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
                FileJuly
                28,
                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 August 31, 2007 was 9,586,941 shares.











ANGELICA
      CORPORATION AND SUBSIDIARIES





TABLE
      OF CONTENTS





JULY
      28, 2007 FORM
      10-Q QUARTERLY REPORT




















Page
                NumberReference





**Part
      I.   Financial Information:**





Item
                1.  Condensed Financial Statements:Condensed
                Consolidated Statements of Income
                - Second Quarter andFirst
                Half
                Ended July 28, 2007 and July 29, 2006 (Unaudited)
            2Condensed
                Consolidated Balance Sheets– July 28,
                2007and
                January
                27, 2007 (Unaudited)
            3Condensed
                Consolidated Statements of Cash Flows–
                First HalfEnded
                July
                28, 2007 and July 29, 2006 (Unaudited)
            4Notes
                to Unaudited Condensed Consolidated Financial
                Statements
            5-14Item
                2. Management's Discussion and Analysis
                ofFinancial
                Condition and Results of Operations
            15-21Item
                3.  Quantitative and Qualitative
                DisclosuresAbout
                Market
                Risk
            22Item
                4.  Controls and
                Procedures
            22-23**Part
                II.  Other Information:**Item
                6.  Exhibits
            24Signatures
            25Exhibit
                Index
            26





Table
          of Contents


CONDENSED
      CONSOLIDATED STATEMENTS OF
      INCOME


*Angelica
      Corporation and Subsidiaries*


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





Second
                  Quarter Ended
              
              
              First
                  Half
                  EndedJuly
                  28,
                  2007
              
              
              July
                  29,
                  2006
              
              
              July
                  28,
                  2007
              
              
              July
                  29,
                  2006Revenues
              
              $
              107,576
              
              
              $
              105,286
              
              
              $
              215,353
              
              
              $
              212,292Cost
                  of
                  services
              
              
              (93,617
              )
              
              
              (90,161
              )
              
              
              (187,113
              )
              
              
              (182,426
              )Gross
                  profit
              
              
              13,959
              
              
              
              15,125
              
              
              
              28,240
              
              
              
              29,866Selling,
                  general and administrative expenses
              
              
              (13,712
              )
              
              
              (13,433
              )
              
              
              (27,110
              )
              
              
              (27,845
              )Amortization
                  of other acquired assets
              
              
              (1,063
              )
              
              
              (1,080
              )
              
              
              (2,126
              )
              
              
              (2,160
              )Other
                  operating (loss) income, net
              
              
              (29
              )
              
              
              (54
              )
              
              
              169
              
              
              
              497(Loss)
                  income
                  from operations
              
              
              (845
              )
              
              
              558
              
              
              
              (827
              )
              
              
              358Interest
                  expense
              
              
              (2,294
              )
              
              
              (2,349
              )
              
              
              (4,630
              )
              
              
              (4,569
              )Non-operating
                  income, net
              
              
              171
              
              
              
              438
              
              
              
              433
              
              
              
              382Loss
                  before
                  income taxes
              
              
              (2,968
              )
              
              
              (1,353
              )
              
              
              (5,024
              )
              
              
              (3,829
              )Income
                  tax
                  benefit
              
              
              1,521
              
              
              
              638
              
              
              
              2,436
              
              
              
              1,615**Net
                  loss**
              
              
              (1,447
              )
              
              
              (715
              )
              
              
              (2,588
              )
              
              
              (2,214
              )**Basic
                  loss per share**
              
              $
              (0.16
              )
              
              $
              (0.08
              )
              
              $
              (0.28
              )
              
              $
              (0.24
              )**Diluted
                  loss per share**
              
              $
              (0.16
              )
              
              $
              (0.08
              )
              
              $
              (0.28
              )
              
              $
              (0.24
              )






















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





2
 Table
          of Contents


CONDENSED
      CONSOLIDATED BALANCE SHEETS


*Angelica
      Corporation and Subsidiaries*


*Unaudited
      (Dollars in thousands)*


July
                  28,
              
              
              January
                  27,2007
              
              
              2007**ASSETS**Current
                  Assets:Cash
              
              $
              1,118
              
              
              $
              6,254Receivables,
                  less reserves of $1,324 and $848
              
              
              61,157
              
              
              
              56,874Linens
                  in
                  service
              
              
              50,761
              
              
              
              50,902Prepaid
                  expenses and other current assets
              
              
              2,816
              
              
              
              4,019Total
                  Current
                  Assets
              
              
              115,852
              
              
              
              118,049Property
                  and
                  Equipment
              
              
              204,041
              
              
              
              203,236Less
                  --
                  accumulated depreciation
              
              
              109,164
              
              
              
              106,780Total
                  Property and Equipment
              
              
              94,877
              
              
              
              96,456Other:Goodwill
              
              
              49,259
              
              
              
              49,259Other
                  acquired assets
              
              
              36,000
              
              
              
              38,108Cash
                  surrender value of life insurance
              
              
              10,041
              
              
              
              9,664Deferred
                  income taxes
              
              
              20,727
              
              
              
              19,035Miscellaneous
              
              
              5,635
              
              
              
              5,734Total
                  Other
                  Assets
              
              
              121,662
              
              
              
              121,800Total
                  Assets
              
              $
              332,391
              
              
              $
              336,305**LIABILITIES
                  AND SHAREHOLDERS' EQUITY**Current
                  Liabilities:Current
                  maturities of long-term debt
              
              $
              1
              
              
              $
              96Life
                  insurance policy loans
              
              
              8,332
              
              
              
              8,298Accounts
                  payable
              
              
              28,353
              
              
              
              32,867Accrued
                  wages
                  and other compensation
              
              
              7,360
              
              
              
              8,961Deferred
                  compensation and pension liabilities
              
              
              1,704
              
              
              
              1,693Deferred
                  income taxes
              
              
              5,235
              
              
              
              4,961Other
                  accrued
                  liabilities
              
              
              30,877
              
              
              
              29,392Total
                  Current
                  Liabilities
              
              
              81,862
              
              
              
              86,268Long-Term
                  Debt, less current maturities
              
              
              90,300
              
              
              
              85,300Other
                  Long-Term Liabilities
              
              
              14,662
              
              
              
              17,191Shareholders'
                  Equity:Common
                  Stock,
                  $1 par value, authorized 20,000,000shares,
                  issued:  9,567,188 and 9,518,688 shares
              
              
              9,567
              
              
              
              9,519Capital
                  surplus
              
              
              8,542
              
              
              
              7,174Retained
                  earnings
              
              
              135,610
              
              
              
              140,277Accumulated
                  other comprehensive loss
              
              
              (3,652
              )
              
              
              (4,839
              )Common
                  Stock
                  in treasury, at cost: 291,197 and 296,419 shares
              
              
              (4,500
              )
              
              
              (4,585
              )Total
                  Shareholders' Equity
              
              
              145,567
              
              
              
              147,546Total
                  Liabilities and Shareholders' Equity
              
              $
              332,391
              
              
              $
              336,305









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


3
 Table
          of Contents


CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS


*Angelica
      Corporation and Subsidiaries*


*Unaudited
      (Dollars in thousands)*




First
                  Half
                  EndedJuly
                  28,
                  2007
              
              
              July
                  29,
                  2006Cash
                  Flows
                  from Operating Activities:Net
                  loss
              
              $
              (2,588
              )
              
              $
              (2,214
              )Non-cash
                  items included in net loss:Depreciation
              
              
              7,191
              
              
              
              7,457Amortization
              
              
              2,868
              
              
              
              2,753Deferred
                  income taxes
              
              
              (2,286
              )
              
              
              (1,615
              )Cash
                  surrender value of life insurance
              
              
              (559
              )
              
              
              (766
              )Gain
                  on
                  disposal of assets
              
              
              (10
              )
              
              
              (534
              )Change
                  in
                  working capital components of continuingoperations
              
              
              (6,599
              )
              
              
              (2,513
              )Other,
                  net
              
              
              (895
              )
              
              
              (42
              )Net
                  cash
                  (used in) provided by operating activities ofcontinuing
                  operations
              
              
              (2,878
              )
              
              
              2,526Cash
                  Flows
                  from Investing Activities:Expenditures
                  for property and equipment, net
              
              
              (5,945
              )
              
              
              (4,002
              )Disposals
                  of
                  assets
              
              
              72
              
              
              
              2,271Life
                  insurance premiums paid, net of death benefits received
              
              
              (185
              )
              
              
              341Net
                  cash used
                  in investing activities ofcontinuing
                  operations
              
              
              (6,058
              )
              
              
              (1,390
              )Cash
                  Flows
                  from Financing Activities:Repayments
                  of
                  long-term debt
              
              
              (58,595
              )
              
              
              (52,068
              )Borrowings
                  of
                  long-term debt
              
              
              63,500
              
              
              
              53,400Repayments
                  of
                  life insurance policy loans
              
              
              (8,298
              )
              
              
              -Borrowings
                  from life insurance policy loans
              
              
              8,514
              
              
              
              1,101Dividends
                  paid
              
              
              (2,079
              )
              
              
              (2,071
              )Exercise
                  of
                  stock options
              
              
              770
              
              
              
              236Net
                  cash
                  provided by financing activities ofcontinuing
                  operations
              
              
              3,812
              
              
              
              598Cash
                  Flows
                  from Discontinued Operations:Operating
                  cash flows
              
              
              (12
              )
              
              
              (323
              )Net
                  (decrease) increase in cash
              
              
              (5,136
              )
              
              
              1,411Balance
                  at
                  beginning of year
              
              
              6,254
              
              
              
              4,377Balance
                  at
                  end of period
              
              $
              1,118
              
              
              $
              5,788Supplemental
                  cash flow information:Purchases
                  of
                  property and equipment included inaccounts
                  payable
              
              $
              190
              
              
              $
              -Life
                  insurance death benefit proceeds used to repay lifeinsurance
                  policy loans
              
              $
              -
              
              
              $
              306




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


4
 Table
          of Contents





NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





SECOND
      QUARTER AND
      FIRST HALF ENDED


JULY
      28, 2007 AND
      JULY 29, 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
                second quarter and first half ended July 28, 2007 and cash flows
                for the
                first half ended July 28, 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 second
      quarter or first half ended July 28, 2007 or July 29, 2006. A summary of the
      status of the Company’s stock option plans as of July 28, 2007, and changes for
      the first half then ended is presented in the table below:


5
 Table
          of Contents




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
              
              
              (48,500
              )
              
              
              15.90Forfeited
              
              
              (3,500
              )
              
              
              32.88Expired
              
              
              -
              
              
              
              -Options
                  outstanding at July 28, 2007
              
              
              529,850
              
              
              $
              21.92
              
              
              
              6.0
              
              
              $
              1,465,000Options
                  exercisable at July 28, 2007
              
              
              473,600
              
              
              $
              21.74
              
              
              
              5.6
              
              
              $
              1,456,000




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 first half ended July 28, 2007 was as follows:




Shares
              
              
              Weighted
                  Average Grant Date Fair ValueNonvested
                  at
                  January 28, 2007
              
              
              296,269
              
              
              $
              19.70Granted
              
              
              79,157
              
              
              
              26.67Vested
              
              
              (5,671
              )
              
              
              21.96Forfeited
              
              
              (53,452
              )
              
              
              21.53Nonvested
                  at
                  July 28, 2007
              
              
              316,303
              
              
              $
              21.09




Total
      compensation
      expense for all stock option and stock bonus plans during the second quarter
      and
      first half ended July 28, 2007 was $230,000 and $486,000, respectively (net
      of
      $121,000 and $256,000 related income tax benefit). During the second quarter
      and
      first half ended July 29, 2006, the Company recognized expense of $170,000
      and
      $370,000 for stock option and stock bonus plans, respectively (net of $105,000
      and $228,000 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 $3,672,000. 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 half
      of fiscal 2007, the Company recorded non-operating income of $433,000 which
      consisted primarily of interest income earned on invested cash balances and
      notes receivable.





In
      the first half
      of fiscal 2006, the Company recorded non-operating income of $382,000 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
 Table
          of Contents


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.
                If
                recognized, $2,217,000 of this amount would impact the Company’s effective
                tax rate.





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 half ended July 28, 2007 or July 29, 2006,
                and
                had no interest or penalties accrued as of July 28, 2007 or January
                27,
                2007.





The
                Company
                believes that it is reasonably possible that the total amount of
                unrecognized tax benefits will significantly change within the next
                12
                months. The Company has certain tax return years subject to statutes
                of
                limitation which are anticipated to close within 12 months. Unless
                challenged by tax authorities, the closure of those statutes of limitation
                is expected to result in the recognition of uncertain tax positions
                in the
                amount of $2,217,000.





The
                Company
                is subject to taxation in the United States, and its tax years for
                2003
                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
                2003.





The
                Company
                recorded a tax benefit of $2,436,000 for the first half ended July
                28,
                2007. This benefit consisted of $1,731,000 based upon the Company’s
                estimated effective tax rate of 34.3% for the year and $271,000 from
                federal and state tax credits. Further, during the second quarter,
                the
                Company favorably settled an audit related to one of its former foreign
                subsidiaries, Angelica International, Ltd., with Revenue Canada.
                As a
                result, the Company recognized an associated benefit of $434,000
                in the
                second quarter. The effective tax rate for the first half ended July
                28,
                2007, reflects the statutory tax rate adjusted for permanent items
                and
                state tax benefits, as applicable.





The
                Company
                has a federal net operating loss carryover of $36,551,000 which will
                expire beginning in 2025; $3,554,000 of federal tax credit carryovers
                which expire at various dates beginning in 2021 or have no expiration
                date; $8,897,000 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 (LOSS) PER SHARE




Basic
      earnings
      (loss) per share is computed by dividing net income (loss) by the weighted
      average number of shares of Common Stock outstanding during the period. Diluted
      earnings (loss) per share is computed by dividing net income (loss) by the
      weighted average number of Common and Common equivalent shares
      outstanding.


The
                following
                table reconciles weighted average shares outstanding to amounts used
                to


7
 Table
          of Contents


calculate
                basic and diluted earnings (loss) per share for the second quarter
                and
                first half ended July 28, 2007 and July 29, 2006 (shares in
                thousands):




Second
                  Quarter Ended
              
              
              First
                  Half
                  EndedJuly
                  28,
              
              
              July
                  29,
              
              
              July
                  28,
              
              
              July
                  29,2007
              
              
              2006
              
              
              2007
              
              
              2006Weighted
                  Average Shares:Average
                  shares outstanding
              
              
              9,274
              
              
              
              9,182
              
              
              
              9,256
              
              
              
              9,173Effect
                  of
                  dilutive securities
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Average
                  shares outstanding,adjusted
                  for
                  dilutive effects
              
              
              9,274
              
              
              
              9,182
              
              
              
              9,256
              
              
              
              9,173




Potentially
      dilutive securities of 57,000 and 73,000 shares were not included in the
      calculation of weighted average shares outstanding for the second quarter and
      first half ended July 28, 2007 as their effect is antidilutive on loss per
      share
      for these periods. Potentially dilutive securities of 34,000 and 41,000 shares
      were not included in the calculation of weighted average shares outstanding
      for
      the second quarter and first half ended July 29, 2006, as their effect is
      antidilutive on loss per share for those periods.





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 2006 which resulted in no indication of impairment.





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




July
                  28,
                  2007
              
              
              January
                  27,
                  2007Gross
              
              
              
              
              
              Other
              
              
              Gross
              
              
              
              
              
              OtherCarrying
              
              
              Accumulated
              
              
              Acquired
              
              
              Carrying
              
              
              Accumulated
              
              
              AcquiredAmount
              
              
              Amortization
              
              
              Assets,
                  net
              
              
              Amount
              
              
              Amortization
              
              
              Assets,
                  netCustomer
                  contracts
              
              $
              41,831
              
              
              $
              (12,416
              )
              
              $
              29,415
              
              
              $
              41,813
              
              
              $
              (10,984
              )
              
              $
              30,829Non-compete
                  covenants
              
              
              11,089
              
              
              
              (4,504
              )
              
              
              6,585
              
              
              
              11,089
              
              
              
              (3,810
              )
              
              
              7,279Other
                  acquired assets
              
              $
              52,920
              
              
              $
              (16,920
              )
              
              $
              36,000
              
              
              $
              52,902
              
              
              $
              (14,794
              )
              
              $
              38,108





Aggregate
      amortization expense for the first half ended July 28, 2007 and July 29, 2006
      amounted to $2,126,000 and $2,160,000, 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








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  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 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 July 28,
      2007, there was $90,300,000 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, $88,500,000 bore interest at rates
      ranging from 5.32% to 5.40% under LIBOR contracts, plus a margin (2.00% as
      of
      July 28, 2007), and $1,800,000 bore interest at 8.25%, the Prime Rate, as of
      July 28, 2007. Furthermore, the Company had $13,401,000 outstanding in
      irrevocable letters of credit as of July 28, 2007, which reduced the amount
      available to borrow under the line of credit to $2,969,000 as of the end of
      the
      second quarter. As of July 28, 2007, the fee on the outstanding letters of
      credit and unused funds was 2.0% 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 July 28, 2007.





As
      of July 28,
      2007, there was $30,867,000 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 6.3%. 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. Of the total amount outstanding at July 28, 2007, approximately $8,332,000
      is considered a current liability and is presented as such in the Condensed
      Consolidated Balance Sheet. The remainder is netted against cash surrender
      value
      of life insurance in the Condensed Consolidated Balance Sheet as of July 28,
      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.


9
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The
      net periodic pension expense
      recognized in the second quarter and first half ended July 28, 2007 and July
      29,
      2006 was as follows:


Second
                  Quarter Ended
              
              
              First
                  Half
                  EndedJuly
                  28,
              
              
              July
                  29,
              
              
              July
                  28,
              
              
              July
                  29,(Dollars
                  in
                  thousands)
              
              2007
              
              
              2006
              
              
              2007
              
              
              2006Pension
                  expense:Service
                  cost
              
              $
              86
              
              
              $
              113
              
              
              $
              172
              
              
              $
              226Interest
                  cost
              
              
              331
              
              
              
              312
              
              
              
              662
              
              
              
              624Expected
                  return on plan assets
              
              
              (333
              )
              
              
              (322
              )
              
              
              (666
              )
              
              
              (644
              )Unrecognized
                  loss
              
              
              17
              
              
              
              17
              
              
              
              34
              
              
              
              34Net
                  periodic
                  pension expense
              
              $
              101
              
              
              $
              120
              
              
              $
              202
              
              
              $
              240




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 second quarter ended July 28, 2007
      and July 29, 2006 amounted to $15,000 and $9,000, respectively, net of tax;
      and
      $41,000 and $2,000 for the first half ended July 28, 2007 and July 29, 2006,
      respectively, net of tax. The Company has 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 70%, 58% and 33%, respectively, of the Company’s total
      requirements for natural gas (measured at current usage rates). As of July
      28,
      2007, the weighted-average cost of natural gas under these contracts is $9.04
      per decatherm. The Company has elected to apply cash flow hedge accounting
      for
      these derivatives in accordance with SFAS No. 133. Accordingly, the net (loss)
      gain on the derivatives included in other comprehensive income (loss) for the
      second quarter and first half ended July 28, 2007, amounted to $(383,000) and
      $1,228,000, respectively, net of tax, and $(566,000) and $(902,000),
      respectively, net of tax, for the second quarter and first half ended July
      29,
      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 these derivatives was included
      in non-operating income for the first half ended July 29, 2006, and amounted
      to
      a loss of $281,000. The Company has recorded a current liability of $2,282,000
      and $2,863,000 as of July 28, 2007 and January 27, 2007, respectively, and
      a


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long-term
      liability
      of $426,000 and $1,968,000 as of July 28, 2007 and January 27, 2007,
      respectively, for the fair value of the derivatives. The Company estimates
      that
      $2,282,000 of unrealized losses included in accumulated other comprehensive
      loss
      before taxes as of July 28, 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 July 28, 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 83% 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 LOSS





Comprehensive
      loss,
      consisting primarily of net loss and changes in the fair value of derivatives
      (see Note 9), net of taxes, totaled $1,845,000 and $1,290,000 for the second
      quarter ended July 28, 2007 and July 29, 2006, respectively; and $1,401,000
      and
      $3,118,000 for the first half ended July 28, 2007 and July 29, 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 July 28, 2007, the
      Company is secondarily obligated as a guarantor for 43 store lease agreements
      and the estimated maximum potential amount of future payments the Company could
      be required to make under these guarantees is $6,830,000. Although these
      guarantees expire at various dates through fiscal year 2014, approximately
      70%
      of the estimated maximum potential future payments expire by the end of fiscal
      year 2009. 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 $3,668,000, which reflects a discount of
      $1,000,000 made on the note at the time of the sale accreted through July 28,
      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




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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 July 28, 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 $834,000 as of July 28,
      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 first half ended July 28,
      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. Collective bargaining agreements covering drivers associated
      with four service centers will expire in 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 approximately 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 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





12
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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 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


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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.  SUBSEQUENT EVENT





Subsequent
        to the
        end of its second quarter, the Company made the decision to sell or close
        its
        Edison, New Jersey service center. The service center had been underperforming
        for some time and failed to make the progress management expected in the
        second
        quarter of fiscal 2007. While the Company expects to sell or close this facility
        before the end of fiscal 2007, the exact timing has not been finalized, as
        the
        Company intends to fulfill its existing customer commitments, work to find
        other
        providers for customers no longer in its market area, and seek to accommodate
        as
        many employees as possible at its other locations, if the facility closes
        versus
        sells. Management is still evaluating which assets will be sold versus
        transferred to other facilities and has not yet determined whether any
        significant charges related to the sale or closure of this service center
        will
        be incurred.


14
 Table
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**Item
      2.  Management’s Discussion and Analysis of Financial Condition****and
      Results
      of Operations**





SECOND
      QUARTER AND
      FIRST HALF ENDED JULY 28, 2007


COMPARED
      WITH


SECOND
      QUARTER AND
      FIRST HALF ENDED JULY 29, 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.





Results
      of
      Operations





*Second
      Quarter
      Ended July 28, 2007 Compared to Second Quarter Ended July 29,
      2006*





Second
      quarter
      fiscal 2007 revenues were $107.6 million, an increase of $2.3 million, or 2.2%,
      compared with the same period in fiscal 2006. Organic growth contributed $2.5
      million of the increase, representing an organic growth rate of 2.4%. The
      current year organic growth rate included an approximate 4.6% improvement in
      pricing, partially offset by a volume decline primarily related to a large
      customer contract that was 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 3.3% compared with the same
      period in fiscal 2006.





Cost
      of services of
      $93.6 million in the second quarter of fiscal 2007 increased $3.4 million,
      or
      3.8%, from the same period last year. The principal factors for this increase
      were continued operational difficulties at our Edison, New Jersey facility,
      which negatively impacted the operations in the New York City/New Jersey area,
      as well as increased linen costs. For the service centers in the New York
      City/New Jersey area, total production and delivery expenses increased $2.5
      million to 85.7% of revenues in the second quarter of fiscal 2007 from 69.5%
      of
      revenues in the second quarter of fiscal 2006 due to equipment failures and
      management turnover. The $1.0 million favorable variance in these costs for
      all
      other service centers (excluding the service centers in the New York City/New
      Jersey area) was a result of increased operating efficiencies and lower
      operating volumes. In addition, total company linen amortization increased
      $2.1


15
 Table
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million
      as a result
      of increased linen purchases in fiscal 2006 to satisfy our 100% fill initiative
      and higher quality linen and our first quarter fiscal 2006 accounting policy
      change to increase the useful life of linens.





Gross
      margin was
      13.0% in the second quarter of fiscal 2007, a decrease from 13.3% reported
      in
      the first quarter of fiscal 2007 and 14.4% reported in the same period a year
      ago for the reasons noted above. Gross profit from the service centers in the
      New York City/New Jersey area declined $1.9 million in the second quarter of
      fiscal 2007 from the same period in fiscal 2006 due to the factors mentioned
      above. In the balance of the country, gross profit increased $0.8 million year
      over year.





In
      the second
      quarter fiscal 2007, selling, general and administrative (SG&A) expenses
      increased by $0.3 million from second quarter fiscal 2006 to $13.7 million,
      or
      12.7% of revenues, compared to 12.8% of revenues a year ago. The increase in
      SG&A expenses resulted from $0.5 million of additional retirement
      benefit accruals and severance costs related to recent staffing reductions;
      $0.4
      million in increased health insurance costs; $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; and $0.2 million related to the settlement of a federal contract
      audit and related professional fees. These increases were partially offset
      by
      the absence of prior year expenses of $1.3 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. Annualized salaries and benefits
      totaling approximately $1.3 million were eliminated in the second quarter of
      fiscal 2007 as part of a cost savings initiative.





Interest
      expense of
      $2.3 million in second quarter 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 7.4% per annum in the second quarter fiscal 2006
      to an
      average 7.0% per annum in the second quarter fiscal 2007.





We
      recorded $0.2
      million non-operating income in the second quarter of fiscal 2007, consisting
      primarily of interest income. During the second quarter of fiscal 2006, we
      recorded $0.4 million non-operating income, which included interest income
      and a
      $0.2 million gain from the death benefit of a Company-owned life insurance
      policy.





For
      the second
      quarter of fiscal 2007, we recorded a tax benefit of $1.5 million compared
      to
      $0.6 million in the second quarter of fiscal 2006. The higher income tax benefit
      in the current year quarter resulted from the increase in pretax loss for the
      second quarter of fiscal 2007 as compared to the second quarter of fiscal 2006,
      as well as the favorable settlement of an audit with Revenue Canada related
      to
      our former foreign subsidiary, Angelica International, Ltd., during the second
      quarter of fiscal 2007.





We
      reported a net
      loss of $1.4 million in the second quarter of fiscal 2007 compared with a net
      loss of $0.7 million in the prior year quarter. The variance resulted primarily
      from the operational difficulties at our Edison facility discussed
      above.


16
 Table
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*First
      Half
      Ended July 28, 2007 Compared to First Half Ended July 29, 2006*





Revenues
      for the
      first half of fiscal 2007 of $215.4 million represented an increase of 1.4%,
      or
      $3.1 million, from $212.3 million in the first half of fiscal 2006. Organic
      growth contributed $3.6 million of the increase, representing an organic growth
      rate of 1.7%. The current year organic growth rate resulted from an approximate
      4.4% improvement in pricing, partially offset by a volume decline primarily
      related to a large customer contract that was not renewed. The organic growth
      was partially offset by a net reduction in revenues of $0.5 million related
      to
      acquisitions and divestitures, primarily due to the sale of non-healthcare
      customer accounts in fiscal 2006. Total healthcare revenues increased 2.6%
      compared with the same period in fiscal 2006.





In
      the first half
      of fiscal 2007, cost of services increased from the same period in fiscal 2006
      by $4.7 million, or 2.6%, to $187.1 million. The principal factors for this
      increase were the operating difficulties at Edison and increased linen costs
      as
      discussed in the preceding section. Total company production and delivery
      expenses increased $1.7 million in the first half of fiscal 2007 from the first
      half of fiscal 2006; however, the same costs for the service centers in the
      New
      York City/New Jersey area increased $4.9 million to 85.5% of revenues as
      compared to 69.1% of revenues in the same period a year ago. The $3.2 million
      favorable variance in these costs for all other service centers (excluding
      the
      service centers in the New York City/New Jersey area) was a result of increased
      operating efficiencies and lower operating volumes. In addition, total company
      linen amortization increased $3.2 million as a result of increased linen
      purchases in fiscal 2006 to satisfy our 100% fill initiative and higher quality
      linen and our first quarter fiscal 2006 accounting policy change to increase
      the
      useful life of linens.





Gross
      margin was
      13.1% in the first half of fiscal 2007, a decrease from 14.1% reported in the
      same period a year ago for the reasons noted above. Gross profit from the
      service centers in the New York City/New Jersey area declined $3.8 million
      in
      the first half of fiscal 2007 from the same period in fiscal 2006 due to the
      factors mentioned above. In the balance of the country, gross profit increased
      $2.2 million year over year.





For
      the first half
      of fiscal 2007, SG&A expenses decreased $0.7 million to 12.6% of revenues
      from 13.1% of revenues in the same period a year ago. The decrease resulted
      from
      the absence of prior year expenses of $2.2 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 $0.5 million in lower
      incentive compensation accruals year over year. 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, $0.5 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


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compensation
      claims
      that were filed on behalf of the same individuals.





In
      the first half
      of fiscal 2007, we reported other operating income of $0.2 million consisting
      primarily of insurance proceeds from a property insurance claim. Other operating
      income of $0.5 million in the first half of fiscal 2006 reflected gains from
      the
      sale of two parcels of real estate.





Interest
      expense
      for the first half of fiscal 2007 increased slightly from fiscal 2006 to $4.6
      million, a result of higher average borrowings.





We
      recorded $0.4
      million non-operating income in the first half of fiscal 2007, which consisted
      primarily of interest income. During the first half of fiscal 2006, we recorded
      $0.4 million 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 half
      of fiscal 2007, we recorded a tax benefit of $2.4 million compared to $1.6
      million in the first half of fiscal 2006. The higher income tax benefit in
      the
      current year resulted from the increase in pretax loss and the favorable
      settlement of an audit with Revenue Canada related to our former foreign
      subsidiary, Angelica International, Ltd.





We
      reported a net
      loss of $2.6 million in the first half of fiscal 2007 compared with a net loss
      of $2.2 million in the same period a year ago. The variance resulted primarily
      from the operational difficulties at our Edison facility discussed above, offset
      partially by the decrease in selling, general and administrative expenses
      discussed above.








Financial
      Condition





As
      of July 28,
      2007, working capital totaled $34.0 million and the current ratio
      (*i.e.*, the ratio of current assets to current liabilities) was 1.4 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 a lower balance in accounts payable as discussed
      below.





Accounts
      receivable
      increased by $4.3 million in the first half 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. Prepaid
      expenses and other current assets decreased $1.2 million in the first half
      due
      to the collection of a miscellaneous receivable and the normal amortization
      of
      prepaid items.





Accounts
      payable
      decreased by $4.5 million due to the timing of invoice payments near the quarter
      end. Accrued wages and other compensation decreased $1.6 million from January
      27, 2007, primarily due to incentive compensation that was accrued at year
      end
      and paid out in the first half of fiscal 2007. Other accrued liabilities
      increased $1.5 million primarily due to higher accrued interest balances.
      Long-term debt of $90.3 million as of July 28, 2007 was $5.0 million greater
      than at January 27, 2007, reflecting


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additional
      borrowings from our credit facility to fund the higher working capital balance
      discussed above. The $2.5 million decrease in other long-term liabilities
      resulted from a decrease in the liability related to our natural gas hedges
      and
      first half contributions to our defined benefit pension plan. Our ratio of
      total
      debt to total capitalization as of July 28, 2007 was 38.3% compared to 36.7%
      as
      of January 27, 2007. Book value per share at the end of the second quarter
      of
      fiscal 2007 was $15.69, a decline from $16.00 as of January 27,
      2007.





Liquidity
      and
      Capital Resources





Cash
      flows from
      operating activities of continuing operations decreased $5.4 million for the
      first half ended July 28, 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 half ended July 28, 2007 included capital
      expenditures of $5.9 million. Cash flows from investing activities for the
      first
      half ended July 29, 2006 included capital expenditures of $4.0 million, net
      proceeds of $2.3 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 $15.0 million for fiscal 2007.





Cash
      provided by
      financing activities was $3.8 million in the first half of fiscal 2007
      reflecting additional borrowings of $4.9 million under our loan agreement and
      $0.2 million from life insurance policy loans, partially offset by dividend
      payments of $2.1 million. In the first half of fiscal 2006, cash provided by
      financing activities of $0.6 million reflected additional borrowings of $1.4
      million under our loan agreement and $1.1 million from life insurance policy
      loans, offset by dividend payments of $2.1 million. In addition, proceeds from
      stock option exercises increased to $0.8 million in the first half of fiscal
      2007 from $0.2 million in the same period a year ago.





As
      of July 28,
      2007, there was $90.3 million of debt outstanding under our credit facility.
      Of
      this amount, $88.5 million bore interest at rates ranging from 5.32% to 5.40%
      under LIBOR contracts, plus a margin (2.00% at July 28, 2007), and $1.8 million
      bore interest at 8.25%, the Prime Rate, as of July 28, 2007.





In
      addition to
      amounts due under our loan agreement, at the end of the second quarter fiscal
      2007 there were $30.9 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 6.3%, were used to pay down our revolving line of
      credit in fiscal 2005 and 2006. On July 28, 2007, we also had $13.4 million
      in
      irrevocable letters of credit outstanding, which reduced the amount available
      to
      borrow under the loan agreement to $3.0 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


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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
“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 July 28, 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.


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**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, and other factors which
      may be identified in the Company's filings with the Securities and Exchange
      Commission.








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**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 second quarter and first
      half ended July 28, 2007 was approximately $6.2 million and $13.1 million,
      respectively. To reduce the uncertainty of fluctuating energy prices, the
      Company has entered into fixed-price contracts as of July 28, 2007 for
      approximately 70% 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 $0.7 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 second
      quarter and first half ended July 28, 2007 was approximately $2.3 million and
      $4.4 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 July 28, 2007, there
      was
      $90.3 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 July 28, 2007, the margin was
      2.00%. Of the $30.9 million in life insurance policy loans outstanding as of
      July 28, 2007, a total of $25.1 million of these loans bore interest at variable
      rates ranging from 5.7% to 6.3%. 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 Exchange Act of 1934 is recorded, processed,
      summarized and reported, within the time


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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.





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**PART
      II.  OTHER INFORMATION**


**Item
        6.  Exhibits**





(a)
            See
                Exhibit
                Index on page 26.























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 Table
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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:  September
      6,
      2007                                           
/s/ Stephen M.
      O’Hara    ­­­­


Stephen
      M.
      O’Hara


Chairman,
      President
      and


Chief
      Executive
      Officer











/s/
      James W.
      Shaffer


James
      W.
      Shaffer


Vice
      President and
      Chief


Financial
      Officer


(Principal
      Financial Officer)


(Principal
      Accounting Officer)





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**EXHIBIT
      INDEX**








Exhibit


Number   
      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.**





10.1
            Letter
                agreements dated May 23, 2007 relating to cash compensation for retainer
                and other director compensation for Steel
                directors.*





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