possible exposure from
      these
      outstanding claims and deposits to be approximately $409,000 as of October
      27,
      2007.





A
      significant
      portion of the Company’s revenues is derived from operations in a limited number
      of markets. Revenues generated from operations in California and Arizona
      accounted for approximately 39% of revenues for the nine months ended October
      27, 2007. The Company also faces some significant risk and uncertainty to its
      business operations related to the status of labor relations at its service
      centers. Approximately 75% of the Company’s workforce is represented by one of
      several unions. A collective bargaining agreement covering drivers associated
      with the Company’s Stockton, California service center will expire in the fourth
      quarter of fiscal 2007. A collective bargaining agreement covering previously
      unorganized drivers at the Company’s Las Vegas, Nevada depot is in the process
      of being negotiated. Collectively, these new and renewal agreements apply to
      less than 1% of the Company’s total workforce. Any work interruptions or
      stoppages that may result from the inability to reach ratified agreements at
      any, some or all of these locations could have a material adverse impact on
      the
      Company’s results of operations and financial condition.





The
      Company is a
      party to various claims and legal proceedings which arose in the ordinary course
      of its business. Although the ultimate disposition of these proceedings is
      not
      presently determinable, management does not believe that an adverse
      determination




12




in
      any or all of
      such proceedings will have a material adverse effect upon the consolidated
      financial condition or operating results of the Company.




NOTE
        12.  NEW ACCOUNTING PRONOUNCEMENTS




In
      February 2006,
      the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial
      Instruments” which amends SFAS No. 133, “Accounting for Derivative Instruments
      and Hedging Activities” and SFAS No. 140, “Accounting for Transfers and
      Servicing of Financial Assets and Extinguishment of Liabilities.” SFAS No. 155
      simplifies the accounting for certain derivatives embedded in other financial
      instruments by allowing them to be accounted for as a whole if the holder elects
      to account for the whole instrument on a fair value basis. SFAS No. 155 also
      clarifies and amends certain other provisions of SFAS No. 133 and SFAS No.
      140.
      SFAS No. 155 is effective for the Company’s fiscal year ending January 26, 2008.
      Earlier adoption is permitted, provided the Company has not yet issued financial
      statements, including for interim periods, for that fiscal year. The Company
      does not expect the adoption of SFAS No. 155 to have a material impact on its
      consolidated financial statements.





In
      June 2006, the
      EITF reached a consensus on Issue No. 06-5, “Accounting for Purchases of Life
      Insurance – Determining the Amount that Could Be Realized in Accordance with
      FASB Technical Bulletin 85-4.” EITF 06-5 stipulates that the cash surrender
      value and any additional amounts provided by the contractual terms of the
      insurance policy that are realizable at the balance sheet date should be
      considered in determining the amount that could be realized under the life
      insurance policy. The consensus also provides additional guidance for
      determining the amount to be realized, including the policy level for which
      the
      analysis should be performed, amounts excluded and measurement criteria.
      Entities will have the option of applying the provisions of EITF 06-5 as a
      cumulative effect adjustment to the opening balance of retained earnings or
      retrospectively to all prior periods. EITF 06-5 is effective for the Company’s
      fiscal year ending January 26, 2008. The Company does not expect that the
      adoption of EITF 06-5 will have a material impact on its consolidated financial
      statements.





In
      September 2006,
      the FASB issued SFAS No. 157, “Fair Value Measurements,” which establishes a
      framework for measuring the fair value of assets and liabilities. This framework
      is intended to provide increased consistency in how fair value determinations
      are made under various existing accounting standards which permit, or in some
      cases require, estimates of fair market value. SFAS No. 157 also expands
      financial statement disclosure requirements about a company’s use of fair value
      measurements, including the effect of such measures on earnings. SFAS No. 157
      is
      effective for the Company’s fiscal year ending January 31, 2009. The Company is
      currently evaluating the impact SFAS No. 157 will have on its consolidated
      financial statements.





In
      September 2006,
      the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension
      and Other Postretirement Plans,” which amends SFAS No. 87, “Employers’
Accounting for Pension,” SFAS No. 88, “Employers’ Accounting for Settlements and
      Curtailments of Defined Benefit Pension Plans and for Termination Benefits,”
SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other than
      Pension” and SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pension
      and Other Postretirement Benefits.” SFAS No. 158 requires that employers
      recognize on a prospective basis the funded status of their defined benefit
      pension and other




13


postretirement
      plans on their consolidated balance sheet and recognize as a component of other
      comprehensive income, net of tax, the gains or losses and prior service costs
      or
      credits that arise during the period but are not recognized as components of
      net
      periodic benefit cost. On January 27, 2007, the Company adopted the recognition
      and disclosure provisions of SFAS No. 158, and included the related cumulative
      effect adjustment in its consolidated balance sheet for fiscal 2006. The
      statement also requires that employers measure plan assets and obligations
      as of
      the date of their year-end financial statements beginning with the Company’s
      fiscal year ending January 31, 2009. The Company currently measures its plan
      assets and obligations as of January 1. The Company has not yet determined
      the
      impact that adopting this portion of SFAS No. 158 will have on its consolidated
      balance sheets.





In
      February 2007,
      the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
      Liabilities.” SFAS No. 159 provides companies with an option to report selected
      financial assets and liabilities at fair value, with the objective to reduce
      both the complexity in accounting for financial instruments and the volatility
      in earnings caused by measuring related assets and liabilities differently.
      SFAS
      No. 159 is effective for the Company’s fiscal year ending January 31, 2009. The
      Company has not yet determined the impact that adoption of SFAS No. 159 will
      have on its consolidated financial statements.





NOTE
      13.  ASSETS HELD FOR SALE





In
      the third
      quarter of fiscal 2007, the Company made the decision to close its Edison,
      New
      Jersey service center. The Company expects to close on the sale of the Edison
      real estate prior to the end of fiscal 2007, and accordingly those assets are
      presented as Assets Held for Sale in the Consolidated Balance
      Sheets.





14


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





THIRD
      QUARTER AND
      NINE MONTHS ENDED OCTOBER 27, 2007


COMPARED
      WITH


THIRD
      QUARTER AND
      NINE MONTHS ENDED OCTOBER 28, 2006








General




Angelica
      Corporation is a leading provider of outsourced linen management services to
      the
      healthcare industry in the United States. We offer comprehensive linen
      management services to the U.S. healthcare industry, including hospitals,
      long-term care facilities, surgery centers, medical clinics, and other medical
      providers. Among the items that we clean and provide, on either a rental or
      customer-owned basis, are bed linens, towels, gowns, scrubs, surgical linens
      and
      surgical packs, as well as mops, mats and other dust control products. To a
      more
      limited extent, we also provide linen management services to customers in the
      hospitality business. Currently, we operate 29 laundry service centers and
      serve
      customers in 25 states. As previously announced, the Company made the decision
      in the third quarter of fiscal 2007 to close its Edison, New Jersey service
      center and pursue a sale of the real estate. The Company also announced in
      the
      third quarter that its Board of Directors has authorized Morgan Joseph &
Co., Inc. to pursue a possible sale of the Company.





Results
      of
      Operations





*Third
      Quarter
      Ended October 27, 2007 Compared to Third Quarter Ended October 28,
      2006*





Third
      quarter
      fiscal 2007 revenues were $108.8 million, an increase of $1.0 million, or 1.0%,
      compared with the same period in fiscal 2006. Organic growth contributed $1.2
      million of the increase, representing an organic growth rate of 1.2%. The
      current year organic growth rate included an approximate 4.6% improvement in
      pricing, partially offset by a volume decline from customer contracts not
      renewed. The organic growth was partially offset by a net reduction in revenues
      of $0.2 million related to acquisitions and divestitures, primarily due to
      the
      sale of non-healthcare customer accounts in fiscal 2006. Total healthcare
      revenues increased 2.5% compared with the same period in fiscal
      2006.





Cost
      of services of
      $92.5 million in the third quarter of fiscal 2007 increased $2.1 million, or
      2.3%, from the same period last year primarily due to increased linen costs.
      The
      variance in linen amortization was a result of increased linen purchases in
      fiscal 2006 to satisfy our 100% fill initiative and higher quality linen and
      our
      second quarter fiscal 2006 accounting policy change to increase the useful
      life
      of linens.





Gross
      margin was
      15.0% in the third quarter of fiscal 2007, an increase from 13.0%




15


reported
      in the
      second quarter of fiscal 2007 and a decrease from 16.1% reported in the same
      period a year ago for the reason noted above.





In
      the third
      quarter of fiscal 2007, selling, general and administrative (SG&A) expenses
      decreased by $2.6 million from the third quarter of fiscal 2006 to $10.8
      million, or 10.0% of revenues, compared to 12.4% of revenues a year ago. The
      decrease in SG&A expenses resulted from reduced wages, benefits and
      incentive compensation of $1.1 million, a $0.3 million decline in travel and
      vehicle costs, and lower bad debt and sales tax accruals of $0.2 million, as
      well as the absence of prior year expenses of $0.6 million associated with
      our
      operations process improvement implementation and Board of Directors’ Special
      Committee.





In
      the third
      quarter of fiscal 2007, we reported other operating income of $0.4 million
      consisting primarily of the gain on divestiture of certain non-healthcare
      customer accounts. Other operating income of $2.4 million in the third quarter
      of fiscal 2006 reflected a gain from the sale of real estate and a settlement
      received from the lawsuit that was initiated in connection with the Vallejo
      eminent domain proceedings in fiscal 2005.





Interest
      expense of
      $2.4 million in the third quarter of fiscal 2007 was a slight decrease from
      the same period a year ago. The decrease resulted from lower interest rates,
      which decreased from an average 7.7% per annum in the third quarter
      of fiscal 2006 to an average 7.2% per annum in the third quarter of fiscal
      2007.





We
      recorded $0.5
      million of non-operating income in the third quarter of fiscal 2007, which
      included interest income and a $0.3 million gain from the death benefit of
      a
      Company-owned life insurance policy. During the third quarter of fiscal 2006,
      we
      recorded $0.2 million of non-operating income which consisted primarily of
      interest income.





For
      the third
      quarter of fiscal 2007, we recorded a tax benefit of $1.7 million compared
      to a
      tax provision of $0.4 million in the third quarter of fiscal 2006. The income
      tax benefit in fiscal 2007 was primarily attributed to a $2.3 million benefit
      associated with the recognition of uncertain tax positions for which a reserve
      had previously been established under Financial Accounting Standards Board
      Interpretation No. 48. Due to the expiration of the statute of limitations
      associated with those uncertain tax positions, we recognized the tax benefit
      of
      those positions through the effective tax rate.





We
      reported net
      income of $4.6 million in the third quarter of fiscal 2007 compared to $2.6
      million in the prior year quarter. The increase resulted primarily from the
      variance in income tax benefit discussed above.





*Nine
      Months
      Ended October 27, 2007 Compared to Nine Months Ended October 28,
      2006*





Revenues
      for the
      first nine months of fiscal 2007 of $324.2 million represented an increase
      of
      1.3%, or $4.1 million, from $320.1 million in the first nine months of fiscal
      2006. Organic growth contributed $4.7 million of the increase, representing
      an
      organic




16


growth
      rate of
      1.5%. The current year organic growth rate resulted from an approximate 4.4%
      improvement in pricing, partially offset by a volume decline from customer
      contracts not renewed. The organic growth was partially offset by a net
      reduction in revenues of $0.6 million related to acquisitions and divestitures,
      primarily due to the sale of non-healthcare customer accounts in fiscal 2006.
      Total healthcare revenues increased 2.7% compared with the same period in fiscal
      2006.





In
      the first nine
      months of fiscal 2007, cost of services increased from the same period in fiscal
      2006 by $6.8 million, or 2.5%, to $279.7 million. The principal factor for
      this
      variance was an increase of $5.6 million in linen costs as discussed in the
      preceding section. Total company production and delivery expenses increased
      $1.5
      million in the first nine months of fiscal 2007 from the first nine months
      of
      fiscal 2006; however, the same costs for the Edison service center increased
      $3.3 million year over year. The $1.8 million favorable variance in these costs
      for all other service centers excluding Edison was a result of lower operating
      volumes and increased operating efficiencies.





Gross
      margin was
      13.7% in the first nine months of fiscal 2007, a decrease from 14.7% reported
      in
      the same period a year ago for the reasons noted above.





For
      the first nine
      months of fiscal 2007, SG&A expenses decreased $3.3 million to 11.7% of
      revenues from 12.9% of revenues in the same period a year ago. The decrease
      resulted from the absence of prior year expenses of $3.1 million associated
      with
      our operations process improvement implementation, the Board of Directors’
Special Committee, and professional fees related to union contract negotiations,
      litigation and financial consulting projects, as well as $1.5 million in lower
      incentive compensation accruals year over year and a $0.3 million decline in
      travel and vehicle costs. These decreases were partially offset by current
      year
      increases of $0.6 million related to the settlement of a federal contract audit
      and legal fees for this settlement and other employee matters, $0.4 million
      related to higher health insurance costs, $0.5 million related to additional
      retirement benefit accruals and severance costs due to staffing reductions,
      and
      $0.4 million related to the settlement of civil litigation filed on behalf
      of
      former employees at our Long Beach, California facility which was sold in
      December 2005, including dismissal of multiple workers compensation claims
      that
      were filed on behalf of the same individuals.





In
      the first nine
      months of fiscal 2007, we reported other operating income of $0.6 million
      consisting primarily of insurance proceeds from a property insurance claim
      and
      the gain from divestiture of non-healthcare business. Other operating income
      of
      $2.9 million in the first nine months of fiscal 2006 reflected gains from the
      sale of three parcels of real estate and a settlement received from the lawsuit
      that was initiated in connection with the Vallejo eminent domain proceedings
      in
      fiscal 2005.





Interest
      expense
      for the first nine months of fiscal 2007 increased slightly from fiscal 2006
      to
      $7.1 million, a result of higher average borrowings.





We
      recorded $1.0
      million of non-operating income in the first nine months of fiscal 2007, which
      consisted primarily of interest income and a $0.3 million gain from the
      death




17


benefit
      of a
      Company-owned life insurance policy. During the first nine months of fiscal
      2006, we recorded $0.6 million of non-operating income which included interest
      income and a $0.2 million gain from the death benefit of a Company-owned life
      insurance policy, partially offset by a $0.3 million loss related to a natural
      gas derivative.





For
      the first nine
      months of fiscal 2007, we recorded a tax benefit of $4.1 million compared to
      $1.2 million in the first nine months of fiscal 2006. The higher income tax
      benefit in the current year resulted from the increase in pretax loss, the
      favorable settlement of an audit with Revenue Canada related to our former
      foreign subsidiary, Angelica International, Ltd, and the $2.3 million benefit
      associated with the recognition of uncertain tax positions discussed
      above.





We
      reported net
      income of $2.0 million in the first nine months of fiscal 2007 compared to
      $0.4
      million in the same period a year ago. The variance resulted primarily from
      the
      increase in the tax benefit as discussed above, partially offset by the decrease
      in other operating income.




Financial
      Condition





As
      of October 27,
      2007, working capital totaled $50.4 million and the current ratio
      (*i.e.*, the ratio of current assets to current liabilities) was 1.7 to
      1, compared with $31.8 million and 1.4 to 1, respectively, at January 27, 2007.
      The increase in working capital is primarily due to a higher balance in accounts
      receivable and the reclassification of certain life insurance policy loans
      from
      current to long-term in the third quarter.





Accounts
      receivable
      increased by $10.7 million in the first nine months of fiscal 2007, primarily
      due to increased revenues, the transition of centralizing our cash applications
      and collections process, and the conversion to a lockbox collection system.
      Issues associated with the transition and conversion are being addressed by
      management to reduce accounts receivable.





Accounts
      payable
      decreased by $2.8 million due to the timing of invoice payments near the quarter
      end. Accrued wages and other compensation decreased $1.4 million from January
      27, 2007, primarily due to incentive compensation that was accrued at year
      end
      and paid out in the first nine months of fiscal 2007.





Long-term
      debt of
      $95.7 million as of October 27, 2007 was $10.4 million greater than at January
      27, 2007, reflecting additional borrowings from our credit facility to fund
      the
      higher working capital balance discussed above. The $3.5 million decrease in
      other long-term liabilities resulted from a decrease in the liability related
      to
      our natural gas hedges and contributions made to our defined benefit pension
      plan in the first nine months of fiscal 2007. Our ratio of total debt to total
      capitalization as of October 27, 2007 was 39.0% compared to 36.7% as of January
      27, 2007. Book value per share at the end of the third quarter of fiscal 2007
      was $16.14, an increase from $16.00 as of January 27, 2007.





18


Liquidity
      and
      Capital Resources





Cash
      flows from
      operating activities of continuing operations decreased $10.0 million for the
      first nine months ended October 27, 2007 compared with the same period a year
      ago. The current year decline resulted primarily from the increase in working
      capital and pension plan contributions discussed above.





Cash
      flows from
      investing activities for the first nine months ended October 27, 2007 included
      capital expenditures of $9.6 million, reflecting the return to a more normalized
      level of capital expenditure activity after reduced spending in the prior year
      due to the pending completion of our operations process improvement
      implementation, and $0.5 million in proceeds from the disposal of assets. Cash
      flows from investing activities for the first nine months ended October 28,
      2006
      included capital expenditures of $5.6 million, net proceeds of $5.8 million
      from
      the disposal of assets, and $0.5 million from the death benefit of a
      Company-owned life insurance policy, the gain on which was recognized in the
      fourth quarter of fiscal 2005. We expect capital expenditures to be
      approximately $18.0 million for fiscal 2007, up from previous estimates due
      to
      the authorization from our Board of Directors to relocate our Antioch,
      California facility.





Cash
      provided by
      financing activities was $8.2 million in the first nine months of fiscal 2007
      reflecting additional borrowings of $10.4 million under our loan agreement
      and
      $0.2 million from life insurance policy loans, partially offset by dividend
      payments of $3.1 million. In the first nine months of fiscal 2006, cash used
      in
      financing activities of $4.4 million reflected net debt repayments of $2.6
      million under our loan agreement and dividend payments of $3.1 million,
      partially offset by borrowings of $1.1 million from life insurance policy loans.
      In addition, proceeds from stock option exercises increased to $0.8 million
      in
      the first nine months of fiscal 2007 from $0.3 million in the same period a
      year
      ago.





As
      of October 27,
      2007, there was $95.7 million of debt outstanding under our credit facility.
      Of
      this amount, $93.0 million bore interest at rates ranging from 4.87% to 5.40%
      under LIBOR contracts, plus a margin (2.00% at October 27, 2007), and $2.7
      million bore interest at 7.75%, the Prime Rate, as of October 27,
      2007.





In
      addition to
      amounts due under our loan agreement, at the end of the third quarter
      of fiscal 2007 there were $30.3 million of life insurance policy loans
      outstanding. The proceeds of these loans, bearing interest at a fixed rate
      of
      8.0% or variable rates ranging from 5.7% to 6.2%, were used to pay down our
      revolving line of credit in fiscal 2005 and 2006. On October 27, 2007, we also
      had $12.8 million in irrevocable letters of credit outstanding, which reduced
      the amount available to borrow under the loan agreement to $15.3
      million.





We
      are subject to
      certain financial covenants under our loan agreement. One of the covenants
      requires us to maintain a minimum consolidated net worth of $120.9 million
      plus
      an aggregate amount equal to 50% of quarterly net income beginning with the
      fourth quarter of fiscal 2005 (with no reductions for net losses), and an asset
      coverage ratio of no less than 1 to 1. We are also required to maintain a
      minimum ratio of




19


“EBITDA”
to
“Fixed
      Charges” of no less than 1.15 to 1, and a maximum ratio of “Funded Indebtedness”
to “EBITDA” of no more than 3.5 to 1. We were in compliance with these loan
      covenants as of October 27, 2007.





Management
      believes
      that our financial condition, operating cash flow and available sources of
      external funds are sufficient to satisfy our requirements for debt service,
      capital expenditures, dividends and working capital over the course of the
      next
      12 months. However, if we pursue a large acquisition, incur significant
      expenditures for new facilities, or are unable to achieve our forecasted
      operating results during the next twelve months, our forecasted cash flows
      could
      be negatively impacted requiring that we consider alternative funding sources
      in
      order to avoid violations of our loan covenants.





Recent
      Accounting Pronouncements





On
      July 13, 2006,
      the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
      “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB
      Statement No. 109” (FIN 48). FIN 48 clarifies the accounting for uncertainty in
      income taxes recognized in an entity’s financial statements in accordance with
      FASB Statement No. 109, “Accounting for Income Taxes” and prescribes a
      recognition threshold and measurement attributes for financial statement
      disclosure of tax positions taken or expected to be taken on a tax return.
      Under
      FIN 48, the impact of an uncertain income tax position on the income tax return
      must be recognized at the largest amount that is more-likely-than-not to be
      sustained upon audit by the relevant taxing authority. An uncertain income
      tax
      position will not be recognized if it has less than a 50% likelihood of being
      sustained. Additionally, FIN 48 provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure and transition. FIN 48 is effective for fiscal years beginning after
      December 15, 2006. We adopted the provisions of FIN 48 on January 28, 2007,
      the
      first day of our 2007 fiscal year. The implementation of FIN 48 had no impact
      on
      our consolidated financial statements.




20


**FORWARD-LOOKING
      STATEMENTS**





Any
      forward-looking
      statements made in this document reflect the Company's current views with
      respect to future events and financial performance and are made pursuant to
      the
      safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
      Such statements are subject to certain risks and uncertainties that may cause
      actual results to differ materially from those set forth in these statements.
      These potential risks and uncertainties include, but are not limited to,
      competitive and general economic conditions, the ability to retain current
      customers and to add new customers in competitive market environments,
      competitive pricing in the marketplace, delays in the shipment of orders,
      availability of labor at appropriate rates, availability and cost of energy
      and
      water supplies, the cost of workers' compensation and healthcare benefits,
      the
      ability to attract and retain key personnel, the ability of the Company to
      recover its seller note and avoid future lease obligations as part of its sale
      of its former Life Uniform division, the ability of the Company to execute
      its
      operational strategies, unusual or unexpected cash needs for operations or
      capital transactions, the effectiveness of the Company’s initiatives to reduce
      key operating costs as a percent of revenues, the ability to obtain financing
      in
      required amounts and at appropriate rates and terms, the ability to identify,
      negotiate, fund, consummate and integrate acquisitions, costs and expenses
      that
      may result from efforts associated with the possible sale of the Company
      (including those that may be caused by having management’s full attention
      distracted by that process), and other factors which may be identified in the
      Company's filings with the Securities and Exchange Commission.




21


**Item
      3.  Quantitative and Qualitative Disclosures About
      Market Risk**





The
      Company is
      exposed to commodity price risk related to the use of natural gas in its laundry
      service centers. The total cost of natural gas in the third quarter and nine
      months ended October 27, 2007 was approximately $5.8 million and $18.9 million,
      respectively. To reduce the uncertainty of fluctuating energy prices, the
      Company has entered into fixed-price contracts as of October 27, 2007 for
      approximately 69% of its estimated natural gas purchase requirements in the
      next
      12 months. A hypothetical 10% increase in the cost of natural gas not covered
      by
      these contracts would result in a reduction of approximately $0.8 million in
      annual pretax earnings.





The
      Company is also
      exposed to commodity price risk resulting from the consumption of gasoline
      and
      diesel fuel for delivery trucks. The total cost of delivery fuel in the third
      quarter and nine months ended October 27, 2007 was approximately $2.1 million
      and $6.5 million, respectively. A hypothetical 10% increase in the cost of
      delivery fuel would result in a decrease of approximately $0.9 million in annual
      pretax earnings.





The
      Company’s
      exposure to interest rate risk relates primarily to its variable-rate revolving
      debt agreement and life insurance policy loans. As of October 27, 2007, there
      was $95.7 million of outstanding debt under the credit facility that bore
      interest at a rate equal to either (i) LIBOR plus a margin, or (ii) a Base
      Rate,
      defined as the higher of (a) the Federal Funds Rate plus .50% or (b) the Prime
      Rate. The margin is based on the Company’s ratio of “Funded Indebtedness” to
“EBITDA,” as each is defined in the loan agreement. As of October 27, 2007, the
      margin was 2.00%. Of the $30.3 million in life insurance policy loans
      outstanding as of October 27, 2007, a total of $24.8 million of these loans
      bore
      interest at variable rates ranging from 5.7% to 6.2%. A hypothetical increase
      of
      100 basis points in short-term interest rates applicable to the outstanding
      variable-rate debt would result in a reduction of approximately $1.2 million
      in
      annual pretax earnings.





**Item
      4.  Controls and Procedures**





The
      Company
      maintains a system of internal controls and procedures designed to provide
      reasonable assurance as to the reliability of the unaudited consolidated
      financial statements and other disclosures included in this report. The
      Company’s Board of Directors, operating through its Audit Committee which is
      composed entirely of independent Directors, provides oversight to the financial
      reporting process.





As
      of the end of
      the period covered by this report, the Company’s Chief Executive Officer and
      Chief Financial Officer evaluated the effectiveness of the design and operation
      of the Company’s disclosure controls and procedures (as defined in Rules
      13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended).
      Based upon their evaluation, the Chief Executive Officer and Chief Financial
      Officer concluded that the Company’s disclosure controls and procedures are
      effective in ensuring that material information relating to the Company,
      including its consolidated subsidiaries, is made known to them by others within
      those entities in a timely manner, particularly during the period for which
      this
      quarterly report is being prepared. The Chief Executive Officer and Chief
      Financial Officer also concluded based upon their evaluation that the Company’s
      disclosure controls and procedures are effective in ensuring that the
      information required to be disclosed by the Company in the reports that it
      files
      or submits under the Securities




22




Exchange
      Act of
      1934 is recorded, processed, summarized and reported, within the time periods
      specified in the Securities and Exchange Commission’s rules and
      forms.





There
      were no
      changes in the Company’s internal control over financial reporting during the
      Company’s most recent fiscal quarter that have materially affected, or are
      reasonably likely to materially affect, the Company’s internal control over
      financial reporting.





23


**PART
      II.  OTHER INFORMATION**




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


At
      the October 30,
      2007 Annual Meeting of Shareholders, each of the three nominees for directors
      of
      the Company was elected based on the following votes:





**Votes**
                
                
                **Votes****Name**
                
                **“For”**
                
                
                **“Withheld”**For
                    one-year
                    terms expiring at the2008
                    Annual Meeting:Don
                    W.
                    Hubble
                
                
                5,580,215
                
                
                
                3,423,698John
                    J.
                    Quicke
                
                
                8,860,962
                
                
                
                142,951Ronald
                    N.
                    Riner, M.D.
                
                
                8,816,780
                
                
                
                187,133
 
 James
        R. Henderson,
        Charles W. Mueller and Kelvin R. Westbrook, with terms ending in 2008, and
        Ronald J. Kruszewski and Stephen M. O’Hara, with terms ending in 2009, all
        continue as directors of the Company.





The
      shareholders
      approved the ratification of the appointment of Deloitte & Touche LLP as
      Angelica’s independent registered public accounting firm for the fiscal year
      2007.  The tabulation was as follows:  8,997,906 voting for,
      2,540 voting against, and 3,467 abstaining.





Information
      regarding the settlement with Pirate Capital and certain of its affiliates
      is
      incorporated by reference from pages 5 and 6 of the Company’s Proxy
      Statement.





**Item
        6.  Exhibits**





(a)
            See
                Exhibit
                Index on page 26.











24




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.





Angelica
                  Corporation(Registrant)Date:  December
                  6, 2007
              /s/
                  Stephen
                  M. O’HaraStephen
                  M.
                  O’HaraPresident
                  andChief
                  Executive Officer/s/
                  James W.
                  ShafferJames
                  W.
                  ShafferVice
                  President and ChiefFinancial
                  Officer(Principal
                  Financial Officer)(Principal
                  Accounting Officer)











25
 **EXHIBIT
          INDEX**
 
 
 ExhibitNumber
                Description*Asterisk
                    indicates exhibits filed herewith.**Incorporated
                    by reference from the document listed.3.1
                Restated
                    Articles of Incorporation of the Company, as currently in effect.
                    Filed as
                    Exhibit 3.1 to the Form 10-K for the fiscal year ended January
                    26,
                    1991.**3.2
                Amendment
                    to
                    Certificate of Designation, Preferences and Rights of Class B
                    Series 2
                    Junior Participating Preferred Stock. Filed as Exhibit 3.1 to
                    a current
                    report on Form 8-K on September 5, 2006.**3.3
                Current
                    By-Laws of the Company, as amended and restated. Filed as Exhibit
                    3.2 to
                    the Form 10-K for fiscal year ended January 27, 2007.**4.1
                Shareholder
                    Rights Plan dated August 25, 1998.  Filed as Exhibit 1 to
                    Registration Statement on Form 8-A on August 28,
                    1998.**4.2
                Form
                    of
                    Amendment No. 1 to Rights Agreement, dated as of August 29, 2006,
                    between
                    Angelica Corporation and UMB Bank, N.A. Filed as Exhibit 4.1
                    to a current
                    report on Form 8-K on September 5, 2006.**4.3
                Form
                    of
                    Amendment No. 2 to Rights Agreement, dated September 19, 2006,
                    by and
                    between Angelica Corporation and UMB Bank, N.A. Filed as Exhibit
                    4.1 to a
                    current report on Form 8-K on September 22, 2006.**4.4
                Letter
                    agreement between Computershare Trust Company, N.A., UMB Bank,
                    N.A. and
                    Angelica Corporation, dated as of November 20, 2007, acknowledging
                    acceptance of Computershare Trust Company, N.A. as successor
                    Rights Agent
                    under the Shareholder Rights Plan.*31.1
                Section
                    302
                    Certification of Chief Executive Officer.*31.2
                Section
                    302
                    Certification of Chief Financial Officer.*32.1
                Section
                    906
                    Certification of Chief Executive Officer.*32.2
                Section
                    906
                    Certification of Chief Financial
                    Officer.*





26